The day has finally come: Your small business has reached the point where it’s time to transcend “Mom and Pop” status and turn into an official limited liability company (LLC). When you’re a new business owner, you have so few things to worry about. You pick your business name, secure a P.O. box for any mail, and register your street address with any local listings or directories. Beyond that? You’re pretty much set.
Okay, so maybe that’s over-simplifying things, but you get the idea.
Becoming an LLC? That’s another matter entirely.
How to start an LLC
An LLC comes with quite a few perks, chief among them is limited personal liability exposure, which can protect you as a person in the event of a lawsuit against your company. Essentially this means your personal assets are protected. The debts and financial burdens are on the LLC, not on you as a person.
This is drastically different from a sole proprietorship, which lacks liability protection and leaves you more vulnerable to a personal suit rather than one against your company. There are also some tax benefits to LLC formation, including some that carry over from sole proprietorship, which can help you maximize your tax returns.
But first, you need to know how to become an LLC. While becoming an LLC is a big step, it’s surprisingly easy to do. Follow these pointers step-by-step to form your LLC in no time.
Step 1: Choose an LLC name
The LLC name search process can easily be the longest part of your journey to becoming an LLC. Most state laws prohibit two businesses from having the same name, so the first thing you should do is check to see if any business has your ideal name.
You should also avoid having a name that’s too similar to another business in your area. For example, if there’s already a “Peggy’s Pies,” you probably shouldn’t name your business, “Peggy’s Pies to Go.” (Sorry, Peggy.)
Step 2: Secure a registered agent service
It’s not a complete guarantee, but practically every state will require you to register with an official statutory agent or registered agent. This person will act as a representative for your LLC, receiving any legal documents, lawsuits, subpoenas, and so on. They will then hand them off to the appropriate person at your company, which in the beginning, will likely be you.
Please note that this person isn’t the same as a lawyer that would offer legal advice. Virtually anyone over 18 can become a registered agent, so they won’t necessarily have any law knowledge or qualifications.
Step 3: Create an LLC operating agreement
An LLC operating agreement is a legal document that lays out how your LLC will, well, operate. In it, you can detail how responsibilities will be divvied up, plus any financial matters, governance issues, inheritance, or other minutiae you feel needs to be laid out.
Some states will require LLC owners to submit an operating agreement, while others won’t. Either way, it’s a good idea to have one. Without one you could find yourself dealing with infighting or disagreements as the company grows, and questions or concerns over business structure arise.
Even a single-member LLC should create an operating agreement, in case you decide to grow your operating staff or in case of the event of your untimely passing.
Step 4: Submit your LLC paperwork to the state
This step is a big one, so grab your favorite snack and put on your reading glasses. It’s time to file the articles of organization. What are the articles of organization? Let’s find out.
Articles of organization
When forming an LLC, you’re required to file a document called the “articles of organization” with a state or local government agency. After the document is filed and approved by the state, the new entity is legally created as a registered business within the state. In short, the articles of organization are a pretty big deal.
Generally, the articles of organization are filed with the Secretary of State’s office in the state in which the new LLC is formed. You may be able to find government-provided forms you can use on the Secretary of State’s website.
Some states, such as Florida, Arizona, and New Jersey, require the form to be filed with a different state government agency. Furthermore, some states may use an alternate name for the document, such as “certificate of formation” or “certificate of organization.”
Although the exact filing requirements differ from state to state, certain information must be included regardless of which state you’re in. Here’s the information you must include in your articles of organization.
- Company name: Run a business entity search in your state for the name you want to use. Check to see if it’s available or if another company has already registered that name. The name must end with an LLC designation, such as “Limited Liability Company,” “LLC” or “L.L.C.” There are also certain words that some states don’t allow in an LLC’s name, including “bank,” “trust,” and “insurance.”
