How to Get an LLC and Make a Limited Liability Company

Benefits of forming a limited liability company

Liability benefits: The most significant benefit of an LLC is limited liability. According to Fareed Kaisani, a Dallas attorney with Platt Richmond, "This means that the owners (also known as members) are not personally liable for the company's debts or legal liabilities."

Tax-related benefits: Federal tax regulations also offer LLCs unique flexibility regarding income tax purposes. "LLCs also have the option to choose how they file taxes," Kaisani says. They can file as a sole proprietorship or partnership (if there is more than one member) or as a corporation," the latter of which can result in significant tax benefits.

Structural benefits: In addition to liability and tax benefits, LLCs offer a simple and flexible structure. "Members can be foreign or U.S. individuals, partnerships, trusts, corporations, or other LLCs," explains Bianca Lindau, a corporate associate at Boston-based Caldwell Intellectual Property Law.

Although foreign entities can also be LLC members, insurance companies and banking institutions typically can't. Each state has their own regulations, so it's critical to review yours before registering your new business.

Managerial benefits: "Owners of an LLC pick the sort of LLC they want and if they want to actively participate in daily decisions and operations or prefer to be more hands-off," says Martin Gasparian, an attorney and owner of California-based Maison Law.

Once you've determined that your business will be an LLC, you can choose from several types of LLC structures (more on that later).

Other LLC benefits

• Legally distinct from business owners
• Comparatively low startup costs
• Potentially eligible for tax-exempt status under Section 501(c)(3)

How to apply for an LLC

While laws and processes differ from state to state, these are the general steps to apply for an LLC.

1. Choose one of the 5 types of LLCs

An LLC is not a one-size-fits-all legal entity. There are several types of LLCs, one of which can be split up into four categories of its own.

Let's break them down:

• Member-managed LLCs. Owners of this type of LLC, known as members, run the company. Member-managed LLCs can be single- or multi-member. In some states, they can be further categorized by members' relation to each other. For example, if the members are relatives, the LLC can be a family LLC.
• Series LLCs. This type of LLC is similar to a corporation with several subsidiaries. It has a parent or umbrella LLC with one or more sub- or series LLCs underneath. "Each series LLC is separate from the others, and its liability is limited to its assets," Lindau says. This structure "allows risk to be segregated within separate entities without the cost of setting up new entities."
• Restricted LLCs. Only Nevada recognizes this type of LLC, which is common in estate planning. With a restricted LLC, "profits can't be distributed to the owners for at least 10 years beginning on the date of formation or conversion to the restricted LLC," Lindau says. Owners don't pay taxes during those 10 years. Instead, they pay upon distribution at a significantly lower rate due to valuation discounts (a percentage that lowers the value of transferred business interest).
• Anonymous LLCs. The true identities of the members are not publicly disclosed with this type. States that offer this type of LLC include Delaware, New Mexico, Nevada, and Wyoming.
• Professional LLCs. "This type of LLC is specifically designed for professionals, such as attorneys, doctors, and architects," says Min Hwan Ahn, an attorney and founder of EZ485, which assists people with immigration and visa applications. "The protection is the same as other limited liability companies, "but with the added requirement that all members must be licensed professionals in the same field."

Once you've chosen your form of LLC, you can move on to the next step.

2. Choose a business name

Marketing and brand purposes are not the only considerations you must make when choosing your new LLC's name. There are other important legal considerations as well.

The name of your business will need to include "LLC." Verify that your name doesn't include any words restricted by your state. For example, most states restrict the words "bank" and "insurance" from business names unless they've received clearance from the proper institution. Check your state business office's website for its list of restricted words.

Make sure the name isn't already in use in your state. If your name is available, some states allow you to reserve the name until you formally register your business. Most states will automatically register your business name when you file your articles of organization.

Conduct a trademark search to avoid infringing on any existing trademarked names. The United States Patent and Trademark Office (USPTO) offers a database of registered trademarks and prior pending trademark applications. This step isn't required, but it's a smart business move. You don't want to end up with a name that's too similar to another business' name.

Purchasing your business name as a domain name is another smart business move that can help boost your LLC's visibility.

3. Register a DBA name

If you plan to run your company under a name different from your business name, you'll need to register a "doing business as" (DBA) name. Also known as an assumed or trade name, a DBA is a name different from your LLC's officially registered business name. Not all states require a DBA name, so check with your state's business office to determine the process you'll need to follow.

4. File articles of organization

To create your LLC, you'll need to file articles of organization with your state. The articles may have a different name in your state, like articles of formation, but they're essentially the same thing.

Your state's business or filing office will typically have an easy-to-fill-out document you can obtain in-person or online. The required information varies from state to state, but you typically only need to provide the name and address of your LLC and the names of its members.

Once you've completed the form, file it with your state along with the filing fee. The U.S. Small Business Administration maintains a list of links to state business offices on its website. Visit your state's site for more information.

5. Designate a registered agent

This is a requirement in most states. A registered agent—also known as an agent for the service of process—is the person or entity who will receive service of process notices, government correspondence, and compliance-related documents on behalf of your business. The agent can be one of the LLC members or a third party.

6. Draft your operating agreement

Operating agreements provide a structure for important internal business decisions. Even though it's not required in many states, it's wise to have one as it provides clarification on key issues. The operating agreement covers matters such as the percentage of ownership among members, voting rights and responsibilities, members' powers and duties, and provisions governing the transfer of members' interests. Rather than drafting your agreement from scratch and missing out on including important details, an online operating agreement template can be helpful as a starting point. However, you can check with your state's business office to see if an operating agreement is required or consider seeking the advice of an attorney to create your agreement.

