The following is our unbiased guide (we offer this free information, but do not provide formation service, just a few ads on this page 😉 ) to LLC formation. If you want to learn what an LLC is, read LLCs – Definition and Explanation first.
Or if you are ready to check out a great book on the topic, see:
Forming an LLC: In Any State (Book and CD-ROM)
Forming an LLC (Limited Liability Company) seems complex at first, but it is actually a series of small steps. We’ll set you in the right direction, and help you find a lawyer, if that’s the way you want to go. We are going to move quickly and just cover the basics. Let’s jump right in…
Step 1: Where Should You Form the LLC?
This question is a jurisdictional question. LLCs, like corporations, are chartered/formed by state governments. There is no such thing as a federal LLC or corporation. Generally, you’ll want an LLC in your home state if that is where you do all of your business. Otherwise, you’ll have a charter in some foreign state and have to register/qualify your corproration in your home state anyway–that’s an extra burden.
Here’s an example: A Wyoming LLC that does business in California must register in California as a foreign LLC, pay a filing fee in California, and also pay the annual minimum California franchise tax. Registration of an out-of-state LLC in a state where the LLC is conducting business operations is often called qualification. So the benefits of organizing out-of-state are limited by such foreign registration rules, because you will probably be required to register in your home state in any case.
But, if you do business in several states, you’ll might want to pick the state that has the most favorable LLC laws: the lowest filing fees, the lowest annual fees, the lowest periodic filing burden, and the secretary of state’s office with the best customer service. If you have questions about best and worst states, check this article: Best States to Form a Corporation. The article addresses corporations, but favorable states are generally favorable to both corporations and LLCs.
Step 2: Select Your LLC’s Name
This step is easy: pick a name that you like that isn’t already taken. Your LLC will have to have one of the following designators in it:
*Limited Liability Company
*Limited Liability Co.
You get the idea: if you have an LLC, you need to let the public know that you are an LLC or you can hardly be expected to enjoy personal liability protection.
You need to pick a name that won’t tread on the rights of others. You have two gates to pass through here. First, if a similar name is already on file with the Secretary of State’s office when you file your papers, your articles of organization will be rejected as being too similar to an existing entity.
And, you’ll need to make sure your company name, if you use it as your public trademark, does not infringe of the trademark rights of another. That’s a topic in itself, and you can learn more about that by reading Trademark Law.
Step 3: Select the Registered Agent
A registered agent is a business or individual designated to receive service of process when a business entity is a party in a legal action such as a lawsuit or summons. You need to designate a registered agent (some states call it “resident agent”, same thing) in your charter paperwork.
This step is easy: if you are forming your LLC in the state where you live, you can serve as the registered agent. If you are incorporating in another state, you’ll need to hire a registered agent. To find a registered agent in any of the 50 states, visit BizFilings Resident Agent Service.
Step 4: Should You Organize Your LLC Yourself or Hire an Attorney?
Obviously, the greatest benefit of forming your LLC yourself is initial savings. Self-organizing an LLC carries the lowest initial cost. Of course, as with any legal matter, cutting costs can often cost more later. For example, if your LLC is not properly organized, ambitious creditors may later reach your personal assets by piercing the corporate veil.
Discount LLC Formation Services
A slightly more expensive alternative is to hire a discount LLC fomration service. The prices range from $200 to $300 per company and the companies offer a streamlined but competent service. We recommend (and use for ourselves) BizFilings for LLC Formation.
Hiring an Experienced Business Attorney
Finally, you may wish to hire a business attorney to organize your LLC for you. A qualified business attorney can do the following:
*Suggest alternatives and solutions that would not occur to even the most diligent layperson.
*Assist with more complex features of LLCs, such as operating agreements and manager-managed LLCs.
*Anticipate problems before they arise.
*Prepare an operating agreement and minutes of the organizational meeting of members according to your specific needs.
*Ensure that no federal or state securities laws are violated when interests in the entity are sold to raise capital for the business.
There are several ways to find a qualified business attorney. Recommendations from friends and associates usually yield excellent matches between attorney and businessperson. Local bar associations in major metropolitan areas usually operate referral services.
Step 5: File the Articles of Organization
The life of an LLC begins with the preparation and filing of articles of organization. Typically a one-page document, the articles of organization set out the following basic information:
*The name of the LLC
*The name and address of the agent for service of process, the person or entity authorized to receive legal papers on behalf of an LLC
*A statement of the LLC’s purpose
*Optionally, the names of initial members or managers (it depends on the state)
Don’t file articles of organization in the closing weeks of a fiscal year, such as in the last weeks of December. If you do, you may be required to file tax returns for the entire year. Wait until January 1 to file your organization papers.
To see sample forms of Articles of Organization, search this site for the state in which you intend to form an LLC, and you’ll easily find one of our LLC guides for that state. There, you’ll have a link to sample forms for your state.
Step 6: Order Your LLC Kit and Seal (Optional)
LLC kits, like corporate kits, are not required by any law. The only real reason to have an LLC kit is to have a nice binder that sits above your desk. If you want a corporation kit, you can get one from BizFilings LLC Kit.
