Ten Steps to Organizing an LLC

Jump right in as we take you step-by-step through the procedure of forming your own limited liability company (LLC).

Step one 1: Where IN THE EVENT YOU Organize?

Your LLC’s life begins when you file articles of organization with the secretary of state or an equivalent department of state. (The government will not charter LLCs or corporations.) Several factors should guide your decision which state is the foremost for your LLC. Those factors are the following:

  • The state or states where your business operates (the main consideration for some companies)
  • Initial LLC filing fees
  • Annual filing fees and annual reporting requirements
  • State-specific advantages such as for example privacy rights

In most cases, if your business is small and operates in and sells services or products in mere one state and even just mostly in a single state, you should organize your LLC in the state where you conduct business.

But imagine if your LLC operates or does business in a number of states? You may well be required to register in every the states where you do business-regardless of the state you select for your company. States generally require out-of-state LLCs (called foreign LLCs) to join up and pay fees in the state where they are operating as a guest. For instance, a Delaware LLC that transacts business in California must register in California as a foreign LLC [and] pay a filing fee in California.

Step two 2: Select Your LLC’s Name

At this time in the business process, you must select a name for your LLC. Understand, of course, that you might use a trade name in the general public marketplace apart from your LLC’s name. That is called conducting business as (DBA) a fictitious name. For instance, a company could operate a store beneath the trade name Evolution, however the LLC’s name could possibly be Evolution Trade Group LLC, or any other name. The single greatest consideration whenever choosing a name is making certain no other person or entity happens to be using the name. This consideration is guided by two factors. First, your usage of a company name may infringe on the trademark or service mark rights of others. Infringing on the trademark rights of others may bring about legal complications. Second, the secretary of state’s office won’t register a fresh LLC with the same name as a preexisting LLC. Remember, however, a secretary of state’s office could have existing records limited to company names for the reason that state-the office could have no records for company names in the other 49 states. Thus, you might wish to seek out existing trademarks and LLC names to ensure your desired name is available.

Searching the Secretary of State’s Records for Existing Company Names Let’s assume that your name will not trigger a conflict with a registered or unregistered trademark, you should then search an online database of existing company names with the secretary of state in the state where you want to organize. Remember that your LLC name should be distinguishable not merely from other LLCs, but from corporations and partnerships aswell. Almost all secretary of state internet sites offer free searching of existing company names.


Your LLC’s name should reflect LLC status. Most states require an LLC identifier. Perhaps moreover, it is best to hold yourself out to the general public as an LLC to make sure maximum liability protection. Therefore, your LLC’s name must include either Limited Liability Company, Limited Liability Co. or LLC. (Some states allow Limited or Ltd., but this designation may imply a restricted partnership.)

Step three 3: Choose the Registered Agent

A registered agent is a person or entity authorized and obligated to get legal papers with respect to an LLC. Because an LLC isn’t a physical person, service of legal papers on an LLC without such a designated representative will be impossible. The registered agent is identified in the articles of organization, but can typically be changed upon the filing of a notice with the secretary of state. (A state of organization could use a different term than registered agent. Typical equivalents include agent for service of process, local agent, and resident agent.)

The agent could be you, a member of family, a corporate officer, a lawyer, or a company that specializes in corporation and business services. The registered agent’s name is a public record; in the event that you desire anonymity, hire a specialist to execute this service. The agent will need to have a home address in the state of organization. Thus, if your business will not operate in the state of organization, you will have to hire a registered agent for the reason that state. You must think about this additional cost when organizing out of state. Such services typically range between $50 to $150 each year. If you want to hire an area agent and do not know where you can turn, visit www.bizfilings.com . Business Filings, Inc. offers resident agent services in every 50 states at reasonable prices.

Having a lawyer or a specialist firm to serve as agent has advantages. As the primary role of a realtor is to get service of legal papers, a lawyer or a specialist firm will probably maintain a consistent address also to understand the type of any legal papers served upon them. The agent may also receive important state and federal mail, such as for example tax forms, annual LLC report forms, legal notices, and so on.

Remember that most secretary of state’s offices where you file your LLC papers won’t check to see should you have properly secured the services of a registered agent. If you don’t decide on a registered agent properly, the secretary of state will mail you documents at the registered agent’s address and you may not receive them. Thus, you should hire your registered agent either before or while filing your write-ups of organization.

Step 4: IN THE EVENT YOU Organize Your LLC Yourself or Hire a lawyer?

At this time in your organization, you need to decide whether you will file and organize your LLC by yourself, hire a discount LLC service or hire a lawyer. Each approach has its benefits and drawbacks.

