Forming a limited liability company (LLC) can appear to be quite a daunting task when faced with the scale of it; many committed entrepreneurs have failed at their endeavor to create their own business, with 20% of entrepreneurships closing in their first year. Breaking this down into six comprehensive steps can make the process significantly easier to understand. Be aware that these steps alone only outline the legal process associated with registering a business, and not everything involved in actually getting a business up and running.
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How to Form an LLC
The first step is to select the state in which the LLC will be based. This is because the rules differ slightly depending on which state the LLC is being registered in. As advised by LLCGuys – for most entrepreneurs, it is recommended to form an LLC in the state in which they live and plan to do business.If the entrepreneur’s business will have a physical presence (e.g. stores or offices etc.) in different states, they will need to register as a foreign LLC in those.
Step two is to decide on the LLC’s name. A business name search must be completed to ensure that the name is unique (i.e. not taken). On top of this, each state has naming requirements that the LLC must comply with. For example, it is common practice that the company name must include the phrase “limited liability company” either in full or its abbreviated form and that the company name cannot confuse the LLC with a governmental agency (e.g. CIA or a State Department).
Next, a registered agent must be selected for the LLC. This is a person or business entity that acts as the official legal correspondence for the LLC; they are responsible for sending and receiving tax documents and legal papers on the company’s behalf. This role does not exclude members of the LLC, or even its owner, who are all capable of performing this role so long as the person being elected is over the age of 18, has a physical address in the state, and is available (in person) during business hours. That being said, it is highly recommended to hire a registered agent service due to its many benefits: peace of mind, certain compliance with the law, flexibility, and privacy.
For an LLC to be officially created its Articles of Organisation must be filed with the state’s business division (normally the Secretary of State). This information can be submitted online or by mail by the owner himself or an LLC formation service if they prefer – though the average cost of this is about $100 to start an LLC.
An Operating Agreement is a document that sets out the structure of ownership and the roles of the members within the LLC. This allows the financial and working relations between the business owners (“members”) and employees to be elucidated. Whilst not compulsory by law in most states, it’s certainly recommended as it helps to prevent misunderstandings by establishing clear expectations about partner responsibilities. Additionally, it brings credibility for single members LLCs and helps to ensure courts uphold its limited liability aspect.
Final step is to ensure that the LLC must have its own Employer Identification Number (EIN) – this can be easily acquired online or by mail. An EIN is a government-issued nine-digit number that acts as a business’s social security number. It is necessary in order to open Business Bank accounts and hire employees.
Other Relevant Factors to Setting Up a Business
Running a business necessarily costs money. It is recommended that potential owners calculate the potential costs of their business as accurately as possible so that the correct source of funding can be secured. It is equally important for a firm to establish a detailed financial plan so that spending is controlled. The sources available for an LLC to seek funding are: bootstrapping, small business grants, and small business loans.
In addition to this, a business must confirm it is properly insured. Certain insurance is mandated by law, such as Workers’ Compensation Insurance, whilst others are recommended, such as General Liability, and others still are intended for specialized LLCs, such as Professional Liability Insurance. A business must follow the laws and use its judgment to decide which sets of insurance it requires.
Closing Remarks
It can be difficult to set up a business, but breaking down this process into six comprehensible steps alleviates the pressure on entrepreneurs greatly. These six steps refer to the core of setting up a business though there are several other considerations that must be borne in mind. This free resource is useful for more information on the formation of an LLC in any state.