Step 7: Define the Management Structure and Choose Managers
This is a tough one, so roll up your sleves. The next step in forming your LLC is to decide what type of LLC your company will be: a member-managed LLC or a manager-managed LLC. Your choice is not carved in stone, you can change later by filing some paperwork. A member-managed LLC can switch to a manager-managed LLC with a mere vote of its members and a new or revised operating agreement.
Who Will Manage? The Members or Appointed Managers?
Member-managed LLCs are operated by the LLC’s owners, much in the manner of a general partnership. Smaller LLCs tend to be member-managed. Member management is simpler because it does not require any voting or appointment of managers-the owners themselves simply go right to work on the LLC’s business. Single-member LLCs, in almost all cases, will be member-managed.
Manager-managed LLCs are operated by appointed managers, who may or may not be members. Manager-managed LLCs appear and operate much like limited partnerships or corporations. They are more complex because the appointment of managers requires voting rules to govern the process of appointment. Larger LLCs tend to be managed by appointed managers.
If you select a manager-managed format for your LLC, the members will need to agree on a few points at the beginning. First, how many managers will run the LLC? One manager works fine for a small company. Larger companies might want to consider having three managers. Larger companies with more complex challenges benefit from the informed consensus that builds through a multimanager team. Put simply, three people are less likely to make a bad decision collectively than one person acting alone.
Also, multiperson boards are less likely to act in a single manager’s personal interest. Managers should always avoid conflicts of interest and abstain from votes in which they have a personal interest. For example, it is improper for an LLC manager to vote on an LLC’s purchase of a piece of property if the manager has an ownership interest in the property. Such a vote would obviously create a conflict of interest. A multiperson management team allows a manager with a personal interest in a particular decision to make full disclosure of his or her personal interest to the other managers, thereby ensuring an informed and fair vote.
Once you determine your LLC’s management structure and the number of managers, you simply select appropriate provisions for your operating agreement. If your LLC is to be manager-managed, you will select initial managers and name them in the LLC’s operating agreement. LLC managers can, but need not, be LLC members.
Step 8: Prepare and Approve Your LLC’s Operating Agreement
Once you select your management structure, you need to prepare and approve your LLC’s operating agreement. Search this site for “sample operating agreement” and you find samples of both member-managed LLC and manager-managed LLC operating agreements. That should get you started.
The preparation of your operating agreement takes work. Don’t simply sign any sample agreement. You must read through the entire document and make sure that you understand all of its provisions. You and your co-owners should execute the operating agreement only after you have all thoroughly digested its contents.
Is an Operating Agreement Necessary?
Operating agreements (unlike LLC binder kits) are vitally necessary. While many states do not legally require your LLC to have a written operating agreement, it is unwise to operate an LLC without one. The first reason is simple: oral agreements lead to misunderstandings. You are overwhelmingly less likely to have a dispute among members if all parties commit their understandings to a mutual written document.
If your LLC members do not adopt an operating agreement, your LLC will be governed by the state default rules. The default rules are set out in each state’s statutes. Naturally, these rules don’t cover every possible circumstance; they cover just the basics. For example, the default rules might say that an owner with a minimum of 10 percent ownership has the right to call a meeting and that members have a right to 20 days’ notice before the meeting is called to order.
You should not rely on the default rules because they might not be right for your company. For example, some states have a default rule that requires LLCs to divide profits into equal shares for each member, regardless of whether each member’s ownership is equal. An operating agreement can set forth the manner in which your LLC divides profits and losses among members.
Finally, adopting an operating agreement can protect the members from personal liability in connection with LLC business. Members should always endeavor to give the LLC separate existence, to hold the LLC out to the public. An LLC without a written operating agreement can appear much like a sole proprietorship or partnership. LLCs require fewer formalities than corporations, but that doesn’t mean that they require no formalities at all.
A reminder, again: you do NOT file your articles of organization with the state, you keep them safe in your office.
Step 9: Obtain a Federal Tax Identification Number for Your LLC
Because your LLC is a legal entity, federal law requires that you obtain a Federal Employer Identification Number (EIN or FEIN). In addition, most banks require you to give an EIN before opening a bank account. You obtain your EIN by filling out Form SS-4, Application for Employer Identification Number, or by applying online. The online application is a recent and welcome simplification of the EIN process. If you mail the form, expect to wait up to six weeks to receive your EIN. If you fax your form to a service center, you will receive your EIN in about five days. You can also obtain an EIN immediately by telephoning an IRS service center during business hours.
How to Apply for an EIN on the Internet
In order to make an online application of an SS-4, google this phrase (we can include a link, because they keep changing it!);
“Apply for an EIN”
–and select the highest entry on the google results page.
A form will appear in your browser. This clever form will take you step by step through the process of applying online for your SS-4. Simply follow the instructions for filling out the form and you will receive your EIN in a few minutes. Print and save a copy of the form and keep it with your entity’s records. You do not need to mail a copy of the form to the IRS.
Good luck–but keep something in mind: if you find the task too daunting, please talk to a lawyer.
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Michael Spadaccini is the author of 8 books on self-help legal matters such as, Ultimate LLC Compliance Guide: Covers All 50 States (Ultimate Series), Ultimate Book of Forming Corps, LLCs, Partnerships & Sole Proprietorships, and Ultimate Guide to Forming an LLC in Any State, Second Edition (Ultimate Series).
You can view his Amazon Author Profile Here.