Starting a business comes with many things to do, including forming a business entity. If you’ve decided to form a limited liability company (LLC), you have a handful of tasks to complete before you officially file with your state.
Here we’ll detail what you need to do before you officially form your LLC.
Determine if an LLC is Right for You
LLCs offer many benefits, but they’re not necessarily the best choice for every business, so first you need to make sure that an LLC is right for you.
One of the main advantages that an LLC has over a sole proprietorship or general partnership is the personal liability protection it offers. However, forming an LLC comes with a filing fee and periodic reporting requirements that vary by state. Sole proprietorships and general partnerships are not filed with the state and therefore have no fees or reporting requirements.
So, you have to decide if the personal liability protection is worth the extra cost and reporting requirements. For most entrepreneurs, it is.
Your other main option is to form a corporation. LLCs have the advantage over corporations when it comes to taxation. Corporate profits are subject to corporate taxes, and shareholders’ dividends are also taxed, which is known as double taxation.
LLCs, on the other hand, are not taxed. The profits of the LLC pass through to its owners to be reported on their personal tax returns.
However, the ownership of corporations is measured in shares, which are easily sold or transferred. The ownership of an LLC, on the other hand, is measured in percentages, and the transfer of that ownership is a bit more complex. This makes corporations more attractive to investors, since shares can easily be transferred to them in exchange for investment capital.
So, if you’re planning to raise money from investors, a corporation might be a better choice for you.
The best business entity choice is not always clear cut, so when in doubt, have a conversation with your business attorney and your tax advisor.
Choose an LLC Name
If an LLC is your choice, you need to choose a name for your LLC that follows the LLC name regulations of your state. Each state has different rules, but all require that your name include an identifier such as “limited liability company” or “LLC”. Most also prohibit the use of certain words like bank or university or anything that could confuse your business with a government entity.
Be sure to check your state’s rules, as some are more restrictive than others.
Then make sure your desired LLC name is available by doing a business search on your Secretary of State’s website. Next, check the United States Patent and Trademark Office’s website to make sure the name is not trademarked.
Finally, make sure the related domain name is not taken by checking a site like GoDaddy.
Select a Registered Agent
Nearly all states require a registered agent for your LLC, which is a person or business entity authorized to accept official correspondence on behalf of your LLC. In most cases you can be your LLC’s registered agent, but that requires you to be personally available at your registered address during normal business hours, which can be very restrictive for a business owner.
Instead, there are a host of registered agent services that you can choose from to appoint as your registered agent. Such services will receive your correspondence, promptly notify you, and make sent documents available to you online. Registered agent services typically cost between $100 and $300 annually.
Choose a Management Structure
While LLCs offer much management flexibility, you have to choose either a member-managed or manager-managed LLC. In a member-managed LLC, all members play a role in managing the business, with no non-member managers. A manager-managed LLC can have a few different scenarios.
- Some members are appointed as managers, while other members are silent partners.
- Some or all members are managers alongside a non-member manager or managers.
- No members are managers and non-members are appointed as managers.
Some states require that you specify your management structure when you officially form your LLC, so you need to make this decision before you file.
Decide on Operating Agreement Terms
If your LLC is going to have more than one member, you need to ensure that you have a meeting of the minds before taking any formal steps. After you form your LLC, you’ll create an operating agreement that will define the arrangement between members, so you should determine the terms of your operating agreement before LLC formation. You don’t want to officially form it, and then find that you and your partners cannot agree on terms.
Terms include the ownership percentages of the business, how profits are distributed, voting rights of members, how disputes are resolved, and how ownership can be transferred. They also include provisions regarding how a member can be removed, and what happens if a member becomes disabled or dies.
A good operating agreement will also specify the specific management roles and responsibilities of the members.
Form Your LLC
If all has gone well, you’re ready to officially form your LLC. You’ll do so by filing articles of organization with your state, although in some states the document is called a certificate of organization or a certificate of formation.
In most states you can file online on your Secretary of State’s website. The form will generally require the LLC name and address, the name and address of the registered agent, and in some states, the management structure and names and addresses of managers or members.
Fees to file range from $40 in Kentucky to $500 in Massachusetts.
Create Your Operating Agreement
Once you’ve filed, be sure to draft your operating agreement. Only a few states require one, but as you can see from the previous description of its terms, it’s highly advisable to have one.
You can find operating agreement templates online that you can customize, but it’s best to have an attorney’s help in drafting the agreement. An attorney can ensure that all members’ rights and interests are protected.
A thorough operating agreement can help you to avoid potential legal action between members.
In Closing
An LLC is an excellent business entity choice for many entrepreneurs because of the advantages that it offers over alternatives. Just be sure to have all your ducks in a row before you officially form your LLC so that the process goes smoothly, and your business gets off to a good start. Once it’s done, you can turn your focus to launching your business on its way to success!
Salman is a prolific environmental writer, and has authored more than 500 articles in reputed journals, magazines and websites. He is proactively engaged in creating mass awareness on renewable energy, waste management, sustainability and conservation all over the world.
Salman can be reached on salman@cleantechloops.com
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