Steps to Forming Your LLC (Limited Liability Company)

Transcription

1 llcuniversity.com Steps to Forming Your LLC (Limited Liability Company) 1 Search your LLC name to make sure it s available. 2 Designate your LLC s Registered Agent. 3 File your LLC Formation Documents and pay the state filing fee. 4 Draft and sign your LLC s Operating Agreement. 5 Obtain your Federal Tax ID Number (EIN) from the IRS. 6 If applicable, file your Annual Report each year with your state. LLC Name **Short Answer: Choosing an LLC name has certain state requirements and restrictions. Your LLC name must also be distinguishable.** A well chosen LLC name can be essential to your business success. Your name will last for many years and will be an important part of your brand your company s reputation. Here are a few quick tips to keep in mind when you are brainstorming options for your name. Make your LLC name easy to spell. You want to make sure people can find you when they re looking for you. Make your LLC name short. Shorter names are easier for people to remember. It also makes it easy for people to refer you to their friends. Make your LLC name have a positive connotation. Leave people with a good feeling when they hear about your business. Is Your LLC Name Taken? In order to make sure your desired LLC name is available for use, you will need to search it against the existing companies on your state s database. We will walk you thru this step-by-step in another lesson. You need to know if your name is taken, so you can: Avoid infringing upon someone else s name rights. Differentiate your business name from existing companies. Make sure your desired LLC name is available for use before you file your documents. Name Requirements for Your LLC

2 Your LLC name must end with the words Limited Liability Company, or the abbreviations: L.L.C. or LLC. Using the abbreviation LLC is the most common. For example, Joe wants to start a company by the name Joe s Landscaping Services. Since he is forming an LLC, he must use the name Joe s Landscaping Services, LLC. Again, using the abbreviation LLC (or the full word) is a requirement when forming an LLC. Name Restrictions for Your LLC Your LLC name cannot imply that it is a corporation. You are not allowed to use the words Corporation or Incorporated, or the abbreviations Corp. or Inc. anywhere in your LLC name. Let s look at our example again. Since Joe wants to form an LLC, he cannot call his company Joe s Landscaping Services Inc. or Joe s Landscaping Services Incorporated. Distinguishability Your desired LLC name must also be distinguishable. This means it cannot be too similar to the names of existing companies that are found in the results during the search of the database. The state will not approve your LLC if there is an existing company with your desired LLC name or if your name is too similar to an existing company. We will now illustrate several examples. Designators (Inc./Corp./LLC/L.L.C.) Designators are the identifiers at the end of a business name. For example, Inc. or Corp. (for Corporations) and LLC or L.L.C. (for Limited Liability Companies). Differences in designators do not create distinguishability. Let s take a look at how this works: Let s say your desired LLC name is Smith Investments, LLC But, during your search of the database, you find an existing company called Smith Investments, Inc. In this example, your desired LLC name is not available. You will need to use an alternative LLC name. For example, Smith Financial Group, LLC. Grammatical Differences The following do not create distinguishability.

3 Singular, Plural, and Possessive Words Differences/variables in singular, plural, and possessive forms of a word do not create distinguishability. Let s say your desired LLC name is Apple Farm, LLC. But, during your search of the database, you find an existing company called Apple Farms, LLC. In this example, your desired LLC name is not available. You will need to use an alternative LLC name. For example, Bob s Apple Orchard, LLC. A, An, or The Differences in articles such as A, An or The do not create distinguishability. Let s say your desired LLC name is Print Shop, LLC. But, during your search of the database, you find an existing company called The Print Shop, LLC. In this example, your desired LLC name is not available. You will need to use an alternative LLC name. For example, Printing Solutions, LLC. And, or, & The following also do not create distinguishability. The use of conjunctions such as and, or, and the ampersand symbol (&). Let s say your desired LLC name is Night & Day, LLC. But, during your search of the database, you find an existing company called Night and Day, LLC. In this example, your desired LLC name is not available. You will need to use an alternative LLC name. For example, Moon and Sunshine, LLC. Hyphens, Periods, and Commas The use of certain punctuation such as hyphens, slashes, periods, commas, etc. Let s say your desired LLC name is Peter Paul & Mary Studios, LLC. But, during your search of the database, you find an existing company called Peter-Paul-Mary Studios, LLC. In this example, your desired LLC name is not available. You will need to use an alternative LLC name. For example, PPM Productions, LLC. Alphanumeric Differences in numerical or written numbers do not create distinguishability.

