A limited liability company (LLC) is the American form of a private limited company. An LLC combines elements of a partnership and a corporation. LLCs allow for greater liability protection without the complexities of a traditional corporation.
The basic structure of LLC formation is:
- Owners have limited liability for the entity’s debts and obligations, similar to a corporation; and
- Income or losses from the business are passed through to the owners, similar to a Partnership.
Distinguishing Elements of LLC Formation
An LLC sets itself apart from a partnership in the following ways:
- A formal document, often called articles of organization, are filed in the state where the LLC is incorporated; and
- Owners of an LLC are not personally liable for the debts and obligations of the entity.
It is different from a corporation in the following ways:
- Profits and losses flow through to the owners, the entity is not taxed; and
- It lacks shareholders and has less administrative requirements than a corporation; and
- It does not have an unlimited life in most jurisdictions and may need to be dissolved upon the death of an owner.
What are LLC Formation Documents?
When forming an LLC, there are several documents that you will need to fill out and file. The first document is the articles of organization. This document will state the basic information regarding your LLC such as name and purpose. An operating agreement is an optional document that will outline how your LLC will be run. Finally, after successfully forming your LLC you will receive a certificate of formation.
What is a Certificate of Formation for an LLC?
Essentially, a certification of formation for an LLC is a receipt that proves your LLC has been legally recognized and registered by your state. Receiving a certificate of formation also demonstrates the proper forms and procedures have been filed and followed. This document will mark the official creation of your LLC for future legal records.
Do It Yourself LLC Formation
Starting an LLC requires several distinct steps and levels of verification.
- Choosing A Name
The first step in understanding how to start an LLC is choosing a name. This may sound simple, but different states have different requirements and restrictions. Before you have your heart set on a name, it’s important to familiarize yourself with these state specifications as well as the already existing business names.
Choosing a unique name is a way to ensure your business isn’t confused with others in its field. Likewise, you should consider branding and marketing options when you choose your name. If you want to utilize a website domain, make sure the domain is available before you register your business. Additionally, you have the option of reserving your LLC name if you don’t intend to act on it right away.
- Choosing a Registered Agent
A registered agent is a necessary part of starting an LLC. Essentially, a registered agent receives legal documents meant for the LLC and then distributes them to the proper personnel at the LLC. A member of the LLC can fill the role of registered agent but there are also businesses that can provide this service if that is more agreeable.
- Creating an LLC Operating Document
An LLC operating document defines how the LLC will be run. Rather than covering daily operations, the LLC operating document covers big picture issues and how they are settled between the various members. Issues like how to handle partner death, going out of business, voting, or the allotment of profits and losses.
This is not a legal requirement, but is a good way to state precedent before various issues arise down the road.
- Choosing a Management Style
There are two management styles for running an LLC: member or manager. Member management is used with smaller LLCs. Because the number of members is smaller, the members can collectively make decisions for the LLC. For larger LLCs or LLC members who want to be less involved with the LLC, a manager or managers can be chosen instead. Like registered agents, there is no requirement for a manager to be part of the LLC.
Choosing the right management style is important when big decisions need to be made down the line. Consider the types of conflicts or situations that frequently come up in your industry and what management style would be best for handling those circumstances. What kind of financial decisions would management need to make? What about industry strategy or goals? These kinds of questions should help you decide which management style is best.
- Filing the Articles of Organization with the State
The articles of organization list basic information to be filed with the state. These typically include information such as the name of your LLC and its address, its purpose and length of existence, as well as the name and address of the registered agent.
The articles must be signed by the individual forming the LLC and in some cases by the registered agent as well. Filing the articles will cost a small fee.
The LLC will then be issued a certificate by the state that permits the creation of the LLC. After this, the LLC has formal permission to begin running as a business.
Doing Business in Other States
If you intend for your LLC to operate in multiple states, more paperwork must be filed that registers the LLC within each state it will be operating in. It should be noted that each individual state will require a new registered agent located in that state.
Forming an LLC can be a confusing process. While this is a general guide to follow, the differences in LLC formation in each state can make research and proper procedure difficult to follow. For additional help and questions about filing your own LLC, contact us today.
How to Form an LLC by Diana Fitzpatrick, J.D. for NOLO
How to Start an LLC by Geoff Williams for U.S. News and World Report