10 Steps to Setting Up a Limited Liability Company (LLC)
The limited liability company (LLC) has in recent years become the most popular legal structure for small businesses seeking personal liability protection and flexibility. The exact requirements vary slightly from state to state, but setting up an LLC is a relatively simple process that can usually be done in one to four hours, depending on the complexity of your organizational structure.
Regardless of the state you live in, here are the basics.
1. Obtain a Copy of Your State's LLC Articles of Organization Form
You'll get this form online from your state's Secretary of State website or office. When you contact them, also find out if the state (or county) in which you are setting up requires you to post a notice in the newspaper. Also, find out any specific rules regarding business names.
2. Choose a Name for Your Business
When setting up an LLC, you'll need to choose a business name that complies with your state's rules for LLC names. The main part of the business name is generally very flexible, but each state has a list of prohibited words, such as "corporation," "incorporated," "insurance," "city," and others. Your legal name must end with an LLC designator, such as "Limited Liability Company," "LLC," etc. Also, the name cannot be the same as another LLC on file in the state in which you are filing.
3. Fill Out the LLC Articles of Organization Form
This is usually a relatively simple process, as the only things you need to notify the state about regarding your LLC are items such as name, its business purpose, principal office address, the registered agent for receiving any legal documents, and the names of the initial members. You do not have to specify at this point the ownership distribution or management structure, just the names of the LLC's members.
4. Publish a Notice in Your Local Newspaper
Depending upon the requirements for your state and county when setting up an LLC, you may be required to publish a notice in a local newspaper stating your intention to form an LLC (if required by your state—don't waste the money otherwise). This should be done prior to filing your Articles of Organization. Currently, this step is only required in Arizona and New York. Check with your state's Secretary of State to be certain.
5. Submit Your Articles of Organization Form
You'll send this document to your Secretary of State along with the appropriate filing fee when setting up an LLC. Fees range from $40 to $900, depending on the state. Be careful: some states may have a corporate tax that is separate from the filing fee but which must be paid at the time of filing. For example, California has only a $70 filing fee, but an $800 annual tax.
6. The LLC Operating Agreement
While you're done in terms of legal requirements, there's still a very important piece missing: the LLC operating agreement. However, the operating agreement is not required by the state and can be created after the legal filings are done. If you are the sole owner of the LLC, you probably don't need one at this point. However, if there's even just one other owner, it's best to make a written agreement of the terms.
7. Create an LLC Operating Agreement
Make sure your operating agreement spells out the financial and management rights and responsibilities of the LLC members, such as: who contributes what if the LLC needs additional capital, when and how profits from the business will be distributed, under what terms members can leave the LLC, etc. Even (or perhaps especially) among friends and family, leaving these questions unanswered can create strains on both the business and personal relationships down the road. Put it in writing.
8. Get on the Same Page With Your Business Partners
Although not legally required, you should probably work out the details of the operating agreement well in advance of filing the LLC articles of organization. You may find that one of your potential business partners doesn't want to be a part of it once they know the whole deal, or perhaps that you need to bring in someone else. Work it out in advance.
9. Do It Yourself
You can hire an attorney or turn to popular websites like LegalZoom for helping you through the process of setting up an LLC, but really, unless your organization is fairly complex, you can do this yourself and save a whole lot of money—which just became a very important resource for your new business.
10. Set Up Your LLC in the State You're Doing Business
Unless you have a compelling reason otherwise, it's generally best for small businesses to set up in the state in which it will principally be doing business. There are some tax and organizational advantages to registering in certain states, however. Delaware, Nevada, and recently Wyoming are the most popular for out-of-state registration, but before making that decision, consult with an attorney and research it further if you're in doubt. Typically, in order to see significant advantages in setting up your LLC in one of these tax-friendly states, you'll need to be generating a large amount of income.
It's wise to set up your LLC where you live today and consider switching once you're bringing in a lot of revenue.