How Do You Start an LLC and What Are the Key Steps Involved?

Most entrepreneurs mistakenly believe that forming an LLC is either too difficult or “too easy”. In reality, it is not too easy to form an LLC – it takes a bit of work, but it is not ridiculously complicated if you know what you are doing. Yet, entrepreneurs don’t know all the steps required to form an LLC and end up hitting roadblocks they hadn’t anticipated.

Limited Liability Companies (LLCs) are a unique entity type that combines the best features of a corporation — namely, limited liability for shareholders — with the tax benefits of a partnership. However, while the owner(s) of an LLC may enjoy a number of benefits, they also have to keep in mind various record keeping and compliance obligations.

Choosing and Securing Your Business Name

The name of your LLC is the legal name in which your LLC will operate in any state in which you operate. Sounds easy enough, right? Actually, selecting an LLC name is one of the more complex processes of starting an LLC.

Every state maintains a database of recorded business names. The name of a limited liability company must be distinguishable from every other name currently existing in the state where it is to be incorporated. “ABC Marketing LLC” may be non-distinctive with “ABC Marketing Services LLC,” depending on the state under which incorporation is to take place. Some states have very strict rules with respect to determining name similarity and prohibiting names, while other states take a more expansive view of these concepts.

All company names must include “LLC” or “Limited Liability Company” in most states, although some states allow names such as Ltd. Liability Co. etc. Check with your state for details.

We highly recommend reserving your business name before filing the formation documents with the state. This service is typically available for a fee and allows for a period of reservation of 60 to 120 days. The costs of reserving a name varies from $10 to $50 depending on the state. It is usually a good idea to reserve your business name if you are not ready to file your formation documents.

Trademark Considerations

Note that having a state name available to use for your startup does not mean that you can trademark the name. Perform a simple search online to see if the name is available at the federal level via a trademark search. The USPTE database is a good starting point.

Filing Articles of Organization

Articles of Organization create your LLC legally. Each state requires the same basic information (name and address of the LLC and its managers/members) but the application format can vary greatly from state to state.

When filing an LLC in the state where the company will be organized, several pieces of information will be required. Typically, a LLC filing will require the name and contact information for the registered agent as well as the street address for the principal office of the company. Most states allow the LLC organizer to select from a variety of different management and governance structures for the company. Additionally, most states do not require a business purpose statement, nor is there a requirement to list the initial members of the company.

Every state has a different filing fee for a limited liability company (LLC). In Kentucky, for example, it is $40. In Massachusetts, the filing fee is $500. The processing time for the LLC articles of organization will vary depending on whether you file online or by hand with the state. Using a formation service, you can start an LLC online and have your LLC active the very same day.

You’ll also want to know about Registered Agents, who serve as middle-people for your LLC, receiving legal documents such as lawsuits. You can be your own registered agent as long as you have a street address and are available during normal business hours. However, most people prefer to pay for this service, which can cost anywhere from $100 to $300 a year. Having a registered agent service provides you with privacy, and extra peace of mind knowing that someone or a company will be there to receive important business documents in a timely manner.

Publication Requirements

After filing your corporation with the state, most states require some form of publication. New York requires a week of publication in the COMPLIANCE PAGE OF THE OFFICIAL PUBLICATION OF PUBLIC RECORDS FOR SIX WEEKS. The cost of this service, however, can be in the range of $1,000 to $1,200 in the larger markets. Nebraska and Arizona require similar publication, at a lower cost.

Creating an Operating Agreement

Operating agreements are optional but can be helpful to an LLC by laying out an organizational structure for the LLC to follow. While most states do not require LLCs to have an operating agreement, it is generally recommended that one be included with the LLC’s organizational documents. The operating agreement will help to prevent misunderstandings and establish a process for making key decisions for the LLC should disputes ever arise.

It’s standard operating procedure for even a single-person LLC to have an operating agreement in place. The main benefit to you is that you’ll be insulated from potential liability, and the agreement will also help to separate out your personal assets from those of the LLC in the event of a lawsuit. In some jurisdictions the courts may even disregard the LLC form and treat you as a sole proprietor if you don’t have an agreement in place.

Apart from the rules regarding the ownership of the LLC and its allocation of tax losses, the operative provisions of the LLC Agreement will generally set out the respective ownership percentages and the terms and conditions for the sharing of profits and losses together with the respective roles and responsibilities of the members in the management of the LLC, such as whether they will share voting rights equally. The Agreement will also set out provisions for withdrawal or transfer of a member’s interest in the company. The Agreement should also specify the amounts and frequency of the required contributions to the LLC by its members, including details in respect of any further capital investments which may be required.

Like any living document, operating agreements can be amended as circumstances change over time. Often it is a good idea to include procedures for amending the agreement in the original document to avoid controversy or conflict.

Understanding Ongoing Compliance Requirements

After you have formed your LLC, there are several additional steps you will be required to take. In every state, LLCs are required to file an annual report (often referred to as the “fringe benefit report” or “business conspiracy report”) which must include updated information regarding the LLC. In addition, LLCs are required to confirm with the state that their registered agent remains active. Most states establish a time frame in which the LLC must file the report, which differs from state to state.

Filing the annual report for an LLC with the state varies in cost. Each state has its own fee which generally ranges from $10 to $500 per year. Some states even charge based on the amount of registered capital or gross revenue for which permission has been applied and/or granted. In Delaware for example, every LLC pays an annual report fee of $300, whether small or large.

Some additional consideration must be given to tax elections that may (or may not) be necessary, such as an election to have the LLC classified as a corporation (filed on Form 8832) or even an S-corporation (filed on Form 2553). These elections are binding for five years for foreign owners and can be difficult to change. LLC members must make an informed decision regarding such matters.

When starting a business, many small business owners overlook the requirement for state tax registration. State governments require businesses to obtain a sales tax permit, an employer identification number (EIN), and any other industry specific business licenses required by the state government.

The LLC formation process involves a series of steps in addition to the state specific requirements. Setting up an LLC is relatively easy and straightforward to do, but meeting your obligations involves more than just forming the LLC. There is much to gain by forming your LLC properly the first time, and it can pay big dividends in the years to come.