- Statement of purpose: You must state the purpose of the LLC. Most states do not require a specific statement of purpose. Rather, a general statement of purpose, such as “to engage in any lawful business for profit,” is usually acceptable. This also leaves the door open for future business opportunities that you may not have anticipated at the time of formation.
- Duration: If the LLC will not last perpetually, you can state the specific time period for which the LLC will be in operation. However, most LLCs elect a perpetual duration. Many states do not require you to include a specific duration, and some will even assume a perpetual duration if none is provided.
- Principal place of business: This refers to the main location or headquarters of the business. It’s usually the address where the company’s management works and where the business’s books and records are kept. If you run a business from your home, you can list your home office as your principal place of business. This also means you could qualify for a home office tax deduction.
- Registered agent: You must list the name and address of your LLC’s registered agent. A registered agent receives important tax and legal documents on behalf of the LLC. You need a registered agent in each state where the LLC is registered to conduct business, and the agent must be located within that state. The registered agent can be an LLC member, an outside individual, or a state-approved registered-agent company.
- Management: Most states require you to indicate whether the LLC will be member-managed or manager-managed. Most LLCs are member-managed, where all of the members share responsibility for running the business. In a manager-managed LLC, the members appoint a manager or a group of managers to handle the company’s daily operations. The manager-managed structure is useful in situations where there are too many members to efficiently manage the business or when there are some members who would prefer to be passive investors.
Instructions for filling out the template
You can download the LLC articles of organization template below and use it to form an LLC. It must be customized to include the organization’s specific information. Follow the instructions provided in bold type and enter the requested information in the highlighted fields. Once you’ve entered all of the information, make sure all of the instructions and highlighted fields are deleted. You will need to sign the document before it’s filed with your state.
Creating your LLC’s articles of organization isn’t the final step, but it’s an important one. Make sure you’ve checked your state’s exact filing requirements and that you’ve included all the necessary information in your articles of organization. If you need help, you can consult an attorney in your jurisdiction or an experienced entrepreneur who is knowledgeable about the process.
Step 5: Receive your LLC status from the state
You made it! You picked your name, hashed out your details in the agreement, filed with the state, and received your LLC status. Now you can focus on the fun stuff: securing additional business licenses (if you need them), creating a business bank account, throwing an LLC formation party, and preparing for whatever next big steps you have planned.
The future of your LLC
Just because your LLC is finalized doesn’t mean you have to stop there. In fact, now you can take your business even further. Here are a few of the things you can do to get even more out of your newfound LLC status:
- Obtain LLC status in other states: You’re an LLC in your state, but why stop there? If you have any intention of doing business outside your home state, having LLC status elsewhere can be great. This can offer you the same liability protection you enjoy at home and make your business look even more professional. (And possibly more attractive to investors.)
- Run a press release in your local paper: You should be celebrating your new LLC status. Make it public with a nice press release that can run in your local paper. This is a great way to drum up business, attract new eyes, and again, possibly gain the interest of some local investors.
- Get an employee identification number (EIN): even if you don’t have any employees and you’re only self-employed, having an EIN can be beneficial because it allows you to give vendors and clients your EIN instead of your social security number. If you intend to hire employees, you have to have an EIN in place.
- Obtain a business credit card: if you’re not using one already, consider getting a business credit card and business bank account. A business credit card will allow you to easily track your purchases, which is especially important if you plan on having employees or other owners who will have purchasing power. This paper trail can also be beneficial in the event of any financial suit.
- Acquire business insurance: your LLC will largely protect you from personal suits, but business insurance will take that protection even further. Look into purchasing business insurance to avoid any potential damages, claims, or losses. There will be a cost, but like all insurance, that cost can outweigh the cost of not having it.
Congratulations on forming your brand new LLC. The journey has been long, strange, and possibly fraught with late nights and greasy food. Remember: Like all things in the business and financial world, you can never have too many records. Keep copies of all your paperwork, cover all your bases, and when in doubt, speak to a legal expert to make sure you’re making the right decisions.