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LLC Formation

LLC Formation What is an LLC?
A Limited Liability Company is a flexible business formation that combines elements of corporate structures with a partnership. A Limited Liability Company is a type of company that offers limited liability to its owners. The Limited Liability Company is a hybrid business formation; it contains characteristics of a partnership, a sole proprietorship and a corporation. A Limited Liability Company is a type of unincorporated organization; it is not a corporation. 

The fundamental characteristic of a Limited Liability Company, in regards to its similarity with a corporation, is the fact that owners possess limited liability in regards to the entity’s debts or any suits filed against it. The primary characteristic the formation shares with a partnership is that a Limited Liability Company awards pass-through income taxation for its owners. Because of these characteristics, a Limited Liability Company is well-suited for organizations with single owners. It is important to note that a Limited Liability company does not fully protect an owner from all personal liabilities—a court can file claims against the Limited Liability Company regarding fraud or misrepresentation if realized.

The 10 Necessary Steps to Forming an LLC:

Organize Your LLC:

LLC formation begins when you file articles of organization with your secretary of state or the equivalent department in your state government. In the United States the federal government does not charter Limited Liability Companies. When forming your LLC you must inspect your state’s particular laws for organization; to properly evaluate if your state fits your particular needs you should consider the following factors with regards to LLC formation: • What does your state charge—in terms of filing fees—for LLC formation?

• What are the annual reporting requirements and filing fees?

• What are the state-specific advantages in regards to privacy rights?

If your business is small and operates in only one state (your company sells its products or services in one state), you should—as a general rule—organize your LLC in the state where you conduct business. If your LLC operates in several states you may be required to register in every state where you conduct business. Individual states will typically require out-of-state LLCs to register in the state where they operate (produce and/or sell) as a guest organization.

Name Your LLC:

Once you have organized your LLC with your secretary of state, you must choose a name for your formation. You may use a trade name when conducting your business in public that is different than the actual name of your LLC. The greatest consideration when choosing a name is ensuring that no other owner or entity is currently using the name. If you copy someone else’s name you may be infringing on a trademark or service mark rights. Moreover, the secretary of state’s office will not register your LLC with the same name as an existing organization. 

Be sure to keep in mind, that your secretary of state’s office will only have records for company names that were filed in the particular state—they do not have access to names in the other 49 states. As a result, you should search for existing LLC names and trademarks to ensure your desired name is free. To conduct a search for LLC names, you should access online databases of existing companies with the secretary of state in the state in which you wish to register. Also note that your LLC should reflect LLC status. The majority of states require LLC identifiers; your name must include either “LLC”, “Limited Liability Company”, or “Limited Liability Co.”

Select the Registered Agent:

Registered agents are individuals or entities who are obligated to receive legal documents on behalf of your LLC. Because LLC’s are not physical persons, service of legal documents on an LLC without appropriate representation is not possible. The registered agent must be identified in the articles of organization; the agent can be a corporate officer, an attorney, a business service or even a family member. The agent’s name must be a public record and the individual or entity must have a physical address in the state of organization. As a result, if your LLC does not operate in the state of organization, you will be required to hire a registered agent in that particular state. Having a professional firm or an attorney act as your agent will offer several advantages. The primary role of the agent is to receive service of legal documents. Because of their expertise, all annual LLC report forms, tax forms and other federal mail will be properly reviewed and filed.

Organizing Your LLC: Should I Hire a Lawyer?

At this point, you must decide whether you will file and organize your entity on your own or with the help of an LLC service or an attorney. Forming an LLC by yourself is the cheapest of the three options. However, because of the complexities associated with LLC formation, cutting costs can present increased costs in the future. A slightly more expensive alternative is to hire an LLC organization service. Typically these companies will cost between $200 and $300 for their services. These companies will file articles of organization with your appropriate state office, prepare operating agreements and record the minutes of the initial meetings. LLC organization services will also navigate the bureaucratic complexities of states and provide service to streamline the LLC formation. Lastly, you may wish to hire a business attorney who will offer the following services:

• A business attorney will suggest alternatives during the LLC formation

• Assist with the complex features of LLCs, such as manager-managed LLCs and operating agreements

• Prepare operating agreements and minutes of the organizational meeting of members according to their specific wants

• Ensure that no laws are violated when interests in the LLC are sold to raise capital for the entity.

