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Set Up an LLC Properly: The Essential Steps

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This Special Article sets forth the key steps to set up an LLC the RIGHT WAY. Please read the entire report and understand the material in each step before actually implementing the steps for your LLC formation.

STEP 1: Select Name for your LLC
The first step is to find a good name for your new LLC business. The name must be accepted by the government agency that is responsible for forming limited liability companies in your state.

Generally, the state agency will not approve a proposed LLC name if the proposed name is the same as, deceptively similar or not distinguishable on the records from another legal entity registered with the state.

It is a good idea verify that your desired LLC name is available prior to filing the documents required to set up an LLC. Refer to this link to search for business name availability in your state.

Please note that in addition to state LLC name use, you may also want to check with your locality to make sure no one has registered the name for use with a sole proprietorship. There are also federal trademark considerations. If you are going to be selling goods and services on a mass scale and developing a brand, you may want to search the database of the United States Patent & Trademark Office and consider hiring a trademark attorney if your trademark and logo are going to be very important to your business.

STEP 2: Prepare Formation Documents to Set Up an LLC
Business owners form limited liability companies for many reasons but the main one is limited liability. In some states, an LLC is not formed until the formation documents have been processed by the state agency and a Certification of Organization has been issued by the agency. If your LLC will be formed in one of these states, this is important because you will not have liability protection when conducting business until your LLC has been formed.

Also most state agencies take awhile before processing LLC paperwork. Many business owners think that once they make the decision to form an LLC, the LLC will be formed immediately. This is not the case with a regular filing in most states. The actual processing times vary and can be as long as 30-60 days or more!

Now, if you need an LLC formed fast and you need to receive the Certificate of Organization to evidence the formation, most states have an expedited filing process which can form your LLC in a day or two (sometimes even the same day). You will pay a lot more for expedited filing costs.

Once you know that you are going to start a business and you want to set up an LLC for that business, you should get the formation process started.

Make sure you keep a copy of your articles of Organization before you file because many agencies do not return the original and copies can only be obtained by paying a fee.

STEP 3: Appoint a Registered Agent for your LLC
All states require that every LLC have a named registered agent. You will need to determine the registered agent for your limited liability company prior to filing the formation documents (Step 2 above) required to set up an LLC.

The purpose of the registered agent is to accept legal documents and papers on behalf of the LLC. The registered agent name and address of the registered agent is a matter of public record and anyone can look this person up. In most states, the LLC itself cannot be its own registered agent.

You will need to check the specific registered agent qualifications for your state as they differ depending on the state. In most states, if you are a resident of the state where your LLC is formed and you will be a member of the LLC, you can serve as the LLC Registered Agent.
Many business owners choose to retain a registered agent service for this role because they do not want their name and address publicly registered and available in the state database (privacy concerns).

There are many companies that provide this service. Make sure you choose an attorney or reputable registered agent company as they will be responsible for accepting important papers for your LLC and forwarding them to your LLC’s principal address.

STEP 4: Determine Ownership of LLC
Who will own the LLC and how much will each owner own of the LLC? This is a fundamental determination that should be resolved before you set up an LLC for your business.

The important step is to make sure you properly document the issuance of ownership interests in the LLC to the actual owners (called Members once they become owners of an LLC).

A newly formed LLC does not automatically have Members in most cases. The LLC is its own separate entity and so the entity needs to issue ownership interests. So, you need to finalize and document the following:

  • Member Names and Addresses
  • Percentage Ownership Interests
  • How Much Money or Other Property Each Member is Contributing for his/her Ownership Interest

Once these questions are agreed upon, the ownership structure needs to be documented. This is usually done through the LLC Operating Agreement.

One of the benefits of a limited liability company is that the Members can decide how they want Members to be treated and what rights, obligations and limitations apply to Members. Accordingly, Operating Agreements can become quite complex the more an LLC wants to tailor its Membership rules.

While the decisions of who will be Members in your LLC, how much they will own and how much they will pay for their Membership Interests are pretty straightforward, there may be other Member specific issues that need to be addressed.

For example, will any Member be required to contribute more capital to the LLC in the future? Or, will any Member be required to contribute services to the LLC as a condition to obtaining or retaining his/her Membership Interests? Other issues include what happens when a Member wants to resign or sell his interests?

Any other Member arrangements should be documented as well in the Operating Agreement or another document between the Members. If there is going to be a services requirement for any Member, your LLC should also sign an employment or services provider agreement with that Member.

This is one area where legal representation by a qualified attorney is always recommended. After you set up an LLC with your state, you should consider seeking help to structure the ownership of your limited liability company.

STEP 5: Determine Management Structure for Your LLC
An LLC has two choices for a management structure: (i) Member-managed and (ii) Manager-managed.

In a Member-managed LLC, the members themselves have management authority and the obligation to make management decisions on behalf of the LLC. The Members will need to approve LLC business decisions and actions. The Members usually act by taking votes and a certain percentage vote is required to approve business decisions and actions. The Members can also delegate authority to officers of the LLC (President, Secretary, Treasurer, etc.).

In a Manager-managed LLC, the members themselves are passive investors in the LLC and have no management or other authority to act on behalf of the LLC. Instead, the Members elect managers and the managers make up what is commonly known as a Board of Managers. The Board of Managers is the governing body of the LLC and has the management authority to authorize LLC business decisions and actions. The Board can also delegate authority to officers of the LLC. In a small business Manager managed LLC, the managers are usually some or all of the Members but a manager does not have to be a Member.