4 Let s say your desired LLC name is Three Teachers Consulting, LLC. But, during your search of the database, you find an existing company called 3 Teachers Consulting, LLC. In this example, your desired LLC name is not available. You will need to use an alternative LLC name. For example, A Few Good Teachers Consulting, LLC. Deceptively Similar Names that are too similar to existing companies also do not create distinguishability. Let s say your desired LLC name is Speedy Delivery Services, LLC. But, during your search of the database, you find an existing company called Speed Delivery Services, LLC. In this example, your desired LLC name is not available. You will need to use an alternative LLC name. For example, At Your Door Quick, LLC. Searching the State s Database When you search the database, you should search your desired LLC name every way you can think of. Unfortunately, we can t show you here exactly how to search your desired LLC name because it depends on the state where you are forming an LLC. Every state has their own database. Once you become a member of our site, we will show you (with a step-by-step video) how to search your state s database. This is an important step in forming your LLC, so take the time to ensure your name is unique and does not conflict with any existing companies. Registered Agent **Short Answer : Most companies trick you into hiring them as your LLC s Registered Agent. We ll give you the truth about what a Registered Agent is, tell you what your options are, and how to save some money.** What is a Registered Agent & Registered Office? There needs to be a reliable street address (and a reliable point of contact) where legal documents can be delivered in case your LLC is sued. This is known as your Registered Office and Registered Agent. Your Registered Office must be a street address located in the state where your LLC is formed. Your Registered Office cannot be a PO Box address. Think of your Registered Office as the home base for your Registered Agent.

5 Your Registered Agent should be available at this address during normal business hours to receive any documents on behalf of your LLC. Your Registered Office can be an actual office address, or it can be your home address, or even the address of a friend or family member. Service of Process Again, your Registered Agent must agree to accept delivery of legal documents related to any lawsuits against your LLC. Delivery of legal documents related to a lawsuit is known as Service of Process. Service of Process includes items such as complaints, summons, and/or subpoenas. Many states will also use your Registered Agent as a general point of contact for mailing you business & tax notices, payment reminders, and other documents. Who Can Be Your Registered Agent? You have 3 options for designating your LLC s Registered Agent: Option 1: You can be your LLC s Registered Agent. Option 2: A friend or family member can be your LLC s Registered Agent. Option 3: You can hire a Commercial Registered Agent for a fee. Note: There are a couple states that allow your LLC to serve as its own Registered Agent, but this is the exception to the rule. In 90% of the states your LLC cannot be its own Registered Agent. How Do I Know Which One to Choose? It depends on whether or not you have a street address located in the state where you are forming your LLC. If you have a street address in the state, then choose Option 1. Option 1 is the most convenient and least expensive (it s free!). This is what the majority of our customers do. If you don t have a street address in the state, then choose Option 2 or Option 3. Choose Option 2 if you have a trusted friend or family member (who has a street address in the state). Since you won t need to hire a Commercial Registered Agent, you ll save yourself some money. If you (or friends or family members) don t have an address in the state, then you will need to choose Option 3 and hire a Commercial Registered Agent. Commercial Registered Agent A Commercial Registered Agent is a company that specializes in receiving Service of Process on behalf of businesses nationwide. They typically charge between $ per year. Once hired, they will receive Service of Process on behalf of your LLC and then forward it to you by mail at any address you d like. Most will also fax or your documents if preferred.

