A limited liability company (LLC) is a popular business structure for startup businesses. LLCs are formed in accordance with state law and have the benefit of providing limited liability protection for the owners. LLCs can also provide for “flow through” tax treatment so that there is not the double level of tax found with C corporations. Only the owners of the LLC are taxed (unless a voluntary contrary election is made), and there is no tax at the LLC level.
The exact rules for setting up an LLC vary by state, although the general requirements are quite similar. You don’t have to hire legal counsel to form an LLC, but it is sometimes advisable if the LLC will have multiple owners or outside investors.
There are a variety of online services that will prepare the paperwork for you and make the required filings for a modest fee. Companies such as LegalZoom and RocketLawyer have set up thousands of LLCs.
In this article, I review a number of the key steps and issues in organizing an LLC.
Because an LLC is formed in accordance with the rules and requirements of a particular state law, the first decision to be made is where you should organize the LLC. Delaware is often chosen because of its well-developed law. But in the vast majority of instances, you should form the LLC in the state where the business will be operated, as this will save you some fees and complexities.
If your LLC will operate or do business in several states, you may be required to register in all of the states where you will be doing business. This will typically involve filing a notice with each Secretary of State and paying the related filing fees.
The next step to organizing an LLC is to pick an available business name for the LLC. There are multiple issues in picking an LLC name:
Picking a good name is not easy, and obtaining the desired domain name you want will likely involve some meaningful cost if it is already owned by a third party.
An LLC is officially formed when you prepare and file an “Articles of Organization” (a few states call this something else) with the Secretary of State. Here are some tips on preparing the LLC Articles of Organization:
The website of the Secretary of State will provide sample Articles of Organization in either Word or PDF format. For example, see the sample Articles of Organization in California, Delaware, and New York.
The LLC Operating Agreement sets forth the owners’ (called “members” in an LLC) financial, management, and other rights and responsibilities. Here are some key issues that should be addressed in the LLC Operating Agreement:
Most lawyers or online filing services have a standard form of LLC Operating Agreement that you can tailor to your individual situation
If your LLC plans to raise money from angel investors, family members, venture capital firms, or other investors, take into account the following:
An Employer Identification Number (EIN) is obtained from the IRS and is required if you plan to have any employees for the LLC. The EIN is also referred to as a “Federal Tax Identification Number.”
In the past, an IRS Form SS-4 was filed to obtain an EIN, and it sometimes took many weeks to get; however, now you can obtain one online via the IRS website. The online process now allows you to get an EIN immediately, and the service is free.
Most banks require you to have an EIN before you can open a business account.
Depending on the nature of your business, you will also have to obtain a local, state, or federal business license. For example, if your business sells alcohol or firearms, then you will need a federal, state, and/or business license. Some cities, such as San Francisco, require business licenses for companies engaging in business within the city. Other cities, such as Chicago, require special licenses for business activities such as retail, restaurants, entertainment venues, theaters, day care, manufacturing facilities, and motor vehicle repair shops.
You want to properly capitalize your LLC with funds sufficient to operate the business, and you want to ensure that the LLC account is separate from your personal accounts. This will require you to set up a bank/checking account in the LLC’s name. Expect that the bank will want to see your filed Articles of Organization, your EIN, and possibly resolutions of the LLC authorizing the opening of the account. You will need to designate who has signing authority, and whether two signatures will be required for large checks over a specified amount.
An LLC Membership Ledger is akin to a stock ledger of a corporation. It shows the names and addresses of the LLC owners (members), what class of units they hold, how many units they hold, and when these units were acquired. The Membership Ledger also records the transfer of units by parties and the dates of transfer. It’s important to keep the LLC Membership Ledger up to date.
Most states require some form of annual report filing. Missing the deadline for such filings can lead to penalties and late fees, and even suspension or dissolution of the LLC.
As you start to do business in other states, make sure you make any required state or local filings in those new jurisdictions.
If the information in your LLC filings changes (such as business name or business address), make sure to appropriately amend your filings.