A limited liability company (LLC) is a business structure where the owners of the business cannot be held liable for the company’s debts and liabilities. It combines the liability protection of a corporation and the taxation benefits of a sole proprietorship or partnership, making it a more preferred business structure of many small businesses.
In order to form a limited liability company, there are necessary paperwork and government regulations that you need to comply with. You have to remember, however, that the rules for forming an LLC vary by state. This guide will walk you through the process of forming an LLC in 8 simple steps.
Step 1. Choose a Business Name
The rules for naming a business vary for each state, and you will typically find these rules from the LLC division of your Secretary of State office. Generally, your LLC business name must not be the same with the name of any other business on file in your state. It must not contain prohibited words (your state will provide you with a list of banned words for your LLC), and you should put an “LLC” at the end of the business name.
Step 2. Create Your Articles of Organization
The LLC articles of organization includes all key components of the company, such as the name, address, list of owners (also called “members”), and the business location.
Step 3. File With the Secretary of State
Each state has specific rules for filing the articles of organization. Some states allow you to file your articles of organization online, while others require that you submit it directly to them. Pay the necessary filing fees which usually range between $40 to $600, depending on your state.
Step 4. Check for Other Requirements
Depending on your state, there are other requirements that you may need to comply with. For instance, you may have a publication requirement to make your business official. This requires you to announce your intent to form an LLC through a local newspaper for a certain number of times over a designated period. An affidavit of publication must be submitted to the filing office to prove your compliance.
Step 5. Get Your LLC Certificate
Your LLC certificate of organization will typically be available within 10 to 20 business days. The turnaround time varies per state.
Step 6. Apply for Employer Identification Number (EIN)
An Employer Identification Number (EIN), also known as Federal Employer Identification Number (FEIN) or Federal Tax Identification Number, is a unique nine-digit number assigned by the Internal Revenue Services (IRS) to businesses in the United States. EIN allows you to make business transactions. You can learn how to get Federal Tax ID and process this o your own, or you may hire an expert’s services to assist you.
Step 7. Apply for Necessary IDs, Licenses, and Permits
All businesses, regardless of structure, are required to have their tax identification number. You can apply online for tax ID number to make the process easier. Also, you have to determine whether your LLC needs specific licenses or permits to operate on a local, state, or federal level. Make sure to get all the necessary permits and licenses required so you can run your business smoothly.
Step 8. Write an Operating Agreement
An operating agreement establishes the LLC’s operations and policies, and explores the rights and responsibilities of its members. This is considered as an essential document for every LLC even though it’s not required for filing with the state. This agreement will help you have a smooth business operation with your business partners.
LLC vs. Partnership and Corporation
A limited liability company provides you with the flexibility that you want for your business with the protection that you need as owners. An LLC can have more than one owner, but unlike a partnership, the owners cannot be held personally liable for the company’s financial liabilities. And because an LLC is a flow-through entity which passes income directly to the owners and/or investors, the tax form for LLC is so much better because it’s not subject to double taxation like that in corporations.