Requirements to Form an LLC

What is an LLC?

An LLC is a business structure that combines aspects of partnerships and corporations. Like a corporation, an LLC provides limited liability protection for its owners. This means the owners’ personal assets are protected from business debts and liabilities.

But unlike a corporation, an LLC has pass-through taxation by default. The business profits pass through the LLC to the owners to be taxed at their personal tax rates. So there’s no “double taxation” at both the corporate and personal level.

LLCs are popular for small businesses because they’re relatively easy to set up and offer flexibility in management structure. They also provide more credibility than sole proprietorships or partnerships when dealing with clients and vendors.

Now let’s look at how to actually form an LLC.

Choose an LLC Name

The first requirement to form an LLC is to choose a business name. Your LLC name must be distinct, include a designation like “LLC”, and comply with state restrictions. Take time to brainstorm and research to pick the ideal available name that represents your brand.

The first requirement to form an LLC is to choose a business name. There are a few key rules for an LLC name:

• It must be distinct from any existing business names in your state. You’ll need to do a name search to ensure your chosen name isn’t already taken.
• It must end with an identifier like “Limited Liability Company,” “LLC,” or “L.L.C.”
• It can’t contain restricted words (like “bank” or “insurance”) without approval.
• Most states don’t allow you to use offensive or misleading words either.

Once you’ve picked an available LLC name, you may be able to reserve it with your state while you complete the rest of the filing process.

Tips for Choosing an LLC Name

When brainstorming LLC names, aim for something memorable, descriptive, and professionally credible. Here are some tips:

• Include your main products/services. This helps customers understand what you do at a glance. For example, “ACME Website Design, LLC.”
• Keep it simple. Avoid overly complex or confusing names. Shorter names are more memorable.
• Check availability. Ensure your business name is available as a web domain and on social media handles too.

Appoint a Registered Agent

LLCs are required to designate a registered agent, which is a person or service that receives important legal and tax documents on behalf of your business.

Your registered agent must have a physical street address (not just a P.O. box) in the state where you form your LLC. The agent’s address is also used as your LLC’s official business address for state registration.

Your registered agent forwards any legal or tax notices about your business to you. Having a registered agent covers you in case you move or aren’t available to receive time-sensitive documents.

Many business owners serve as their own registered agents initially to save money. But hiring a professional service as your registered agent can ensure reliability.

File Formation Documents

To formally create your LLC, you’ll need to file what’s known as articles of organization (or a certificate of formation or charter, depending on your state).

The articles of organization serve as your LLC’s official registration documents with key information about your business. Here are some of the details you’ll need to include:

• Your LLC’s name and principal business address
• Registered agent’s name and address
• The business purpose
• The names and addresses of the LLC members (owners)
• Operational details like how membership interests will be divided and how the LLC will be managed

You’ll file the articles of organization through the appropriate state agency, usually the secretary of state’s office. Filing fees typically range from $50 to $500 depending on your state.

Create an Operating Agreement

An LLC operating agreement governs how your business will run and outlines the financial and functional relationship between members. It’s an extremely useful internal document.

While operating agreements aren’t required in most states, they’re highly recommended. Here are some of the key details to address:

• Member responsibilities
• Profit/loss distributions
• Member voting rights
• Member contributions of cash, assets, or services
• Rules for accepting new members
• Procedures for dissolving the LLC

Work with an attorney to ensure your operating agreement complies with state laws and supports your business needs.

Obtain Licenses and Permits

Depending on your industry and location, your LLC may need to obtain special business licenses and permits before opening for business.

Some common examples include:

• Sales tax permit – Required to collect and remit sales tax in most states.
• Health permits – For food-related and healthcare businesses to meet public health codes.
• Liquor license – If you’ll sell alcoholic beverages.
• Trade licenses – For service providers in specialized trades like construction, funeral services, landscaping, etc.

Check with your local county clerk, city government, and relevant state agencies to find required licenses for your LLC. Failing to obtain the proper permits and licenses can lead to penalties.

Get an EIN from the IRS

You’ll need to obtain a federal employer identification number (EIN) for your LLC. This number identifies your business for tax purposes.

It’s similar to a social security number, but for companies instead of individuals. You’ll need an EIN to open business bank accounts, apply for licenses/permits, hire employees, and file taxes for your LLC.

Getting an EIN only takes a few minutes online. You can easily get an EIN directly from the IRS website.

Comply with Ongoing Requirements

Even after your LLC is formed, you must remain in compliance with various state and federal regulations. Failing to adhere to LLC requirements could put your liability protection at risk.

Some key areas to stay on top of include:

• Annual reports – Most states require LLCs to submit an annual report and pay filing fees to maintain active status.
• Taxes – LLCs must pay applicable income taxes, payroll taxes, excise taxes, franchise taxes, and more at the federal and state level.
• Meeting formalities – Document member meetings, maintain detailed financial records, properly fund the business, and obey formal LLC processes.
• Change notifications – Notify your state if you change your LLC’s address, registered agent, add/remove members, or dissolve the company.

Stay organized and set calendar reminders to help meet your ongoing compliance responsibilities. Consider working with legal and tax professionals as well.

Maintain the Corporate Veil

One of the top benefits of an LLC is personal liability protection. However, failing to properly maintain your LLC can result in the loss of this protection.

To keep the corporate veil intact:

• Separate finances – Keep LLC and personal assets and accounts completely separate.
• Document formalities – Hold member meetings, take detailed meeting minutes, keep organized records.
• Limit liability clauses – Don’t sign contracts holding members personally liable for LLC activities.
• Properly capitalize – Make sure the LLC is adequately funded and not underinsured.

Winding Up an LLC

There may come a time when you need to dissolve your LLC. This could happen if the members decide to part ways, the purpose of the LLC has been achieved, or the business isn’t profitable.

To properly dissolve your LLC, you must formally wind up operations:

• File articles of dissolution with the state
• Notify creditors, vendors, and clients
• Pay off outstanding debts and get a tax clearance certificate
• Settle remaining financial obligations
• Distribute remaining assets to members
• File final tax returns

Be sure to cancel required licenses and permits and close bank accounts as well.