Creating a Limited Liability Company

Many founders decide to choose a Limited Liability Company (LLC) for their type of business model. This model is es­pe­cial­ly suited to small busi­ness­es since – as the name suggests – the liability that comes from the business ac­tiv­i­ties is limited. One advantage is that the founders own pockets won’t take a hit if the business ends up not doing so well. The second advantage is that there are only a few re­quire­ments so it’s rel­a­tive­ly easy to set up. Depending on the com­plex­i­ty of your company, you may only need a couple of hours until you’re ready to file the forms.

A LLC is a business entity that combines the limited liability pro­tec­tion of a business with the flexible tax and or­ga­ni­za­tion­al structure that can be seen in a part­ner­ship. The model is known as a hybrid due to the fact that it has features of both a part­ner­ship and a cor­po­ra­tion. To show that an LLC isn’t a cor­po­ra­tion, the founders are known as “members” and those managing are referred to as “managers”. It’s not unusual for the members to actually be the managers, es­pe­cial­ly when the LLC only consists of a few people.

When it comes to taxes, LLCs differ from cor­po­ra­tions in that they aren’t taxed as a separate business entity (unless they want to be). Instead, all profits and losses go to each member, meaning that each member reports profits and losses on their tax return, just like the owners of a part­ner­ship would do.

LLCs are very popular and in every state (excluding New York), LLCs outnumber cor­po­ra­tions two to one. There are three main reasons that so many business owners opt for LLCs:

• The owner chooses how simple or com­pli­cat­ed the LLC should be. The amount of paperwork (e.g. contracts, agree­ments, etc.) and how much in­ter­ac­tion is to be had with the employees (e.g. frequency of meetings) is totally up to the person or persons that created the LLC.
• If an LLC consists of one member then it is con­sid­ered to be a sole pro­pri­etor­ship when it comes to taxes, but if there are multiple members then it’s con­sid­ered a part­ner­ship. This means that with a sole member, the company doesn’t even have to file a tax return; the owner simply reports on their own Form 1040.
• If the owner doesn’t want the business to be a sole pro­pri­etor­ship or part­ner­ship anymore, it can easily be changed to a C or S cor­po­ra­tion by filling out a short form with the IRS. You can’t keep changing though; this option can only be used once every 5 years.

There are some dif­fer­ences between the various states, but here are the basic steps to setting up your own LLC:

Here you can find the LLC Articles of Or­ga­ni­za­tion form for every state. In some states, you have to post a notice in the newspaper declaring your in­ten­tions so make sure to check if this applies to you.

Each state has different rules regarding which names are allowed so make sure whichever name you choose complies with their rules. Certain words are forbidden such as “cor­po­ra­tion”, “insurance”, “in­cor­po­rat­ed”, etc. To make it clear what kind of company you’re running, the name must end with “Limited Liability Company” or “LLC”, and it must be com­plete­ly different from any other names reg­is­tered in your state. Websites such as LegalZoom reveal whether your desired business name is available in your state. It’s often possible to reserve the desired name (for a small fee) until you file the form in­tro­duced in the next step.

This form simply requires your company’s name, what purpose it serves, its address, and the reg­is­tered agent that should receive any legal documents as well as the names of the initial members. At this point, you don’t need to explain how the ownership is dis­trib­uted or who is in charge, just the names will suffice.

A few states require business owners to reveal their intention to create a LLC in the newspaper. Right now, the only two states that require this are New York and Arizona. The notice should be published before you file your Articles of Or­ga­ni­za­tion.

Once the form is filled in, it needs to be sent to your Secretary of State. The ap­pro­pri­ate filing fee must also be sent with it. You pay between $40 and $900 depending on which state you live in. Some states also charge a corporate tax, which needs to be paid at the same time.  Fill it out and file it with a state or local gov­ern­ment agency. This can be done by mail, in person, and sometimes even elec­tron­i­cal­ly. After it has been approved, it means that the new entity has been legally created as a reg­is­tered business within the state.

Tech­ni­cal­ly that is all you have to do legally, but there’s still the LLC Operating Agreement. However, this isn’t required by the state and can be taken care of after you’ve sent off all the legal matters. Companies with a single owner don’t need one of these agree­ments, but if there are multiple owners, it’s a good idea to sit down and draft a written agreement to make sure everyone is on the same page.

Even though this agreement doesn’t need to be filed, It’s important to create one so that the members know what their financial and man­age­ment rights are as well as their re­spon­si­bil­i­ties. It’s best to have it all in writing even if you’re working together with friends or family members as things could easily turn sour.

The agreement typically includes:

• members’ per­cent­age interest in the company
• members’ rights and re­spon­si­bil­i­ties
• members’ voting power
• al­lo­ca­tion of profits and losses
• man­age­ment of the LLC
• rules regarding meetings and voting
• buy-sell pro­vi­sions and what happens if a member wants to sell, becomes disabled, or dies.

To make sure you keep an overview when starting a LLC, you should first compile a rough checklist:

• Obtain an LLC Articles of Or­ga­ni­za­tion form for your state
• Choose a business name
• Fill out the LLC Articles of Or­ga­ni­za­tion form
• Publish a notice in the newspaper (if ap­plic­a­ble)
• Submit your Articles of Or­ga­ni­za­tion form
• Prepare an LLC operating agreement

You need to provide a Reg­is­tered Agent, which is a person or company that must have a physical address in the state in which the LLC has been formed. There must be someone available during business hours to accept any legal or state documents that the company might receive. There are companies such as My­Compa­ny­Works that provide the Reg­is­tered Agent for you. Any documents you receive are scanned and e-mailed to you, or sent to you if a physical signature is required.

Once your company has been filed by the state, you should collect your Federal Employer Iden­ti­fi­ca­tion Number (FEIN), also known as “EIN” or “Tax ID Number”, although this is optional. This is issued by the Internal Revenue Service (IRS) and acts as an iden­ti­fi­ca­tion number for companies.

When you’ve completed the steps listed above, your Limited Liability Company is official! There’s still the task of obtaining the licenses and permits that all new busi­ness­es need before they can open their doors. These include a business license (also known as a “tax reg­is­tra­tion cer­tifi­cate”), a federal employer iden­ti­fi­ca­tion number, a seller’s permit, or a zoning permit.

We already explained at the beginning of the article that filing fees can range from $40 to $900 depending on the state. There’s also the fee that you might have to pay to re-file if the state conducts a name search during the filing process and finds out that the name is already in use (this is why it makes sense to check first). You may wish to trademark the name to stop other from using it or anything similar; this process can cost over $200.

If you live in one of the states where you must declare your intention of starting a LLC in the local newspaper, this doesn’t come cheap. In 2010, the fee to publish the notice in New York City was $1,250. If your company is not located in the state it’s reg­is­tered in, you will require the services of a Register Agent (mentioned above), which equate to around $100 annually. In some states, it’s not unusual for LLCs to be charged a yearly license fee or franchise tax and the costs can vary dra­mat­i­cal­ly; from $80 a year in Delaware to $800 a year in Cal­i­for­nia.

Some busi­ness­es choose to enlist the help of a service to make sure the whole setting up process goes smoothly. Prices start from around $50, but vary if you want more services or want the whole process to move a little bit faster. If the whole set up is a bit com­pli­cat­ed i.e. members have all invested different amounts into the business, you could consider hiring an attorney to help figure things out. You would have to factor the extra cost into your budget though.

As is the case with a lot of things mentioned in this article, the time it takes to set up an LLC depends on which state the company is located in. Between a week and ten days is normal although some states might issue their approval in as little as three business days. Around the beginning and end of the year, you can expect the whole process to take a little bit longer.

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