If you’re starting a business, you’re probably excited to get it up and running and start making money. You might want to form a limited liability company (LLC), which is rather a simple process.
What is an LLC?
An LLC is an increasingly popular business structure for startups, offering liability protection for ownership and greater flexibility than a corporation, particularly in terms of taxes. The LLC itself does not pay taxes. As a “pass-through” entity, income passes through the business to the owner or owners, who report it on their personal tax returns. An LLC is created by filing paperwork with your state, and nominal fees are involved.
An LLC offers its owner or owners, who are called members, considerable flexibility in terms of management. You can choose your management and operational structure and decide how you want to be taxed. Your LLC can have a single member or multiple members, all of whom have personal liability protection, meaning your personal assets are not at risk if you cannot pay business debts or are involved in a lawsuit.
How Long Does an LLC Take to Set Up?
Filling out the paperwork to form your LLC is simple. You can complete the documents and submit them online in less than an hour. From that point, it’s just a matter of how long your state’s processing of business filings takes.
Generally, in most states, it should take no more than a week to 10 days, and then you’re officially in business! However, there are other important steps involved for you to make sure that all your bases are covered.
The paperwork and fees vary by state, so you can check your secretary of state’s website to find more information.
How to Form an LLC
- Choose Your State. The first step is to choose the state in which you plan to do business. LLC processes and requirements vary by state, so visit your state’s website for details. Generally, you can form your LLC with an online application. If you plan to have physical locations in more than one state, you will need to register a foreign LLC in the states where you will do business other than your home state.
- Choose Your LLC Name. Your business name is extremely important. It should reflect the brand you plan to build, tell customers what you do, and be memorable. Once you’ve chosen a name, you’ll need to make sure that it’s not already taken. You can do a search on your state’s website, and on other state websites if you are doing business in more than one state. You should also check the US Patent and Trademark Office to make sure the name hasn’t been trademarked.
- Choose a Registered Agent. A registered agent is the person or company that sends and receives legal documents on behalf of your LLC. The registered agent can be a member of the LLC, or you can choose a third party such as an attorney, or a company that offers registered agent services. Most states require you to have a registered agent. The agent must be a resident of the state where you do business, or a corporation authorized to do business in your state.
- Determine Your Management Structure. There are two types of management structures:
- A Member-Managed LLC is managed by the members of the LLC. This is usually chosen by smaller LLCs with few members who will be involved in various management roles.
- A Manager-Managed LLC is managed by people who are not members of the LLC and are employees of the business. This structure is often used when an LLC is larger and has multiple members.
- File Articles of Organization. The articles of organization is the form you file to create your LLC. These forms vary by state but can generally be filed online. You’ll need to fill out the LLC name, the name and address of the registered agent, the names of the LLC owners, and in some states, the way the LLC will be managed. Fees are generally around $100.
- Draft an Operating Agreement. An operating agreement is not usually required but is highly recommended. The operating agreement should clearly define the following:
- The percentage of each member’s interests in the LLC
- How profits and losses will be allocated to each member
- Each member’s rights and responsibilities
- The management structure and management roles of members
- The voting rights of each member
- Rules for meetings and voting
- What happens when a member sells their interest, becomes disabled, or dies
It’s a good idea to have an attorney’s help when creating your operating agreement so that you can be sure you’re covering all bases to protect all members and avoid future issues.
- Apply for Business Licenses. It’s important to make sure you’re in compliance with all laws at the local, state, and federal levels. It’s likely, depending on your location and type of business, that you’ll need business licenses and permits. Do some research to determine which licenses you need. At the very least you’ll need a sales tax permit to sell products and collect sales tax.
- Obtain an EIN. EIN stands for Employer Identification Number and is like a social security number for your business, allowing the IRS to easily identify your business. It is also known as a Federal Tax Identification Number (FTIN), or sometimes for corporations a Tax Identification Number (TIN). An EIN is required if your LLC has more than one member, if you plan to hire employees, or if you choose to have your LLC taxed as a corporation. The application is free and can be found on the IRS website. The application is form SS-4, and it can be mailed to the IRS or submitted electronically, and once your information on the application has been validated, the EIN is assigned immediately.
- File Annual Reports. Your state may require you to file annual reports for your LLC, which may involve a fee. Check your state for requirements.
Filing the paperwork to officially form your LLC is simple and can be done in less than an hour. Then you just have to wait for the state to process the form and make your business official.
It’s up to you to complete all the rest of the steps to form your business to make sure you’re in compliance with all laws and that member rights are defined in the operating agreement. It’s recommended that you have an attorney’s help during the LLC formation process, particularly with the operating agreement.
Completing all the steps and gaining state approval of your LLC should take less than two weeks, and then you’re ready to start bringing in the cash!
Learn more about LLC operating agreements in this Step By Step article, or read about the benefits of an LLC.