It’s more work than forming a partnership and easier than creating a corporation – and it may be the best thing you can do for your business.
By now, you’re probably familiar with the advantages of running your business as an LLC: limited liability protection and a simpler method of paying taxes than that imposed on corporations. This article focuses on the steps you will take to make your LLC a legal reality. Essentially, you must:
- Choose an available business name that complies with your state’s LLC rules.
- File formal paperwork, usually called articles of organization, and pay the filing fee (ranging from $40 to $900, depending on the state).
- Create an LLC operating agreement, which sets out the rights and responsibilities of the LLC members.
- Publish a notice of your intent to form an LLC (required in only a few states).
- Obtain licenses and permits that may be required for your business.
Choosing a Name for Your LLC
The name of your LLC must comply with the rules of your state’s LLC division. (Typically, this office is combined with the corporations division, and is part of the Department or Secretary of State’s office.) While requirements differ from state to state, generally:
- the name cannot be the same as the name of another LLC on file with the LLC office
- the name must end with an LLC designator, such as “Limited Liability Company” or “Limited Company,” or an abbreviation of one of these phrases (“LLC,” “L.L.C.” or “Ltd. Liability Co.”), and
- the name cannot include certain words prohibited by the state, such as Bank, Insurance, Corporation or City (states differ widely on prohibited terms).
Your state’s LLC office can tell you how to check if your proposed name is available for your use. Often, for a small fee, you can reserve your LLC name for a short period of time until you file your articles of organization.
Besides following your state’s LLC naming rules, you must make sure your name won’t violate another company’s trademark.
Once you’ve found a legal and available name, you don’t usually need to register it with your state; when you file your articles of organization your business name will be automatically registered.
Filing Articles of Organization
After settling on a name, you must prepare and file “articles of organization” with your state’s LLC filing office. While most states use the term “articles of organization” to refer to the basic document creating an LLC, some states (including Delaware, Mississippi, New Hampshire, New Jersey and Washington) use the term “certificate of formation.” Two other states (Massachusetts and Pennsylvania) call the document a “certificate of organization.”
One disadvantage of forming an LLC instead of a partnership or a sole proprietorship is that you’ll have to pay a filing fee when you submit your articles of organization. In most states, the fees are modest – typically around $100. In a few others, they take a bigger bite: consider California ($70, plus an $800 annual tax), Illinois ($400) and Massachusetts ($500).
Articles of organization are short, simple documents. In fact, you can usually prepare your own in just a few minutes by filling in the blanks and checking the boxes on a form provided by your state’s filing office. Typically, you must provide only your LLC’s name, its address and sometimes the names of all of the owners – called members. You will probably also be required to list the name and address of a person – usually one of the LLC members – who will act as your LLC’s “registered agent,” or “agent for service of process.” Your agent is the person who will receive legal papers in any future lawsuit involving your LLC. Generally, all of the LLC owners may prepare and sign the articles, or they can appoint just one person to do so.
Creating an LLC Operating Agreement
Even though operating agreements need not be filed with the LLC filing office and are rarely required by state law, it is essential that you create one. In an LLC operating agreement, you set out rules for the ownership and operation of the business (much like a partnership agreement or corporate bylaws). A typical operating agreement includes:
- the members’ percentage interests in the business
- the members’ rights and responsibilities
- the members’ voting power
- how profits and losses will be allocated
- how the LLC will be managed
- rules for holding meetings and taking votes, and
- “buy-sell” provisions, which establish rules for what happens if a member wants to sell his interest, dies or becomes disabled.
Arizona and New York: Publication of Notice
| If you are forming an LLC in Arizona or New York, you must take an additional step to make your company official: You must publish in a local newspaper a simple notice stating that you intend to form an LLC. You are required to publish the notice several times over a period of weeks and then submit an “affidavit of publication” to the LLC filing office. Your local newspaper should be able to help you with this filing.
Licenses and Permits
After you’ve completed the steps described above, your LLC is official. But before you open your doors for business, you need to obtain the licenses and permits that all new businesses require. These may include a business license (sometimes also referred to as your “tax registration certificate”), a federal employer identification number, a sellers’ permit or a zoning permit.
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