A limited liability company (LLC) offers liability protection and tax benefits and is also one of the simpler business entities to form. However, it is important to take the steps to properly form your LLC before you open your doors to customers. If you fail to do so, you may lose your limited liability protection, and you could face penalties in the form of fines.
Step One: Choose Your Business Name
An important first step is to select a name for your business. Not only do you want a name that is marketable for your goods or services, it must also comply with your state’s laws. Your state may require all LLCs to include “LLC” or “Limited Company,” or a similar phrase or abbreviation to let the public know you are a limited liability entity.
In addition, check to make sure your name is not infringing on another company’s trademark. You are generally prohibited from using a name that is used by another business selling similar goods or services, particularly in your locality. To see if another company already has the name, you can start by performing a simple online search. In addition, many Secretary of State websites have an online search tool to see if your selected name is available or if it has been registered by another business.
You may also search the federal trademark database. If a business has federal trademark protection for a particular name, and they are offering similar services or goods as your business, you may be precluded from using the name anywhere in the country. If you use a name that has state or federal protection, you could be sued for trademark infringement.
Step Two: File Articles of Organization with the State
Each state has its own requirements to form an LLC. Typically, you must file a document referred to as the articles of organization and pay the required fee. Your state may have a different term for the required filing, such as a certification of formation.
The articles will include information such as the name and address of the business, the date of formation, and the purpose of the business. You must also provide the contact information for a registered agent, which is an individual or business who is responsible for receiving any official legal documents from the state, as well as any subpoenas should the LLC be sued.
Step Three: Draft an Operating Agreement
An operating agreement is an internal manual for how the LLC will be managed. The agreement may include information such as the financial contributions of each member, how profits and losses will be distributed, the duties and responsibilities of each member, and the procedures for holding meetings. This is not a document that is filed with the state, but is instead kept with the company’s internal records.
Although not required in every state, it is recommended for every LLC to avoid conflicts between owners. Even for a single-member LLC, it can provide important information such as what happens to the business in case the owner becomes incapacitated. In addition, an operating agreement shows that you are observing corporate formalities, which is important to preserve the liability protection of the LLC.
Step Four: Register with Tax Agencies
Your LLC may be required to register with different tax agencies. If you have more than one owner or any employees, you must obtain an Employment Identification Number (EIN) from the IRS, which is a unique tax identification number for your business. For single-member LLCs without employees, you may not be required to apply for an EIN unless you elect to be taxed as a corporation. However, an EIN can still be helpful to protect your identity, so you do not have to use your social security number for bank accounts and filings with the government.
You may be required to register with your state tax agencies. Some states and counties require all businesses to register, while other areas may only require you to register if you sell tangible goods or provide particular kinds of services. Check with your state agencies to see what is required for your business.
There are additional steps for businesses with employees. You are responsible for making tax payments to state and federal agencies, as well as unemployment insurance and worker’s compensation. In order to make these payments, you must register with the appropriate agencies. Check with your state tax departments, an accountant, or a local attorney to determine the requirements for your business.
Step Five: Obtain Business Licenses
Depending on your business and location, you may also need to apply for business licenses. Some towns and counties require all businesses to be licensed. Other businesses, like those selling food or alcohol, may be required to obtain a number of licenses from different state and federal agencies.