Many sole proprietors, startups and small businesses are reluctant to form a Limited Liability Corporation (LLC). The first benefit is that you are not personally liable for the debts of your enterprise. With the help of professionals, the process to create an LLC, the additional tax return being prepared and the associated record keeping requirements are cost effective compared to the tax savings (especially when coupled with an S-corp election). For more information see the Business Types page on this website.
Steps to form an LLC (not all are required)
Choose a business name – While you can select any name you like, there are a few restrictions. The name that you choose should be different from an existing LLC in your state. In addition to this, you cannot include certain restricted words like “bank” or “insurance” in the name. You also have to ensure that the name indicates that it is an LLC.
File the articles of organization – This document is required to be filed with the designated authority in your state by the “organizer” of the LLC. The organizer may be a member of the LLC but can also be any other person or business entity. The details to be furnished in the articles of organization include your business name, address and the names of the members of the LLC.
Create an Operating Agreement – This is an internal document and is not required to be filed with the state authority in many cases. But if your LLC has more than one member, it is highly advisable to create an operating agreement as it gives details of the LLC’s organizational structure and its finances and lays down the rules and regulations for the business’s internal functioning. Most operating agreements usually include the percentage of interest that each member of the LLC has, each member’s rights and responsibilities, and the manner in which profits and losses will be allocated.
Publish a Notice of Intent – Again, this is not mandatory in many states. But in the states where it is required, it usually entails the publication of the articles or a notice regarding the formation of the LLC in a specified newspaper.
Obtain licenses and permits as per applicable laws – Once your LLC is officially established there is still one step remaining before you can begin business operations. You are required to obtain the necessary licenses and permits. The Employer Identification Number or EIN is one of the key registrations that you must complete. If your LLC has two or more members, it is mandatory to obtain an EIN from the Internal Revenue Service. Those LLCs with a single member do not need a separate EIN unless they intend to get taxed as a corporation. Business owners are also required to comply with the federal, state and local regulations and obtain the necessary permits and licenses.