6 If you decide to hire a Commercial Registered Agent, we recommend Northwest Registered Agent. (Here s a link to their website: They have been in business for more than two decades and their support is top notch. Registered Agent Myths Exposed Unfortunately, many LLC formation companies trick you into hiring them as your Registered Agent. These companies hide this information in the fine print during the checkout process. Most people don t realize they are paying extra fees that are being automatically charged to their credit cards each year. These companies use language like, Your LLC is required to have a Registered Agent. (and then give no additional information). While your LLC is required to have a Registered Agent, they don t tell you that you have other options outside of their company Like you being the Registered Agent for your LLC, or using a friend or family member as your LLC s Registered Agent Even if you need to hire a Commercial Registered Agent, you should use a reputable company not companies that have to trick you into hiring them. Registered Agent Recap Once you determine who your LLC s Registered Agent will be, you will then list their name and address when you file your LLC Formation Documents with the state. Don t worry about being locked in to one Registered Agent If you ever need to change your Registered Agent (or Registered Office), you just need to file a simple form with your state and pay a small fee. LLC Formation Documents **Short Answer : LLC Formation Documents are what officially create your LLC with the state. Approval times and filing fees vary by state.** What are LLC Formation Documents? In order to form your LLC, you must file LLC Formation Documents and pay your State filing fee. LLC Formation Documents are the state-specific forms that officially create your LLC. These documents are often referred to as your Articles of Organization, Certificate of Organization, or Certificate of Formation. Some states also require additional documents in order to create your LLC.

7 Before Preparing Your Documents Before preparing your LLC Formation Documents, you need to have 2 things completed. First, you will need to choose a name for your LLC. Your desired LLC name cannot be in use by an existing company. You can determine your name s availability by checking your State s name database. Second, make sure you have chosen a Registered Agent for your LLC, or that you have hired a Commercial Registered Agent. Filling Out Your Documents Your LLC Formation Documents will contain your LLC s name, your office address, your effective date and your Registered Agent information. Many states require additional information (or additional documents) to be filed with your LLC Formation Documents. Since the LLC Formation Documents are state-specific, we needed to create 50 individual lessons that walk through how to file them step-by-step for each state. These video lessons are available inside the LLC Formation Course and customized to the requirements of your state. How to File LLC Formation Documents Generally, there are two ways you can file your LLC Formation Documents with your State. You can send your LLC Formation Documents by mail or you can fill out your LLC Formation Documents online and submit them electronically. The State will charge a one-time fee in order to form your LLC. There are no monthly fees to form an LLC. The fees vary by state and you can find them listed below. If you send your LLC Formation Documents by mail you will pay your state filing fee with a check or money order. If you fill out your LLC Formation Documents online and submit them electronically you will pay your state filing fee with a debit or credit card. State Filing Fees Alabama $183 Alaska $250 Arizona $50 Arkansas $50 California $85 Colorado $50 Connecticut $160 Delaware $90

8 Florida $125 Georgia $100 Hawaii $50 Idaho $100 Illinois $505 Indiana $90 Iowa $50 Kansas $165 Kentucky $90 Louisiana $100 Maine $175 Maryland $100 Massachusetts $500 Michigan $50 Minnesota $160 Mississippi $50 Missouri $105 Montana $70 Nebraska $105 Nevada $75 New Hampshire $100 New Jersey $125 New Mexico $50 New York $200 North Carolina $125 North Dakota $135 Ohio $99 Oklahoma $100 Oregon $100 Pennsylvania $125 Rhode Island $150 South Carolina $110 South Dakota $150 Tennessee $300 Texas $300 Utah $70 Vermont $125 Virginia $100 Washington $180 Washington D.C. $220 West Virginia $100 Wisconsin $130 Wyoming $100 Which State is the Best? Forming your LLC in another state will not save you money.

