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A (LLC) business structure is a great option for medium to high-risk businesses because it protects your personal assets.

How to Form an LLC

A (LLC) business structure is a great option for medium to high-risk businesses because it protects your personal assets.

Intro to forming an LLC

An LLC is a great option for medium to high-risk businesses because it protects your personal assets, unlike other entities like general partnerships. Additionally, by default, LLCs are pass-through entities, meaning profits go directly to members instead of being taxed on the company level. Members account for their profits on their federal tax returns. One may avoid payment of taxes on income at the entity level and personal level if default taxation or S Corporation status is elected. There are other advantages, as well as disadvantages, to forming an LLC. You can form an LLC in a few basic steps:

Selecting a state

The first step in starting an LLC is choosing which state to register it in. Normally, you should select the state where the LLC is located. But you don’t have to. In fact, there are a variety of compelling reasons why you might want to choose Delaware even if your business won’t be based there.

Privacy

In most states, a company registering itself has to have a registered agent with an official, physical address for correspondence with state officials. Although, officers and directors are often still disclosed on filings even if they are not disclosed on the public records.

Expediency

The standard times can range anywhere from minutes to a handful of business days to a couple of weeks.  You’ll want to check with the state filing office or your lawyer to determine how long it will take for the state to confirm the filing.

Simple Structure

The members have the ability to decide how formally or informally they want to manage the LLC. One person can hold several positions and hold a variety of titles in the company, such as being the officer or director. For example, the CEO can also be on the board of directors.  Though keep in mind that state laws usually refer to owners of an LLC as members and the equivalent of directors as managers.

Selecting or reserving a name

Choosing a name for your LLC can be tricky. It needs to be a unique name that customers will remember and set it apart from other companies in the same industry. 

 

You have to make sure nobody else in your state has taken the name or a very similar name for their business. In some cases, you have to make sure nobody’s business has the same name at a national or even international level, so as to avoid running into the issue of trademark infringement. Wonder.Legal gives the example of calling your sneaker-selling business Nike. You can’t do that even if there’s no Nike LLC in your state because there is potential for consumers to confuse Nike® shoes with your brand of “Nike” shoes. And in general, your LLC name should include the term “Limited Liability Company,” “company” or “Limited.” Abbreviations you can use include “LLC,” “L.L.C.,”  or “Ltd.” and “Liability Co.”

 

Your business name can’t contradict your business’s permitted use and can’t mislead people. For example, it can’t contain the word “bank” if it’s not a bank. You also can’t call your LLC a corporation.


If you come up with a great name before you’re able to establish your LLC, you can reserve it with your state so no one else will get it. In most states, you have to pay a fee to reserve the name. Your Secretary of State will reserve the name for you after you’ve applied for it. Depending on the state you’re in, the name could be reserved from 60 to 120 days. In some states, you can renew your reservation.

Choosing members, managers and a registered agent

You need to decide on the following before filing with your chosen state:

 

  • Each LLC is owned by one or more members. If you don’t want to be the only one running it, you’ll have to choose one or more other members. 
  • Having one or more people to manage your company is optional. If you’ll create a single-member LLC and want to have one or more managers, you’ll have to appoint them in your articles. If your LLC will have multiple managers, you will need to all decide how to manage it, whether that be by doing it themselves or appointing one or more others to do it.

Every LLC needs a registered agent, which is someone who receives official documents on behalf of the company.

Drafting and filing a formation document (and pay a filing fee)

You will need to file a document with your chosen state to tell it you’re establishing an LLC. The document is called the Articles of Organization in most states. In the words of Wonder.Legal, the following are often included in the document:

 

  • The LLC’s name
  • The type of LLC
  • The purpose of the LLC
  • The name of the party that is filing the Articles or Certificate
  • The LLC’s address or addresses
  • The names of the members or managers of the LLC
  • The name and address of the LLC’s registered agent

After submitting your formation document, you will have to pay the filing fee specified by your state.

Creating an operating agreement

An operating agreement isn’t required in most states, but it’s still a great idea to create one. It’s more detailed than an Articles of Organization document. It basically outlines the rules your business will follow. It may also describe how managers and members will interact with each other. 

 

In the words of Wonder.Legal, an operating agreement may contain:

 

  • The name and address of the LLC
  • The name and address of the registered agent
  • The purpose of the LLC
  • The duration of the LLC
  • A list of members as well as their capital contributions and ownership percentages
  • Meetings
  • Profit and loss allocation
  • Member Withdrawal, termination, or death
  • Voting rights
  • Member duties
  • Fiscal considerations
  • Officers
  • Dissolution

If you’re not sure how to proceed, a lawyer can help you draft your operating document.

Opening a bank account

It’s important to have a separate bank account for your LLC, especially for tax reasons and to avoid the appearance of mixing personal assets with business assets. Any business run as a separate legal entity from its owner must have a business checking account.


For information on setting up a business account, follow this guide by the U.S. Small Business Administration.

You now know how to form an LLC!

Depending on your state and other factors, there may be additional steps you should take for your LLC: 

  • In some states, you have to publish a notice in a newspaper for a duration of time, and you’ll need an affidavit filed as proof that the notice was published.  
  • It is wise to consider getting business insurance, especially if your business will involve significant risk
  • You might need a federal tax identification number. If your business will have employees, you’ll need an Employer Identification Number (EIN).
  • Depending on your business’s location and what it will be doing, you might need a license or permit.

Setting up an LLC can seem intimidating, but it only requires a few steps. Regardless, it is always wise to consult with a lawyer when starting a business. Lawyers on Lawmato can help get you started. Download our app today!

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