Choosing the right business structure is one of the critical decisions you must make when setting up a new business. Some vital factors to consider include the liability of members, ease of management, taxing criteria, and overall flexibility.
Luckily, by registering your startup as an LLC, you benefit from a hybrid business structure that combines the positive attributes of corporations, sole proprietorships, and partnerships.
Some benefits of LLCs include personal property protection, tax advantages, ease of management, and great flexibility. Also, they have fewer administrative procedures and paperwork, so they are easy to form. Thus, this structure is more suitable for startups preparing for future growth. It's also very popular for these reasons.
How long does it take for an LLC to be approved? This depends on your state, whether you create it online or by mail, and whether you opt for an expedited option, if available.
Generally, online filings are approved faster than mail ones. For more details, you can research online for state-specific LLC approval times.
When setting up an LLC, there are specific steps you must follow. They include the following:
1. Choose A Business Name For Your LLC
A business name defines your business and creates an identity among your customers, investors, competitors, and company stakeholders. When choosing one, ensure it's unique from other LLC names in your state.
While the guidelines may vary by state, there are standard rules for selecting an LLC name. They include:
The LLC name must include the phrase 'limited liability company' or the abbreviations' LLC' or 'LLC.'
The LLC name must not include words such as FBI, Treasury, or State Department, as it might cause confusion with a government agency.
Ensure the LLC name is available in your state. You can check if the one you chose is open for use by conducting an entity search on the Secretary of State's website.
Also, selecting an LLC name with an available URL is advisable to ensure your business has a web presence.
2. Appoint A Registered Agent
Having a registered agent is a standard requirement in all fifty states.
A registered agent is an individual or business entity responsible for sending and receiving critical documents such as tax forms, lawsuits, and government correspondence forms on behalf of your business.
The agent must be a full-time resident in your state of incorporation or service authorized to conduct business in your state with a physical address. It can be yourself, a team member, or a registered agent service.
While the first option is the simplest, it's not a good idea if you're using your home address. Registered agent information goes on public record, so your actual location will be listed in public forums, raising privacy concerns.
Also, the task is highly demanding and heavily relies on your availability during regular business hours. So, if you travel a lot for work, no one will be present to receive and send vital business documents.
In that case, it's best to hire a reliable third-party registered agent service available at all business hours.
3. File Articles Of Organization
The articles of organization is an official document that creates an LLC and should be filed with the Secretary of State. You can do it online, by mail, or in person.
Note that states charge a filing fee, which differs by jurisdiction. Therefore, ensure you check with your state for the exact amount.
Here are the essential details to provide when filing articles of organization:
LLC name
Name and address of your registered agent
Whether your LLC is member-managed or manager-managed, along with their names and addresses (members control the former, while the other involves them appointing a professional manager or managers to oversee daily operations)
Also, you're required to include the dissolution date. Most LLCs are indicated as perpetual unless you intend to dissolve the business at a specific date.
4. Create An Operating Agreement
An operating agreement is a legal document that outlines an LLC's ownership and operating procedures. While it's not a legal requirement in most states, creating one is considered good practice for businesses. It ensures both owners and employees know what to expect from the company.
An operating agreement contains the following:
The names of members and their obligations
The LLC's ownership and management structure
The capital contributions of members
The criteria for profit or loss distribution
The process for adding and removing members
It serves as a reference document if you face potential lawsuits. The general state laws apply if you have no operating agreement, which may not work in your best interest. So, having this document is highly beneficial.
With the help of a business lawyer, you can craft a comprehensive operating agreement for your LLC.
5. Obtain An Employer Identification Number (EIN)
An Employer Identification Number (EIN) serves as the social security number for your LLC. It's also called the Federal Tax Identification Number.
The EIN allows the Internal Revenue Service (IRS) to identify your LLC and monitor its tax status. Also, you may need it to:
Open a business bank account
Hire employees
File taxes
Fortunately, the IRS provides EINs free of charge to LLC owners. You can apply online on the IRS website or by mail.
Ready To Get Started?
An LLC is a flexible and easy-to-form business structure ideal for startups. If you're starting one, use this step-by-step guide as your reference.
While you're at it, ensure to fulfill all the state and federal requirements that apply to LLCs during formation. Also, enlist the help of a business lawyer to see how you can best take advantage of this business arrangement while staying on good terms with the authorities.
