A limited liability company (LLC) is a business structure that provides its owners—known as members—with limited personal liability for the company’s debts and obligations. This means members’ personal assets are generally protected from business-related lawsuits or creditors. Additionally, an LLC typically allows profits and losses to pass through directly to the members, avoiding corporate taxation, similar to sole proprietorships and partnerships.
However, before establishing an LLC, it’s important to determine whether it is the most appropriate structure for you to build your business.
To help get you started, we’ve outlined fundamental information about LLCs and what is required to establish this business entity. We discuss choosing the right state to create an LLC, the factors you should consider when choosing a business name, why and how you should appoint a registered agent for your LLC, how to file the articles of organization and more.
Choosing the Right State to Establish an LLC
Every state has its own regulations governing LLCs, and the rules of the state where you establish your business will significantly impact how you set up your LLC and how you will have to run it.
There can be significant differences between states, so it’s important to do your research. If you find that too time-consuming or complex, consider consulting with a business adviser or attorney. These professionals can help you comply with state regulations while setting up your LLC.
You can file your LLC in whatever state you would like. However, most people file in the state where they live or where they’ll likely be doing business. There is a lot of flexibility when choosing the state for your LLC. As Precision Global Consulting (PGC) experts explain, “you’re not required to incorporate your business in the same state that you operate in, there is a great degree of flexibility to where you can register.”
Some factors to consider when choosing your state include:
- Formation fees (paid once upon setup, but can significantly differ from state to state)
- Annual fees
- Tax rates
- Corporate laws
- Privacy laws
An LLC business structure offers flexibility in taxation and management. How your LLC will be taxed will depend on whether your LLC has a sole proprietorship, partnership or corporate structure.
The tax rates you will pay depend on the state where you have your LLC, thus making it an important decision. For example, some LLCs find it beneficial to be in a state with no personal income tax, such as Nevada, Florida or Texas.
If your business will have a physical office or storefront, your LLC should be registered in the state where it will be located.
How to Choose a Business Name for Your LLC
After you decide where to file your LLC, you need to come up with a business name and check to see if the name is available in your chosen state. You should choose a memorable name that suits your plans for growth. Selecting a name that will be easy to optimize for search engines is also a good idea. If your business name is too generic, it may be hard to find on Google search.
Your business name should be unique and legally compliant. Use a tool like Business Name Search on LLC.org to determine whether a name is available. You are responsible for ensuring that another LLC has not already used the business name in your state.
Try to avoid choosing a name that is too long. You want it to be easy for your customers to remember. You should also make it relate to your brand and type of business. As LLC.org explains, your name will become your brand. It will be key in how people think about your LLC business.
Appointing a Registered Agent for Your LLC
You must have a registered agent when building an LLC. This person is registered to receive legal and tax notices as a representative of your business. You can be your own registered agent or appoint someone else, often your attorney or a company that provides registered agent services. Other options might include a trusted employee, family member, friend or a registered agent service.
Being your own registered agent comes with some perks, like maintaining complete control over your LLC’s business information and documents. It may also save you some money. Just note that you must provide a physical address connected to the registered agent where all documents will be sent; this cannot be a virtual office or P.O. box.
States vary in their requirements for LLC registered agents, so it’s also important to determine your state’s rules before making your selection.
Filing the Articles of Organization to Get an LLC for Your Business
Filing your articles of organization, also called a “certificate of organization” or a “certificate of formation,” formally establishes your LLC. According to the U.S. Small Business Administration (SBA), this document includes the essential details about your LLC.
Articles of Organization include:
- Company name
- Company address
- Member names
- Registered agent
Most businesses are also now required to file something called a Beneficial Ownership Information Report. This report is to ensure there is transparency in business ownership. You can file the report with the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) online. All of this can usually be done through the Secretary of State, or you can hire an attorney to do it for you.
Do You Need an Operating Agreement for Your LLC?
An operating agreement is a legal document that protects from liability and clarifies agreements between the agreement’s members. According to the SBA, it includes information on your company’s financial and functional decision-making structure. In other words, it describes how your LLC will make significant business decisions financially and operationally.
Additionally, it explains the responsibilities, powers and duties of each member of your LLC. It’s a good idea to create an operating agreement for your LLC, whether or not your state mandates it. This document provides an extra layer of protection for your business and yourself.
Once you’ve created an operating agreement and all owners (members) have signed it, all business owners must follow its rules. If you don’t have an operating agreement, you must follow your state’s default rules.
Getting an EIN and Business Licenses
An EIN (employer identification number) is like a Social Security number for your business. When your LLC has an EIN, paying state and federal taxes is simpler and easier.
According to the IRS, your “LLC will need an EIN if it has any employees or if it will be required to file any… excise tax forms… Most new single-member LLCs classified as disregarded entities will need to obtain an EIN.”
Having a business EIN also makes it easier to do your business taxes. You can attach your business’s returns and other tax information to its EIN, saving you work, as you won’t have to use individual Social Security numbers. This allows for easier record-keeping that helps with compliance and makes audits easier.
You can obtain and register your EIN free of charge on the IRS website. Use this avenue, as there are many scams in which sites promise to do this for you for large fees.
Maintaining Your LLC Status and Staying Compliant
Once you’ve set up your LLC, you need to maintain it and keep your business in compliance. These include creating annual reports, filing taxes correctly and updating your registered agent. Here are some other tips for staying compliant:
- Obtain the required business licenses and insurance and make sure they’re up to date. Beware of mail scams telling you you need to get a license or pay money to get a labor law poster.
- Establish separate business and personal bank accounts. You should also have a credit card dedicated solely to business use.
- Conduct all your LLC’s business in your business name. As The Robinson Advocacy Group explains, this is key to ensuring that customers and clients know they’re doing business with an LLC rather than a private person.
- Regularly file the necessary required reports with your state.
If you decide to do business in other states, you may need to register your business there. This is usually necessary if you have a presence in that state or have employees in that state.
Take the First Step to Create Your Own LLC
Forming an LLC has many benefits. It’s a practical step to help protect yourself as an entrepreneur and improve the credibility of your business.
Whether you’re in the process of making your side-hustle into a full-time business, or you already have a company that you want to take to the next level, creating an LLC might be the right option for you.
This article appears in the September 2024 issue of SUCCESS+ Magazine. Photo by Prostock-studio/Shutterstock.
