Many more businesspeople have thought about upgrading their business structure to an LLC (limited liability company) than have actually acted on it. The reason is simple, many aren’t quite sure how the process works. They may feel lost or intimidated by things like writing up articles of incorporation and other aspects of making their business “official” as far as the state is concerned.
But the benefits of becoming an LLC are often just too great to pass up: tax advantages, protection against personal liabilities, and greater business flexibility.
So how does one go about forming an LLC? Here are the 5 basic steps you need to follow:
1. Choosing a Name
You may wish to keep your current business name when you file for LLC status with your state’s LLC office, but that’s not always possible. You have to make sure the desired name is available – it cannot be the same as any other LLC entity within that state.
You can run specialized checks to discover which names are available, and you can pay a small fee to reserve your desired business name until you finish filing the articles of incorporation. Also, your name must officially end with “LLC” or the spelled out form “Limited Liability Company.”
2. Filing Articles of Incorporation
Articles of incorporation, or articles of organization as they’re often called with LLCs, are required regardless of business type or size if you’re going to form an LLC.
You have to include all the most essential information about your business in the articles of incorporation. This can include name of business, names of members, business’ location, company purpose, and other information, but it varies from state to state.
Many times, it’s wise to get expert assistance in drafting, finalizing, and filing your articles of incorporation to avoid any mistakes or omissions.
3. Creating an Operating Agreement
Not only must you file articles of incorporation to form an LLC, you must also draft an LLC operating agreement. This agreement must be assented to by all of the LLC members.
The agreement will spell out things like who owns the LLC or what percentage of it is owned by each member, how it will be managed, the voting procedure, how profits/losses will be handled, and what rights/responsibilities apply to each member.
You can’t form a business without rules for how it will be run. That’s why it’s important that your operating agreement be legally specific, valid, and practical. If you make mistakes in the operating agreement, you could risk losing control over your own business down the road.
4. Publishing a Notice of LLC Formation
In a couple of states, you have to take the additional step of publicly publishing an official notice of the formation of your LLC in a local newspaper. This is seen as a bit old fashioned and unnecessary by most states, so it’s only required in Arizona and New York.
The newspaper notice has to stay in print for a specified period of time in order to be valid. Failing to take this step in the relevant states, technically, would delegitimize the formation of your LLC.
5. Obtaining Licenses/ Permits
In order to actually function as an LLC, more is necessary than just filing papers with the state that say you exist. You may also, depending on the state and the type of business, have to obtain various licenses and/or permits.
Also, in order to maintain your LLC status as valid, you have to keep records of your business finances and of business meetings in a detailed and proper way.
Forming an LLC is a big decision for any entrepreneur. The advantages it offers are often well worth it, but familiarity with the process and professional help in navigating it are going to be necessary to get it done.