Self-Organization . Obviously, the best good thing about organizing your LLC yourself is initial savings. Self-organizing an LLC carries the cheapest initial cost. Of course, much like any legal matter, cutting costs could cost more later. For instance, if your LLC isn’t properly organized, ambitious creditors may later achieve your personal assets by piercing the organization veil. (The doctrine applies equally to corporations and LLCs.) See Chapters 6 and 7 to find out more on preserving your LLC’s full liability protection.

Discount LLC Organization Services. A slightly more costly alternative is to employ a discount LLC organization service. The costs range between $200 to $300 per company, and the firms provide a streamlined but competent service. Such companies are essentially filing services you need to include only the next activities:

  • They file articles of organization with the correct state office.
  • They make a boilerplate operating agreement.
  • They record the minutes of the original meeting of LLC members.
  • Nevertheless, discount LLC organization services do offer value. They are able to often navigate the bureaucratic complexities of varied states and offer prompt service and tested documents. However, the boilerplate operating agreement and proposed minutes of the organizational meeting that discount organization services provide often contain fill-in-the-blank and optional provisions that may baffle an inexperienced organizer.

    Hiring a skilled Business Attorney. Finally, you might desire to hire a business attorney to arrange your LLC for you personally. A professional business attorney can do the next:

  • Suggest alternatives and solutions that wouldn’t eventually even the most diligent layperson.
  • Assist with more technical features of LLCs, such as for example operating agreements and manager-managed LLCs.
  • Anticipate problems before they arise.
  • Prepare an operating agreement and minutes of the organizational meeting of members according to your unique needs.
  • Make sure that no federal or state securities laws are violated when interests in the entity can be purchased to improve capital for the business enterprise.
  • What you can get to pay varies. The hourly rate for business attorneys ranges from $100 to $350 each hour. The low end of the scale will apply beyond major urban centers and for less experienced attorneys. For services such as for example forming LLCs and corporations, business attorneys often charge a set fee. You will probably pay between $500 and $2,000 for complete organization services.

    Step 5: Determine the LLC Ownership

    Your LLC will issue ownership shares, called units, to its members within the organization process. A member’s units within an LLC are described in the aggregate as [their] percentage interest. So if an LLC issues 100 units to its members and one member receives 60 units, that member’s ownership percentage is 60 percent. You should choose your ownership structure early in the business process, before filing your write-ups of organization.

    The owners of an LLC could have the proper to vote their units compared with their ownership interest. Thus, majority voting power ultimately exercises control over LLCs. Even if the LLC members choose to delegate management and operating authority to appointed managers, the members ultimately benefit from the to elect managers and, if necessary, remove managers. In a nutshell, LLC members never delegate almost all their voting power plus they have ultimate authority and control over the LLC.

    JUST HOW MANY Members? In the first years of the development of the American LLC, many states required LLCs to have several members-single-member LLCs were prohibited. Today, all states allow single-member LLCs. There are no legal prohibitions on the utmost number of LLC owners, nevertheless, you should make an effort to keep the amount of members small.

    Each member admitted to the LLC should execute an investment representation letter. The investment representation letter offers some way of measuring protection to the entity as the member being admitted to the LLC makes certain representations regarding his / her qualifications and fitness to serve as an associate of the LLC. Also, in the investment representation letter, the member makes certain representations regarding his / her investment objectives, which are essential representations to be able to adhere to state and federal securities laws.

    Business owners donate to a business a capital contribution of property in trade for an interest available. A capital contribution may be the total sum of money, other property, services rendered, promissory notes, and/or other obligations contributed to a company for such owners’ interest in a company. In most cases, the levels of capital contributions designed to an LLC determine the ownership percentages for the reason that LLC.

    Members’ capital contributions ought to be determined at the look stage. Each member’s capital contributions ought to be focused on writing in the LLC’s operating agreement.

    Step 6: File the Articles of Organization

    The life span of an LLC begins with the preparation and filing of articles of organization. Typically a one-page document, the articles of organization lay out the next basic information:

  • The name of the LLC
  • The name and address of the agent for service of process, the individual or entity authorized to get legal papers with respect to an LLC
  • A statement of the LLC’s purpose
  • Optionally, the names of initial members or managers
  • Other optional matters, such as for example whether the LLC could have an infinite life or be dissolved on some date
  • To begin the life span of an LLC, you file articles of organization with the secretary of state (or other appropriate department) in the state of organization. You need to file articles of organization plus a filing fee, which differs in each state.

    In most cases, don’t appoint initial members or managers in your write-ups of organization unless it really is required. The states differ on whether appointment of initial members or managers is necessary in articles of organization. In California, listing the names of initial managers/members is optional. In Nevada, it’s required. Members and managers can simply be appointed immediately after filing. Articles of organization are public documents and therefore could reveal the names of an LLC’s members to any person in the public.