The fees associated with this service will vary; typically the hourly rate for business attorneys will range between $100 and $400 per hour.

Determining Ownership:

Your Limited Liability Company will issue shares, known as units, to its members as part of the formation process. An individual’s units are their percentage interest. If an LLC issues 1,000 units to its members and one owner receives 600 units, that member’s ownership is 60 percent. It is important to choose your ownership structure in the beginning of the organization process—the structure should be filed before your articles of organization. Owners of an LLC have the right to vote their units in relation to their ownership interest. As a result, majority voting power will exercise control over a Limited Liability Company; even if the members choose to delegate control to appointed managers, the members will enjoy the right to elect or remove managers. 

Each member of a limited liability company should construct an investment representation letter. This document will offer a measure of protection to the business because the member being admitted makes certain representation regarding qualifications and his or her overall ability to serve as a member of the formation. Moreover, the investment representation letter will make representations regarding investment objectives.

File Articles of Organization:

The LLC will become legitimate when you prepare and file articles of organization. This one-page document will include all the necessary information regarding your formation including the following: • The name of your Limited Liability Company

• The name and address of your agent for service of process—this individual or entity is authorized to receive and evaluate legal papers on behalf of your entity • A formal statement that illuminates the purpose of the LLC

• The names of initial managers or members (this is optional)

You will file articles of organization with your secretary of state in the state of organization. Nearly all state governments will offer sample articles of organization on their websites.

Order the LLC Kit:

LLC kits are filing resources used to hold all records (operating agreements, minutes of meetings, business licenses, tax filings, articles of organization, membership ledgers) associated with your LLC. These kits are not required by law.

Choose Managers:

Once you have filed your articles of organization, the next step is to decide the specific formation of your LLC: you must choose between a member-managed LLC or a manager-managed LLC. The choice is not absolute—a member-managed LLC can switch to the manager-managed format following a vote. A member-managed LLC is operated by the owners of the formation, similar to how a general partnership is run. Smaller Limited Liability Companies typically opt for the member-managed formation, because of simplicity—a member-managed LLC does not require an appointment of managers. 

A manager-managed LLC requires members to agree on a number of business aspects--including the number of managers--before the company can conduct business. Once you determine the management structure and the number of managers, you must select the appropriate provisions and document them in your operating agreement. For example, if your LLC is manager-managed, you must select the initial managers and name them in your operating agreement.

Prepare the Operating Agreement:

An operating agreement will govern your LLC’s internal operations, including voting requirements, elections, meetings and the specific powers of the formation’s members and managers. An LLC operating agreement is a 5 to 20 page document and is kept confidential—keep your operating agreement with your company’s core records. A number of states will not require you to construct an operating agreement, however, it is foolish to start an LLC without the document. 
If you do not adopt an operating agreement your business will be solely governed by the state’s default laws. Moreover, an operating agreement will protect you and your members from personal liability. In your operating agreement you must define the percentage of ownership and the distribution of shares. These fundamental aspects should be set forth in writing; an affirmed record will eliminate any disputes that may arise in the future with respect to ownership.

Secure a Federal Tax Identification Number

Because a Limited Liability Company is a legal entity, federal law requires that you possess a Federal Employer ID Number. Furthermore, the majority of lenders will ask for the employer identification number for opening a bank account or lending funds to your LLC. To obtain an EIN, fill out form SS-r (the Application for Employer Identification Number) or apply online through the Internal Revenue Service website.

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