What is an LLC (Limited Liability Company)?
The first step to starting a business is by setting up an LLC either in the state you live in or in another state. A Limited Liability Company (LLC), as the name suggests, provides personal liability protection to its owners and shareholders and helps keep your business expenses, taxation, and management separate from your personal finances.
An LLC is like an individual with its own separate assets, loans, bank accounts, and other obligations. It’s a legally separate entity from its shareholders and thus, like any individual, LLCs can also file lawsuits or be sued in return.
The main benefit here is that if your LLC gets sued, the individual owner is not liable for its debts or obligations. Starting an LLC is not a complicated task if you follow the steps needed for it. Having said that, here’s a step-by-step guide on how to start an LLC.
How to Create an LLC
STEP 1: Select the state
It’s advisable to open an LLC in the state where you plan on conducting your business. Even if it’s an online business, you may still need to form an LLC in the state you live in since you will be transacting from your home. On the other hand, non-US residents can choose any state and it’s generally best to go for one of the cheapest business-friendly states.
If you plan on doing business in multiple states, you need to start an LLC in every state where you plan to operate. Some states allow the formation of “Anonymous” LLCs where your information is not disclosed to the public.
New Mexico, for example, does not require you to submit ownership information at all and is preferred by people who value privacy above all else. Delaware and Wyoming, on the other hand, do require you to disclose ownership information, but this information is not published to the public and thereby protecting you from potential lawsuits from frivolous individuals looking for a quick score.
FAQ: Selecting a state
What is the difference between Domestic LLC and Foreign LLC?
As the names suggest, a domestic LLC is what you’d set up in your home state and an out-of-state entity is known as a foreign LLC.
Which states allow for an Anonymous LLC?
Delaware, Wyoming, and New Mexico all allow for the creation of anonymous entities. In Delaware and Wyoming, you are still required to disclose ownership information to the state, but this information is not shared with the public.
New Mexico on the other hand gives you total privacy and you don’t have to disclose management information to the state at all.
What is the difference between Domestic LLC and Foreign LLC?
As the names suggest, a domestic LLC is what you’d set up in your home state and an out-of-state entity is known as a foreign LLC.
Can I live in one state and have a business in another?
Yes, but forming an LLC in another state does have its disadvantages contrary to popular belief. Firstly, even if you set up an LLC in a cheaper state, you’d still have to register that LLC as a foreign LLC in your home state. This usually ends up costing more.
STEP 2: Name your company
The next crucial step in business formation is naming your company and this is where you’d have to take precaution and time to pick a good name for your business that is memorable and meaningful.
You might not be looking to become the next big social media giant, but a business name should still be unique and distinctive as it’s the first step to creating a “brand”. Be careful to not include forbidden words or phrases in your LLC name like “Bank”, “Trust”, or “Insurance”. Many states carry a list of forbidden words and it’s best to check with your state’s business website.
Furthermore, it’s essential to make your business ready for the internet to stay competitive in a world that is becoming increasingly digital. For this reason, check to make sure that a domain name is available for your business. You can use the handy domain search widget below:
Find a domain starting at $0.88
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Finally, remember to include the phrase “limited liability company” to your business name. You can also use abbreviations like “LLC, L.L.C, limited liability co., ltd. liability company, or limited”.
FAQ: Naming your LLC
What should you include in your business name?
You must include the phrase “limited liability company” or an abbreviation like “LLC, L.L.C., or ltd liability co.” in your business name. You should also not use confusing names that could mistake your LLC with a state or federal department (Treasury, FBI, etc.)
How do I come up with a catchy business name?
The first step to branding starts with your business name. Modern-day businesses come up with names by using mash-ups (Dunkin’ Donuts), use foreign words (Gucci), get inspiration from mythology (Nike), or you could also use your own name (Ralph Lauren).
What is a DBA?
DBA stands for “doing business as” and is referred to as your business’s trade name or fictitious name. Filing a DBA enables you to conduct business under a name other than your LLC’s name. It’s great to have a DBA if you’re looking to create an offshoot brand or an “umbrella” company with several different types of businesses under it.
Do I need a DBA for my LLC?
You do not need a DBA, in most cases, for your LLC. The reason for this is that your LLC can act as a brand name in and of itself. You can also collect payments and checks under your LLC’s name without any problems.
A DBA is a good option if you’re looking to diversify your business by creating an umbrella corporation and having different business entities under the parent company.
STEP 3: Choose a Registered Agent
A Registered Agent is a designated third party (individual or business) who accepts Service of Process and other legal documents on behalf of an LLC. A registered agent is required to be appointed to file an LLC in every U.S. state.
A registered agent plays an important role as a liaison and if an individual or government agency wants to contact your LLC, they look up the contact information for the registered agent on record and send mail or other legal documents to the LLC’s agent.
While the registered agent can be the business owner, family member, friend, or an employee, it’s recommended to hire a professional registered agent service to receive important documentation in a timely manner.
FAQ: Choosing a Registered Agent
Can anyone be a registered agent?
A registed agent can be any person who is at least 18 years old and maintains a physical address in the same state where the LLC is formed.
Can a business be a registered agent?