    Just about any secretary of state’s site offers sample articles of organization in either word processor or portable document format (PDF). It is best to utilize the form recommended by the secretary of state, if one is available.

    Step 7: Order Your LLC Kit and Seal (Optional)

    An LLC kit is bit more than an attractive three-ring binder where you keep up LLC records such as for example articles of organization, operating agreement, minutes of meetings, tax filings, business licenses, membership ledger, etc. LLC kits range in cost from $50 to $100. LLC kits usually are the following:

  • Model operating agreement and minutes of the organizational meeting, with optional provisions
  • Blank stock certificates
  • An LLC embossing seal
  • A blank member ledger and transfer ledger
  • LLC forms on CD
  • LLC kits aren’t required for legal reasons in virtually any state; they are completely optional. Whether you elect to get a kit or not, it is best to keep up with the following core LLC documents in a three-ring binder: articles of organization, operating agreement, membership ledger, and business licenses.

    The LLC Seal An LLC seal is a hand-operated embossing seal which has the name of your LLC, state of organization, and date of organization. Seals are accustomed to impress the state company endorsement on important documents, such as for example recorded minutes of company meetings. LLC seals have a historical ancestor: the organization seal. Corporate seals, once universally required, are no more mandated atlanta divorce attorneys state. LLC seals are standard features in nearly every LLC kit but are usually not required for legal reasons.

    Stock Certificates A stock certificate is a printed document that evidences ownership of shares within an LLC. LLC kits includes blank stock certificates. You can print the certificates by running them through a printer, typing them, or filling them out yourself.

    Stock certificates are historically connected with corporations. However, LLCs operate with less formality than corporations; stock certificates aren’t as commonly utilized by LLCs. Still, the function of stock certificates is important: it offers the stockholder written proof his / her ownership of the business. I recommend using stock certificates because they minimize disputes over ownership.

    Membership Ledger A membership ledger is a written table showing the owners of an LLC. The ledger must indicate the percentage held by each owner. As new members are put into the LLC through the sale of membership interests, their ownership is recorded on the ledger. The membership ledger also needs to show transfers of members’ ownership interest, as whenever a member dies and his / her interest is transferred through his / her will.

    The need for the membership ledger can’t be overstated. It must be maintained diligently. The membership ledger is comparable to the deed on a bit of real estate. It’s the primary proof ownership within an LLC and posesses great amount of weight when presented in court. LLC owners should insist upon receiving updated copies of the membership ledger periodically. See Appendix A for an example membership ledger.

    Step 8: Define the Management Structure and Choose Managers

    The next thing is to decide which kind of LLC your company will be: a member-managed LLC or a manager-managed LLC. Your decision isn’t carved in stone. A member-managed LLC can switch to a manager-managed LLC with only vote of its members and a fresh or revised operating agreement.

    Member-managed LLCs are operated by the LLC’s owners, much in the way of an over-all partnership. Smaller LLCs have a tendency to be member-managed. Member management is very simple since it doesn’t require any voting or appointment of managers-the owners themselves simply go to focus on the LLC’s business. Single-member LLCs, in virtually all cases, will be member-managed.

    Manager-managed LLCs are operated by appointed managers, who may or may possibly not be members. Manager-managed LLCs appear and operate much like limited partnerships or corporations. They are more technical as the appointment of managers requires voting rules to govern the procedure of appointment. Larger LLCs have a tendency to be managed by appointed managers.

    If you decide on a manager-managed format for your LLC, the members should acknowledge a few points in the beginning. First, just how many managers will run the LLC? One manager works fine for small businesses. Larger companies with an increase of complex challenges take advantage of the informed consensus that builds through a multimanager team. Quite simply, three people are not as likely to produce a bad decision collectively than one individual acting alone.

    Finally, odd-numbered manager teams are always better even-numbered manager teams. Even-numbered teams will often encounter deadlock on decisions, when managers split 50-50 on a concern. Acute cases of deadlock can trigger resignation or removal fights, owner votes, or even court intervention if the deadlock can not be resolved based on the LLC’s operating rules.

    Once you determine your LLC’s management structure and the amount of managers, you just select appropriate provisions for your operating agreement. If your LLC is usually to be manager-managed, you will select initial managers and name them in the LLC’s operating agreement. LLC managers can, but do not need to, be LLC members.

    Ultimately, LLC managers serve with respect to an LLC’s members. Take into account that an effective operating agreement should give the members the proper to oust a manager who’s not serving to the satisfaction of members. Additionally it is smart to require that managers be appointed each year or every couple of years. Managers shouldn’t be appointed for indefinite terms.