The management structure of an LLC is established in the LLC Operating Agreement. The LLC Operating Agreement is the most important document for the LLC. This Agreement should have specific process provisions addressing how the Members or the Managers make decisions and call meetings.

Your should plan on creating and adopting an LLC Operating Agreement at the beginning of your LLC business. Without one, there is a high risk of Member disputes and confusion without one. Even if you are a single Member LLC, the Operating Agreement is a necessary agreement to evidence that your LLC is separate and apart from yourself. This evidence is very important if anyone were ever to challenge your LLC and try to hold you personally liable for business lawsuits and debts.

Without a written Operating Agreement, you will still need another written document to evidence the issuance of LLC ownership interests and your management structure will be based on the management specific provisions of the state’s Limited Liability Company laws.
Operating Agreement Options

If there is one area of an LLC business where an attorney will have the most value, it is in creating an LLC Operating Agreement for your business. Make sure you find an experienced business attorney.
If a lawyer is too expensive and you want to handle this yourself, make sure you purchase a professional and complete LLC Operating Agreement form as a starting point for customizing one for your business.

STEP 6: Obtain a Federal Employer Identification Number
Most newly formed LLCs will require a federal employer identification number (also known as an EIN# or a TIN#). This number is the number assigned to your LLC by the Internal Revenue Service (the “IRS”).

Soon after you set up an LLC, your LLC should open a bank account and keep track of money in their own accounts. Banks will require an EIN# to open an account for an LLC. If your LLC will have employees, the EIN# is also used to file payroll returns and pay payroll taxes to the IRS.
An LLC obtains an EIN# by completing and filing the IRS Form SS-4 with the IRS.

If you intend on preparing your LLC’s SS-4 application, please review the publication and the SS-4 form instructions thoroughly before applying. The LLC Expert provides an EIN obtainment service and can take care of the details if desired.

STEP 7: Determine Federal Income Tax Structure for your LLC
A great benefit of the limited liability company is that an LLC may choose how it will be taxed for federal income tax purposes.

If your LLC is a single member LLC, the LLC has the choice of being taxed as (i) a sole proprietorship; (ii) a C corporation or (iii) an S corporation. Multi-member LLCs can be taxed as (i) a partnership; (ii) a C corporation or (iii) an S corporation.

If your LLC is a single member LLC and you want the LLC to be taxed as a sole proprietorship, you do not need to make any filings with the IRS. Similarly, the default rule for multi-member LLCs is partnership taxation, so no filing is required. If you would like your LLC to be taxed as either a Corporation or an S Corporation, then you will need to file a business entity classification form with the IRS

Before you choose your tax structure, it is advisable that you consult your accountant because this decision can have significant economic consequences.

STEP 8: Register with the State Department of Taxation
In addition to paying federal income taxes to the IRS, the business generated by your LLC will require the payment of state income taxes in states which have an income tax. If your LLC is selling products that are subject to sales tax, a sales tax license is also required.
After you set up an LLC with the state corporation agency, you should visit the website of your state’s department of taxation to learn more about your state’s specific tax registration, filing and payment requirements.

STEP 9: Obtain Other Required Licenses
Your LLC will need to obtain a business license in the locality (county or city) where it does business. Each county and city has different rules, applications and potential fees for obtaining a business license. Also, if you plan on using a trade name other than the name of your LLC, you should register those names in the locality as well. Call your locality (or visit their website) to learn more.

Some businesses require an occupational or professional license in order to operate their business. Examples of these types of business include lawyers, doctors, architects, real estate brokerages, engineers, land surveyors. If your business requires other licenses, make sure you obtain the licenses and register the LLC with the relevant state professional regulatory boards when necessary.

In a limited number of circumstances, there are also some products that require licensing before they are sold (for example, lottery tickets, gasoline, or firearms). Contact the relevant licensing authorities to determine the licensing requirements of your business.

STEP 10: Employer Registrations
If you plan on hiring employees for your LLC, your LLC will need to register with the IRS to send in payroll taxes. Federal employment tax issues can be complicated and require some time to learn the process. Here is a link to the relevant page on the IRS website:

https://www.irs.gov/pub/irs-pdf/p15.pdf

Download the employment guide as a first step.

Your LLC will also need to register with your state’s employment commission or agency. Most of them will have a handbook guide as a starting point.

Employment registrations and payroll taxes can get overwhelming. There are payroll services that can assist your LLC with this matter.

Some states also have mandatory workers compensation obligations if you have a certain # of employees. These rules are also quite complex. Find your states relevant website or a good workers compensation insurance provider and they will be able to explain the specific rules and requirements.

STEP 11: Know There Are Many More Next Steps
Obviously, the first 10 steps noted above are the minimum steps needed to set up an LLC business. At this point, there are still a myriad of other operational and other business matters to take care of. For example, your LLC will need to open a bank account and your LLC should also seriously consider whether to purchase insurance for the business.

This Report is designed to give you the important first steps. Consider using a reputable and knowledgeable formation service to take care of the details to properly set up an LLC in your state.

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James Mccarthy
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James Mccarthy

Great write up Rupesh. The article helped me to to understand the LLC incorporation process. Thanks