Forming an LLC: What to Consider First

Before you form your LLC, you'll need to consider where to form it, who will manage it, and more.

The life of an LLC begins upon the filing of the articles of organization with the secretary of state's office. Prior to filing the articles, the following issues should be considered.

(For more detailed information on the LLC formation process, see Nolo's article on How to Form an LLC, which includes all steps required and state by state differences.)

Where to form the LLC

An LLC can be formed in any of the 50 states and the District of Columbia.

Many people choose to form LLCs in their home state. This may save you money because the LLC will not need to register as a "foreign LLC" if it does business in its home state, and there is no need to pay another person to serve as the registered agent.

If your home state has high annual LLC fees or income taxes, and your LLC does not "do business" in that state, it may be wise to form the LLC elsewhere. "Doing business" means more than just selling products or making passive investments in that state - it usually requires having an office or otherwise having an active business presence.

Many people choose to form an LLC in Delaware because of its history, experience, popularity and pro-business climate. Nevada has also gained popularity due to its pro-business environment and lack of a formal information-sharing agreement with the IRS. Nevada does not have corporate income taxes, Delaware does not tax out-of-state income and business filings in these states can usually be performed more quickly than in other states.

Choosing a name

In general, the name of a limited liability company must end with the words "LLC", "L.L.C.", "Limited Liability Company" or "Ltd. Liability Co." The name of a person may be used as part of the name of the limited liability company. Please note that a name will not be accepted if it is likely to mislead the public or if it too closely resembles the name of another LLC formed in that state.

Before you choose the name, you should do a little research to see if the name is taken. You can search yourself at the Secretary of State of the state in which you wish to form your LLC.

If the name of the LLC is used in connection with goods or services, you may wish to consider obtaining federal trademark protection for the name. This ensures that no one else in the U.S. may use that name in connection with the same general.

Management by members or managers

A limited liability company may be managed either by (a) the members or (b) one or more managers. A "member" is an owner of the limited liability company. If a limited liability company is managed by the members, then the owners are directly responsible for running the company.

A "manager" is a person elected by the members to manage the limited liability company. In this context, a manager is similar to a director of a corporation. A manager can be, but is not required to be, a member. If a limited liability company is managed by managers, then its members are not directly responsible for running the company.

Whether an LLC should be managed by members or managers depends on several factors, including:

  • The number of owners;
  • The type of business;
  • Where the owners are located;
  • How involved the members will be in the operations of the LLC.

Management by members is usually the best option for LLCs that have only one member or just a few members, all actively participating in the affairs of the LLC. If there are many members, on the other hand, including some that do not actively participate in the operations of the LLC (such as silent partners), then management by managers may be the best option.

Officers

Regardless of how a limited liability company is managed, it can still appoint officers to run the day-to-day operations of the company. An LLC is not, however, required to have officers. Officers serve at the pleasure of either (a) the managers, if the limited liability company is managed by managers, or (b) the members, if the limited liability company is member-managed. Members or managers may both be officers. There is no limit on the maximum number of officers, nor is there a limit on the number of offices that a person may hold. In fact, the same person may hold all offices.

Registered Agent

Each LLC must have a registered agent, the person designated to accept official notice if the LLC is "served" with a lawsuit. A registered agent must be either (1) an adult living in the state of formation with a street address (P.O. boxes are not acceptable) or (2) a company registered with the Secretary of State in the state of formation.

As previously mentioned, one of the advantages of forming an LLC in your home state is that any of the members, managers or officers can act as the registered agent. However, there are some advantages to having another person or company act as your registered agent. First, this adds an extra layer of privacy, since the name and contact information for the registered agent is publicly available. Second, this ensures that if your LLC is named in a lawsuit, no one will surprise you at home on a Sunday night with court papers.

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