Yes, a business can act as a registered agent, but a business may not act as its own registered agent. If a company is to act as your registered agent, they must provide a valid street address in the state of formation where legal correspondence can be delivered.
Is a Registered Agent service worth it?
Yes, having a registered agent service like ZenBusiness far outweighs the costs you may incur in a year. It is an easy and efficient way to receive legal documents and notices without worrying about missing them or not getting them in a timely fashion.
What is Service of Process
Yes, having a registered agent service far outweighs the costs you may incur in a year. It is an easy and efficient way to receive legal documents and notices without worrying about missing them or not getting them in a timely fashion.
STEP 4: File your LLC Articles of Organization
To make your business official, you must file the Articles of Organization with the state. Each state has its own forms and procedures for setting up an LLC. When filing your Articles of Organization, you should include the chosen name for your LLC, details of your registered agent, information of services your LLC offers, and the necessary state filing fee.
When forming an LLC, you must also mention whether your LLC will be member-manager or manager-managed. Each has its own benefits and disadvantages and we have outlined each in the FAQ section below.
FAQ: Filing your LLC
What is member-managed LLC?
In a member-managed LLC, the owners of the business themselves take part in the day-to-day operations of the company, make business decisions, and have the ability to create binding contracts and agreements on behalf of the LLC.
Most small businesses opt for being member-managed due to its smaller structure and lack of resources.
What is manager-managed LLC?
In a manager-managed LLC, the owners (members) of the LLC designate one or more managers to run day-to-day operations and manage the business as a whole. Typically, the owners take a passive role and cannot be part of running the business.
Owners (members) can however vote-in or remove a manager and this type of structure is best for larger companies where the management of the business might be complex and the owner(s) deem it necessary to bring in a competent manager to handle the day-to-day affairs of the company.
Are the Articles of Organization the same as a business license?
No, Articles of Organization is not a business license. In some states, the Articles of Organization is referred to as the Certificate of Organization or the Certificate of Formation.
A business license is a type of license required by a city, county, or other local jurisdictions. A business license may be required in addition to an LLC for the type of business you are conducting and it’s best to check with your state or local government in regards to this.
STEP 5: Create LLC Operating Agreements
An LLC Operating Agreement is not required in most states, but it good nonetheless to have it in place to outline the ownership structure of the company. An Operating Agreement for your LLC outlines the equity structure, management, liability, and roles for its members.
Once signed, the Operating Agreement becomes an official document and the members of the LLC are legally bound to its terms and conditions. Here are some of the articles to include in an Operating Agreement:
- Equity Structure: This includes the percentage of equity or units of ownership of the LLC if there are multiple members.
- Voting Rights and Management: This addresses how the company is managed and how members vote to make decisions. Votes may be allocated based on ownership percentage or equally amongst the members.
- Capital Contributions: This section details the money given by members to start the LLC. Capital contributions may take the form of cash, property, services rendered, or a promissory note. A higher percentage of ownership is usually given to those members that make a larger capital contribution.
- Allocation of Profits and Losses: This section details how profits and losses are split among the members. The default rule here is the proportional allocation of profits, losses, and distributions among members based on percentage owned.
- Duties of Members and Managers: This section outlines the appointment of managers and how new members can be added or transfer of ownership to another new member.
- Dissolution and Liquidation: This section of the Operating Agreement specifies how or what events can cause dissolution and how the assets are liquidated upon dissolution.
FAQ: Creating Operating Agreements
Do you have to have an Operating Agreement for an LLC?
A lot of states do not require an Operating Agreement, but it’s a good practice to have one in place as it acts as the by-laws for an LLC and it greatly reduces the risk of conflict and misunderstanding between the members of the LLC.
What is the difference between an Operating Agreement and the Articles of Organization?
The Articles of Organization contain vital information about the LLC – like the business name, information about the registered agent, etc. The Articles of Organization is required to start an LLC.
An Operating Agreement on the other hand is a set of by-laws that dictates how the LLC will distribute its rights and responsibilities and how its equity is structured. An Operating Agreement is optional in most states.
STEP 6: Get an EIN
An EIN (Employer Identification Number) is used to identify a business entity for tax purposes. It’s basically a Social Security Number for a business. An EIN comes in handy when opening a business bank account, filing tax returns, applying for a business license, or for importing and exporting goods.
EIN is sometimes also referred to as a Federal Tax Identification Number (FTIN) or Federal Employer Identification Number (FEIN).
An EIN is required if your LLC has any employees or if there is more than ONE member in an LLC or if there is an excise tax liability. Whether you meet the criteria or not, it’s best to get an EIN especially since it’s free to obtain one.
FAQ: How to get an EIN
Option 1: Apply Online for an EIN from the IRS
-OR-
Option 2: Apply for an EIN by mail or fax.
Conclusion
Now that we’ve outlined the steps needed for creating an LLC, you will realize that the most tedious part of the process is just getting the paperwork ready and in order.
This is where a professional registered agent service comes in handy to save you time and money. Regardless of whether you file an LLC by yourself or get a service to do so for you, the benefits of having an LLC far outweigh the cons in the long run.
Hope you enjoyed this article and leave a comment below if this guide on starting an LLC has been helpful.
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