Guide to Forming an LLC for Small Businesses

Guide to Forming an LLC

For most small businesses, the best option is to form an LLC. LLCs are the most common and easiest form of business in the US to start, run, and manage. An LLC is formed at the state level in the state where a business resides and operates. If your business will have a physical presence (offices, stores, employees etc.) in different state, then you’ll need to register a foreign LLC in each state where you will do business.

The process for forming an LLC is similar in every state. However, the process may vary slightly. Below we’ll review the general concept of forming an LLC and then provide the specific step-by-step process to file, create and start an LLC in each state.

What is an LLC?

An LLC, or “Limited Liability Company”, is a type of business structure much like a corporation. It provides its members limited liability. This means that all business debts and assets belong to the LLC, not its members. So if the business fails, or is sued, damages are limited to the assets of the LLC. The personal assets of LLC members are protected from the debts and obligations of the business.

An LLC offers more management and tax flexibility than a traditional corporation. Most LLCs are taxed like partnerships or sole proprietorships. However, they can elect to be taxed like C-corps or S-corps. Much like a partnership, LLCs can self-manage—but they may appoint managers to oversee day-to-day operations like a corporation.

The LLC is formed at the state level.

Types of LLCs

There are several types of LLCs. There are single-member LLCs, multi-member LLCs, Series LLCs, and nonprofit LLCs, to name a few. Limited liability companies can also select how they will be taxed by the IRS. LLCs often select to be taxed as an S-corp in order to save money on self-employment taxes. With so many options available, it’s important to understand which LLC is is right for your business.

Name your LLC

Before you can register your LLC, you need to select a business name that isn’t already in use by another company. Every state now offers an online database where you can search name availability. With the exception of Alabama, you are not required to reserve the LLC name prior to filing the Articles for Organization.

When selecting your business name, avoid using restricted words or phrases that could cause your name to confuse your LLC with a government agency (FBI, Treasury, State Department, etc.). For example, corporations in Washington are prohibited from incorporating “trust” or “bank” in their names. Most states require LLC names to include the abbreviation or phrase “LLC,” “L.L.C.,” or “Limited Liability Company” identifying the business as a limited liability company.

Designate a registered agent

A registered agent is an individual designated to receive official mail and service of process (lawsuits) on behalf of an LLC. A registered agent must be available to receive official correspondences during normal business hours at a physical address in the state where the LLC is established. Having a registered agent ensures that official correspondences are never missed and no question goes unanswered. As a LLC member you can choose to designate yourself as the registered agent for your LLC. A registered agent’s information becomes part of the public record of your company.

Submit LLC Articles of Organization

LLC formation documents, formally referred to as Articles of Organization, must be submitted with the state where you want to form an LLC. (In some states, this document is known as the Certificate of Formation or the Certificate of Organization.) LLC formation documents are typically processed by the department of Secretary of State. With the exception of Nebraska and Iowa, Articles of Organization can be completed online from the state website, or filled out by paper and mailed in. You can also write your own Articles for Organization or hire an attorney to do so. Information required on the Articles of Organization form typically included your LLC’s name, your registered agent, and a signature—but requirements vary.

Get an EIN

After forming an LLC, you need to file for a federal tax ID from the IRS. A federal tax ID, also known as a Federal Employer Identification Number (FEIN) or EIN, is like a social security number for your LLC. If you plan on paying taxes or hiring employees through your LLC you’ll need an EIN. To apply for an EIN with the IRS file Form SS-4. You can apply for an EIN online through the IRS website in just a few minutes. You can also acquire your EIN via fax or by mail.

Write an LLC operating agreement

An operating agreement is the governing document of an LLC. It defines LLC ownership, how profits and losses are distributed, who will manage the LLC, and member roles of your new LLD. An Operating Agreement is not officially required in most states to form an LLC, but it’s an important document to have. The operating agreement is for internal use; it’s not filed with the government or any state agency. However, it’s a vital document for every LLC that is legal binding.

There are six main sections of an operating agreement:

  • Organization: Outlines ownership structure, LLC members, and where and when the company was established.
  • Management and Voting: Identifies member voting rights, as well as how the LLC is managed.
  • Capital Contributions: Identifies initial membership contributions to the LLC, and how future funds will be raised.
  • Distributions: Outlines how profits and losses are distributed among members.
  • Membership Changes: Outlines the process for adding or removing members, as well as rules for transferring ownership shares.
  • Dissolution: Explains the conditions in which the LLC may be dissolved.

Open a bank account

In order to maintain limited liability protection through your LLC, you must keep your personal and business assets separate. Combining personal funds and business funds in the same account (aka “commingling of funds”) is the quickest way to “pierce the corporate veil” and lose limited liability protection. To avoid commingling of funds, open a business bank account. Opening a business bank account requires three documents: your Articles of Organization, operating agreement and EIN. Depending on how clearly powers are defined in your ownership documents, you man also be required to present a LLC resolution to open a bank account.

Fund the LLC

Now that you have a business bank account established, it’s a good idea to fund it with capital contributions. Assuming your business requires $20,000 to get started, each LLC member would deposit a sum in the account equal to their proportionate percentage of membership interest the LLC. Percentage interest in the LLC can be changed at any time if individuals want to contribute more down the road.

File state reports & get licenses

After you’ve formed an LLC, some states require you to periodically confirm or update basic information about your business. These updates typically involve submitting an annual, biennial or quarterly report. On occasion, in addition to filing reports states have other requirements to kept your LLC in good standing. In Arkansas, for example, LLCs are required to pay an annual franchise fee in addition to filing an annual report. Other states, including Alabama, Alaska, California, Louisiana, Nevada and Washington, require LLCs to file an initial report shortly after formation.

In addition to forming an LLC, you may also be required to obtain a business license and permit before opening your doors for business. Several states and municipalities have specific licensing requirements for certain types of businesses and trades.

File LLC taxes

LLCs need to understanding their state and federal tax filing requirements and liability. Single-member LLCs are taxed as disregarded entities. Multi-member LLCs are taxed as partnerships. LLCs can also elect to taxed as a S-corporation or C-corporation. LLCs that are taxed as S-corps or C-corps have different tax classification and filing requirements.

State LLC Guides

The rules and regulations to form an LLC vary from state to state. To learn the process and requirements for forming an LLC in a specific state, select the state from the list below. Each state specific LLC guide provides step-by-step instructions for forming an LLC, links to all necessary forms, government agencies, mailing address and fax numbers for your state.