7. Publish a notice of formation

Some states require you to publish a notice in your local paper announcing the formation of your LLC. Check with your state's business office for information regarding the content of the notice, how many times it must be published, and any other requirements that might apply.

8. Obtain a business license and permit

Most small businesses will need some type of business license or permit. The types of licenses or permits you'll need depend on both your state and local government requirements and the industry your business is in. Check with your city, county, and state business offices to learn local requirements.

9. Obtain an EIN number

This is not always required, but many financial institutions prefer employer identification numbers (EINs) over Social Security numbers when opening bank accounts for your business. However, it is required for federal tax purposes if you plan on having employees in the future.

Obtaining an EIN is simple and quick. Go to the Internal Revenue Service (IRS) website to fill out a short form. When you submit the form, you'll receive your EIN. You can print out the accompanying letter, and one will also be mailed to you.

10. Open a business bank account

Once you get your business license, you can open up bank accounts for your business. "Having a separate account for the business is helpful, as this gives one an overview of income and expenses, making accounting efforts and financial decision-making easier," Lindau says.

Typically, LLCs have one or more of the following:

• Business checking: Allows for depositing and withdrawing funds, writing checks, and making online transactions. The accounts often have fees, but they also offer various features, such as overdraft protection, merchant services, and credit cards.
• Business savings: This account earns interest on extra funds, though the interest rate is typically lower than personal savings accounts, but may offer more benefits for business owners.
• Merchant services: You'll want this account if you want to accept debit or credit card payments. This account allows you to process card payments and directly receive funds in your business checking account.
• Business line of credit (LOC): For short-term financing, an LOC can be handy. It allows your company to borrow funds as needed and pay them back over time like a credit card. A LOC usually requires collateral and has a higher interest rate than other types of loans.

"It's important to shop around and compare the fees, interest rates, and features of different types of bank accounts to find the best fit for your LLC's needs," Kaisani says. Consult with a business attorney for sharper insights on what accounts are right for your business.

Other things to consider for your LLC

Consider state and local formation and maintenance costs when choosing to form an LLC. According to Kaisani, "There are filing fees, state fees, and ongoing costs such as annual reports, taxes, and legal fees."

How much does it cost to get an LLC?

Using the state of Nevada as an example, LLC formation filings cost $75. There is a 24-hour expedite fee of $125. Also included in the setup costs are the cost of the annual list ($150) and business license ($200). To have a business in Las Vegas proper or greater Las Vegas, additional fees apply. Once the state filing is completed, a general service business would pay $100 for the local business license and $50 for processing, and if the business is home-based, you can add an additional $50. There is no single price for a business license in Las Vegas.

What records do I need to keep for my LLC?

"Another consideration is the record-keeping involved," Kaisani says. "LLCs are required to maintain proper records and documentation, including the company's operating agreement, financial statements, and meeting minutes," which can be time-consuming and may require the help of a professional, especially for unique partnership situations. “Often, small business owners do not understand the sophistication of what they are trying to accomplish with their company agreement terms. I always recommend consulting with a licensed attorney in your state when considering forming a new company of any type."

What if I plan to do business in other states?

If you plan to do business in other states, consider that you'll have to "foreign qualify" in the new state, which means additional fees. "A business owner who has formed an LLC in one state and wishes to grow into another can do so," says Gasparian. "Foreign qualification is the procedure for acquiring authorization to carry on business in the state where they intend to increase the scope of their current corporation's operations." The qualification is necessary when a business has a physical presence or economic connection to the additional state and reaches a certain income threshold in the new state.

Is having an LLC worth it?

There's no easy answer to that question. "It depends on your situation," Lindau says. "LLCs can be used for various purposes, from holding property to running a business. It's likely not worth the time and cost if the business is short-term or a one-off."

But it is worth the time and expense if you intend to grow your small business and when it is likely that your industry will deal with third parties. "However, choosing the best entity for your business," says Lindau, "should ideally be carefully and comprehensively assessed with knowledgeable counsel, considering all relevant facts and circumstances."

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FAQs

How long does it take to get an LLC?

How long it takes to create an LLC varies from state to state. That said, it can typically take between a week to ten business days, depending on how quickly your state processes business filings. Certain times of the year have heavier waiting periods. Particularly, at the beginning and end of the year when there is a surge in filing volume.

Can I convert my existing business to an LLC?

Yes, there are several ways to convert to an LLC. However, state laws differ in terms of what process they allow. Many states allow you to streamline the process by turning your existing business entity into an LLC through a plan of conversion rather than forming a new LLC and transferring assets. Some states also offer a merger option in which you will still have to create a new entity but can automatically transfer your business assets and liabilities to the new LLC.

Can a single person apply for an LLC?

Yes, you can form a single-member LLC if you want the benefits of limited liability or don’t wish to operate as a sole proprietorship.

The steps to form a single-member limited liability company are similar to forming a multiple-member LLC:

1. Conduct a name search
2. Choose a registered agent
3. Prepare articles of organization and operating agreement
4. Submit documents with the filing fee
5. Obtain a federal tax ID number (optional)
6. Open an LLC bank account

How is an LLC taxed?

There's a unique amount of flexibility with how an LLC is taxed. The IRS assigns a default tax structure based on the number of members in your LLC. If your LLC only has one owner, you'll be taxed as a sole proprietorship. If your LLC has more than one member, you'll be taxed as a general partnership.

However, depending on the number of members, you can elect to change your tax classification to corporation, partnership, or proprietorship.

Diane Faulkner contributed to this article.