A limited liability company (LLC) is one of the most common business entity types, and for good reason. It provides management flexibility, tax benefits, and limited liability. Compared to corporations, LLCs are simple to form and maintain. Each state has its own requirements, and it is important to take the time to set up the business properly.
Select a name for your business that is marketable and will attract customers. However, this is only the first step; you must ensure the name is available. If another company is using the name, your state may prohibit you from registering it, and you might be infringing on the company's trademark.
The first step is to conduct an online search to see if another business is using the name. If a business on the other side of the country offers goods and services that are entirely different from your business, you might be able to use the same name without infringing on their trademark. However, you will find many exceptions to this rule, and as a result, it best to find an original name.
Many states provide an online search tool for business names, but your search will show only businesses registered in your state. Also search the United States Patent and Trademark Office database to determine if another company has national trademark protection.
Every LLC must have a registered agent, who accepts official documents on behalf of the LLC, such as correspondence from the government and notices of lawsuits filed against the company. Typically, the agent must have a physical address in the state where you incorporated the LLC. Some areas allow a company to serve as a registered agent, as opposed to an individual. You will list the agent's contact information on your business formation documents.
To legally form an LLC, you must file the appropriate paperwork with the state. Your state may refer to the paperwork as the "articles of incorporation," "certificate of formation," or "certification of organization."
The cost to form an LLC will vary by state, with filing fees ranging from $50 to $450. You will face additional costs if you hire a professional registered agent or if you apply for additional licenses, such as health permits or liquor licenses.
You have the option to form your LLC in a different state than where you reside or do business. Some business owners elect states that have lower filing fees and tax rates, such as Delaware and Wyoming. To do so, you need a registered agent that provides services in the selected state.
On the filing paperwork, you will list whether your LLC is member-managed or manager-managed. Member-managed means the owners are responsible for the day-to-day operations of the company. Manager-managed means the LLC brings in a third-party to handle the affairs of the business, while the owners take a more passive role.
An Employer Identification Number (EIN) is a unique tax identification number for your business. The application is free and simple to complete. You can submit your application electronically on the IRS website.
If your LLC has more than one owner, or if you have employees, you need an EIN. If you have a single-member LLC and no employees, you do not need an EIN. However, many business owners use an EIN to protect their own identity, so they do not have to use their social security numbers on their business accounts.
An operating agreement provides the guidelines for how owners will run and manage the LLC. It should cover issues like how owners will share profits and losses, whether owners can transfer their interests to third-parties, and how the owners can dissolve the business.
Some states require an operating agreement, while it is optional in other areas. However, most LLCs can benefit from an operating agreement, as it helps resolve conflicts between or among owners. In addition, if an LLC is not treated as a separate business, the owners might lose their liability protection. Here's why: By forming an LLC, keeping your personal assets separate, and following business formalities, you are creating a clear line between your personal assets and the business assets, so that you will not be personally responsible for the debts of the business. One such business formality is creating an operating agreement. When you draft and follow an operating agreement, you're demonstrating to anyone who is interested (such as a creditor of the business) that the LLC is separate from your personal assets.
LLC owners can create their own operating agreements. You will find a number of online tools and templates to help you create an agreement tailored to the needs of your company. If you have questions or need assistance, you can reach out to an attorney.
Depending on your state and type of business, the government might require additional licenses and permits. Some towns and counties require all businesses to obtain a license to do business locally. Other industries, like food and alcohol, require a number of different licenses from government agencies.