How To Set Up a Limited Liability Company (LLC)

By Pinyo, on December 26, 2008

I have been thinking about setting up a Limited Liability Company (LLC) for my web business to manage personal liability risk.  LCC is an attractive option for incorporating a small business, because it provides the limited personal liability of a corporation, but the pass-through taxation of a partnership or an S corporation. For this reason, LLC has become the business entity of choice for small businesses wishing to incorporate in recent years.

How To Set Up a Limited Liability Company (LLC)

The exact requirements for forming an LLC vary slightly from state to state. Fortunately, LLC formation is a relatively simple process that can usually be done in a few hours. Here are the general steps on setting up an LLC:

1. Obtain a copy of your state’s LLC Articles of Organization form

Get a copy of the LLC Articles of Organization form for your state. You can find this at the Secretary of State’s office, here’s a list of Secretary of State’s office for each state. When you contact them, ask them if your state has any rules concerning business names and find out if you’re required to post a notice in the local newspaper. Also find out any specific rules regarding business names.

2. Select an appropriate name for your business

When you select your business name, be sure it complies with your state’s rules regarding LLC business names. The main part of the business name is generally flexible, but each state does have guidelines concerning prohibited words. For example, “Corporation”, “Incorporated”, “Insurance”, and “City” are generally prohibited. Your legal name must end with an LLC designator, such as “Limited Liability Company”, “LLC”, etc. Also, the name cannot be the same as another LLC on file in the state in which you are filing.

3. Complete the LLC Articles of Organization form

This document is relatively easy to complete. Information requested includes:

• Name of your business
• Purpose or nature of your business
• Principal office address
• Name of the registered agent who will receive legal documents
• Names of the initial members — you do not have to specify the ownership allocation, or management structure.

4. Publish a notice in your local newspaper

If this is required by your state (don’t waste the money otherwise), publish a notice in your local newspaper.  This notice must detail your intention to form an LLC. Some states require this to be done before filing your Articles of Organization. To be sure, consult with your Secretary of State’s office.

5. Submit your Articles of Organization form

Send your Articles of Organization form to the Secretary of State in addition to the required LLC filing fee. Fees range from $40 to $900, depending on the state.

Caution: Some states may have a corporate tax and/or annual fee, which is separate from the LLC filing fee. For example, California charges an annual limited liability tax of $800, and New York charges annual of $100 per member with a minimum fee of $500 and a maximum of $25,000 (Single Member LLC only pays $100 annually).

Tips Regarding Limited Liability Company (LLC)

LLC Operating Agreement

If you’re not the only member, it’s worthwhile (although not legally required) to have an Operating Agreement that spells out the financial and management rights and responsibilities of the LLC members.  You should also include details such as:

• What to do if the LLC needs additional capital
• When and how profits from the business will be distributed
• How can a member leave the LLC
• etc.

Here’s a blank Operating Agreement template.

LCC State of Filing

Unless you have a compelling reason, it’s generally best for small businesses to incorporate in the state where it will principally be doing business. Some people register in states like Delaware, Nevada, and Wyoming because they offer some tax and organizational advantages to register there.

Conclusion

The steps to set up a Limited Liability Company is faily simple, but if you are a first-timer like me, you may want to look at MyCorporation.  For a nominal fee, MyCorporation will walk you through the entire process of incorporating your company, and does all the leg work for you.  MyCorporation web site also provides a wealth of information about LCC.  By the way, MyCorporation is offering free service until the end of December.

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Pinyo is the brain behind Moolanomy personal finance blog and a few other web sites. If you like this article, please subscribe for free daily email updates.

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