    Step 9: Prepare and Approve Your LLC’s Operating Agreement

    The operating agreement governs an LLC’s internal operations, [including] such as for example holding meetings, voting, quorums, elections, and the powers of members and managers. Operating agreements are often lay out in a five- to 20-page document. Your LLC kit, if you opt to purchase one, may include a sample operating agreement for your unique state. Operating agreements aren’t filed with the state, like articles of organization. Actually, operating agreements ought to be kept confidential. Yours should remain with the LLC’s core records.

    The preparation of your operating agreement takes work. Don’t just sign any sample agreement. You need to read through the complete document and ensure that you understand most of its provisions. You as well as your co-owners should execute the operating agreement only once you have all thoroughly digested its contents.

    Even though many states don’t legally require your LLC to possess a written operating agreement, it really is unwise to use an LLC without one. The first reason is easy: Oral agreements result in misunderstandings. You are overwhelmingly not as likely to possess a dispute among members if all parties commit their understandings to a mutual written document.

    If your LLC members usually do not adopt an operating agreement, your LLC will be governed by the state default rules. The default rules are lay out in each state’s statutes. Naturally, these rules don’t cover every possible circumstance; they cover just the fundamentals. You should not depend on the default rules because they could not be right for your company.

    Finally, adopting an operating agreement can protect the members from personal liability regarding the LLC business. Members should endeavor to supply the LLC separate existence, to carry the LLC out to the general public. An LLC with out a written operating agreement can appear much just like a sole proprietorship or partnership. LLCs require fewer formalities than corporations, but it doesn’t mean that they might need no formalities at all.

    Percentage of Ownership The way the ownership percentages of an LLC are divided among its members is among the most significant decisions a company’s organizers will face. Choose wisely-in most cases, a lot more than 50.01 percent of the vote of an LLC’s members can dictate significant decisions regarding the LLC. For this reason many company founders frequently jockey for 51 percent ownership-to maintain company control. Furthermore, if an LLC is ever sold, the amount of money received for the LLC is going to be divided among the owners compared with their ownership.

    The owners’ percentage ownership ought to be set forth on paper within the operating agreement. This written record will eliminate any later misunderstandings or disputes regarding share ownership.

    Distributive Share A distributive share is each owner’s percentage share of the LLC profits and losses. Frequently, a member’s distributive share is add up to that member’s percentage ownership share. This is one way most people setup their LLC. For instance, Nancy is a 55 percent owner and Sheila a 45 percent owner of an LLC. By the end of the entire year, they have profits of $10,000 to divide between them as owners. They’ll divide these profits according with their ownership share. Nancy would receive 55 percent of the gains as her distributive share, or $5,500. Sheila would receive 45 percent of the gains as her distributive share, or $4,500.

    Your operating agreement covers the next matters:

  • The powers and duties of members and managers
  • The date and time of annual meetings of members and managers
  • Procedures for removing managers, if you opt to operate a manager-managed LLC
  • Procedures for electing managers
  • Quorum requirements for member votes
  • Quorum requirements for manager votes, if you opt to operate a manager-managed LLC
  • Procedures for voting by written consent without appearing at a formal meeting
  • Procedures for giving proxy to other members
  • How profits and losses will be allocated among members
  • Buy-sell rules, which established procedures for transfer whenever a member really wants to sell his interest or dies
  • The owners of an LLC formally adopt the operating agreement by all signing the agreement and agreeing that it shall govern the operations of the LLC. An operating agreement is a contract among the members of an LLC; once it really is executed, the LLC’s members are bound by its terms.

    Step 10: Get yourself a Federal Tax Identification Number for Your LLC

    Because your LLC is a legal entity, federal law requires that you have a Federal Employer Identification Number (EIN or FEIN). Furthermore, most banks need you to give an EIN before opening a bank-account. You have your EIN by filling in Form SS-4, Application for Employer Identification Number, or through the use of online. In the event that you mail the form, be prepared to wait up to six weeks to get your EIN. In the event that you fax your form to something center, you’ll receive your EIN in about five days. Also you can obtain an EIN immediately by telephoning an IRS service center during business hours.

    To create an online application of an SS-4, [go] to https://sa2.www4.irs.gov/sa_vign/newFormSS4.do . Simply follow the instructions for filling in the form, and you will receive your EIN in a minute. Print and save a copy of the proper execution, and keep it together with your entity’s records. You don’t have to mail a copy of the proper execution to the IRS.

    Your LLC’s Fiscal Year LLCs will need to have the same fiscal year-end as their members. While LLCs can have corporations as owners, it’s more prevalent for LLCs to be owned by natural persons. Natural persons, as if you and me, have fiscal years that end on December 31-our fiscal year is a twelve months. LLCs that are owned by natural persons must select December 31 as their fiscal year. Thus, the LLC’s taxation statements will be due on April 15 in the entire year following each fiscal year.

    Get more in-depth information on LLCs in Forming an LLC (Entrepreneur Press).