Are you ready to begin your journey of becoming a successful business owner? Forming a limited liability company, or LLC, is one of the smartest decisions you can make. Not only will you be legal in the state you live in, you’ll also be protecting your personal assets with several tax advantages.
Read on to learn 10 steps on how to start an LLC!
Benefits of Starting an LLC
There are numerous benefits to starting an LLC you may not have considered. One of the main benefits is limited personal liability.
As a sole proprietorship, you and your business are legally the same entity. This means that business debts become your personal debts.
Starting an LLC eliminates this risk by creating a legally separate entity from the owners. Although it’s possible to lose money that you’ve invested in the company, your personal assets can’t be used to collect those business debts. This benefit remains even if your business is sued for negligence.
One Step at a Time: How to Start an LLC
The following steps will give you a general idea of how to start your own LLC. However, once you work through these steps, it’s recommended to research your state-specific requirements in case there are any variations.
1. Choose an LLC Name
Choosing a business name may be the hardest part of starting your LLC. Think of a name that can accurately describe your business in a few words. You’ll need to think of one that’s easy for people to remember.
Once you have a list of ideas, you’ll be able to check out your state’s online database in order to see if your favorite names are available. There are some restricted words and phrases to keep in mind, such as the words “bank” and “trust.” Many states also require you to have “LLC” within the name as well.
2. Registered Agent
You’ll need to designate a registered agent to receive service of process and official mail. They need to be available at a physical address during normal business hours. Your registered agent’s information will also become part of the public record.
3. Articles of Organization
The state form needed to file your LLC is usually called the Articles of Organization. These forms are normally processed by your Secretary of State. Once the Articles of Organization are approved, you’ve legally formed an LLC within your state.
4. LLC EIN
After you’ve formed your LLC, you’ll need a federal tax ID, or FEIN, from the IRS. Short for Federal Employer Identification Number, it acts as a social security number for your LLC. The form needed to apply for a FEIN is called Form SS-4, which is available on the IRS website.
5. Operating Agreement
The operating agreement is a business contract that details how your LLC will be managed. It documents all the terms and conditions agreed to by members and owners of your LLC.
Although it’s not a legal requirement to have an operating agreement in most states, it is recommended. It helps protect your business in terms you agree with; otherwise, you’ll be left with your state’s default language on how to divide profits between members and other arrangements.
Even if you don’t have members and are a single owner of an LLC, an operating agreement helps further differentiate you from a sole proprietorship. Operating agreements should include the following information:
- Formation Date
- Registered Agent
- Member Information
- Member Contributions
- Liability of Members Statement
- Admitting New Members
- Fiduciary Duties
- Dissolution and Termination
6. LLC Bank Account
You’ll need to separate your personal assets from the business assets by opening a new business bank account. This usually requires your Articles of Organization, operating agreement, and FEIN. You may also need an LLC resolution, depending on the bank.
7. LLC Funding and Assets
Once you open a bank account, the next step is to make sure it’s well-funded — especially in the beginning stages of your business, when consistent marketing is necessary.
Apart from business loans, if you have multiple members in your LLC, each member can contribute their personal money or assets to fund the business. They’ll receive a proportionate percentage of membership interest in return.
8. Reporting Requirements
Even after you create your LLC, you’ll need to check in with your state annually, biennially, or periodically to confirm basic information. These reports are usually combined with other state requirements, like an annual franchise tax. Some states also require an initial report shortly after you legally establish your LLC.
9. Licenses and Permits
Make sure to check with your state on business permit or licensing requirements. They can vary depending on the industry and trade.
As your business becomes established and grows, you may want to expand out to different states. You can do this through a Certificate of Authority. The process of applying for an out-of-state LLC, or “foreign LLC,” is similar to the process of initially forming an LLC in your own state.
A Successful LLC
Although it may seem overwhelming at first, by simply focusing on and following one step after another, you’ll be on your way to establishing your LLC. Before you begin the process, make sure you understand each step and its necessity, and check with your state on other specific requirements, such as permits and licenses.
By learning how to start an LLC and documenting everything properly in the beginning, you’ll be establishing a foundation for the lasting success of your business.
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