Forming an LLC: The Basics

Forming an LLC: The Basics

by Brette Sember, Esq., December 2016

Forming an LLC can provide you and your business with a variety of benefits. Organizing your company as a limited liability company requires some careful steps and documentation to ensure that you are following the law. As you begin the LLC formation process, here are four considerations:

1. Naming Your LLC

When you start a business, the name you give your LLC may be something you've thought long and hard about. Before you get too attached to the name, you'll need to make sure it is available in the state you are filing in. If another LLC has the same name, you won't be able to use it.

You also want to be sure the name fits your state's requirements. Most states will require that LLC or Limited Liability Company be part of the name. Additionally, your state may prohibit some words from being used in the name, often words like “bank" or “insurance."

2. Choosing a Registered Agent

An important part of LLC formation is the registered agent. A registered agent must be a person who is located in the state in which you are forming your LLC. This is the person you designate to receive legal service of process, as well as government forms and notices, on behalf of your LLC. He or she must have a physical street address (not a P.O. box).

The registered agent does not have to be anyone at your company or anyone employed by you, and does not have to be a member of the LLC. In fact, there is a whole industry of registered agent companies that you can hire to handle this on behalf of your company.

3. Completing Your Articles of Organization

The next step to form an LLC is to work on your own or with an attorney to create your LLC articles of organization and file with your state's LLC office, which is usually the Secretary of State. You have the option of filing this yourself or doing so with the assistance of an online legal service company or a business attorney.

This document contains a lot of basic information about your LLC, including the name of the LLC and its primary address. It should also include a statement of your LLC's purpose. This can be a general statement about being formed for a lawful purpose—no other details are needed.

The articles of organization also should include information about how your LLC will be managed. You need to indicate whether the members of the LLC will do hands-on management or if there will be hired management. Another requirement is to discuss how long the LLC will be in existence (there is no limit on this, so it is fine to say in perpetuity).

Include the name and address of the LLC's registered agent, and the signature of at least one member (owner) of the LLC. There is a fee for filing this document with the state. An attorney or online legal service company can help you file this with your state's Secretary of State and help you determine the amount of the fee.

4. Creating an Operating Agreement

Another important component when you are determining how to form an LLC is the creation of an LLC operating agreement. While operating agreements are not required under state law when forming an LLC and do not have to be filed with the state, they are very important documents to create because they help you and any other members of the LLC organize your business, plan for the future, and put all pertinent facts in writing.

Take some time to carefully plan how your business will run and then include all of the details in your operating agreement, so that you will have the information in one place for future reference. An operating agreement should include:

  • The percentage interest each member owns in the LLC
  • What the rights and responsibilities of the members are, as well as the voting power each member has
  • How profits and losses will be allocated among the members
  • How the business is going to be managed, and the rules for taking votes and holding meetings
  • The specifics of when members can sell and buy shares from each other, such as when a member dies or wants to leave the business

With some careful thought, assistance from a business attorney or an online legal provider, your LLC will soon be up and running.