9 The costs are much higher than you think. Learn why here: What You Can Expect Once you submit your LLC Formation Documents along with the filing fee, the State will review and process your documents. If there are any issues with your filing, the State will notify you and then tell you what corrections need to be made. If you filed by mail and there are no issues, on average your LLC will be approved in 1-2 weeks. If you filed online and there are no issues, on average your LLC will be approved in under 1 week. Depending on your state, you will receive back a stamped and approved copy of your LLC Formation Documents. This confirms your LLC is now a legally formed business in the state. Ongoing Requirements Once your LLC is formed, paperwork with the State is not over. As part of the ongoing requirements for your LLC, most states require that you file an Annual Report (or similar document) and pay a recurring fee (usually once per year). Also, you will be required to file State taxes every year. Additional details on these items are listed below. Where do I Get the Forms? You have a few options: Pay an attorney $200-$500 per hour. - see or Pay a website to get the forms. - see or Download them from your state s website. - Click here for links to all 50 states: Or get them from us and fill them out with a step-by-step video. - see The LLC Formation Course: Note: Make sure you also get an Operating Agreement and your Federal Tax ID Number, no matter what option you choose (these are not available on state websites).

10 Operating Agreement **Short Answer: Your Operating Agreement explains how the LLC will be managed, how taxes are paid, and how profits and losses are distributed. It s basically the rules of your LLC.** What is an Operating Agreement? An Operating Agreement is an agreement for the member(s) of your LLC that sets forth how the LLC will be managed both financially and operationally. Your Operating Agreement also spells out how much of the LLC each member owns. You can have 1 member who owns 100%, you can have 2 members with a 50/50 split, 60/40, 70/30 (anything really!), or you can have 3 or more members and you can split the ownership any way you d like. The LLC is a flexible business structure. There is no limit on the number of members you can have. And, there are no restrictions on how you split the ownership of the company. Internal Document Unlike your LLC Formation Documents, the Operating Agreement does not need to be mailed anywhere. You do not need to mail it to the State. You do not need to mail it to the IRS. It is strictly an internal document. This means that you will just keep a copy with your other business documents. Purpose of the Operating Agreement Again, the purpose of the Operating Agreement is to spell out who the member(s) are and what percentage of the LLC they own, also known as their membership interest. It also defines how the LLC is managed, how taxes are paid, and how profits and losses are distributed amongst the member(s). Remember, your LLC can be owned by one person (called a Single-Member LLC) or your LLC can be owned by 2 or more people (called a Multi-Member LLC). What You Need for Your Operating Agreement In order to complete your Operating Agreement, you will need some basic information. The formation date of your LLC. The name and address of the Registered Office and Registered Agent. The general business purpose of the LLC. Member(s) percentages of ownership.

11 Names of the Members and their addresses. Your final Operating Agreement is not set in stone. You can make changes as needed. Making Changes to your Operating Agreement One of the benefits of forming an LLC is the flexibility of managing your business. The Operating Agreement is a working document that is meant to be fluid and allow for changes as your business grows. If you want to make simple changes (such as a change of address for a member or changing your Registered Office or Registered Agent), you ll need to revise the original Operating Agreement. If, however, you need to make complex changes (for example one member purchases the interests of another member, or you decide to raise financing with investors), it is best to hire an attorney. Making changes like these can have negative legal and tax consequences if done incorrectly. Once all changes are made, you ll need to print the new Operating Agreement and have all of the members sign it. It is best practice to keep a copy of all versions of your Operating Agreement so you have a history of the changes that were made. Who Needs Your Operating Agreement? You may need to provide a copy of your Operating Agreement to: A lender if you are obtaining financing A title company if you are purchasing real estate Accounting and tax professionals for financial assistance Lawyers for legal advice Potential investors or partners who have an interest in your business Operating Agreement Protects Your Assets If you re involved in a legal battle, the Court will likely ask for your LLC s Operating Agreement. Having one can help prove to the Court that you have a legitimate LLC and that you are running your business properly. If the Courts were to find you running an LLC without an Operating Agreement, they may go after your personal assets. Where Can I Get an Operating Agreement? Unfortunately, none of the states provide an Operating Agreement. You have a few options: Pay an attorney $200-$500 per hour to draft one. - see or

12 Buy one from a website. Cost is between $50-$ see or Write one yourself and fill out a template. Cost should be minimal. - see or Or use the one that we provide so you can customize it to fit your business. - see The LLC Formation Course: Federal Tax ID Number **Short Answer: A Federal Tax ID Number is to a business what a Social Security Number is to an individual. It s used for taxes & banking and it also identifies your company to the IRS.** A Federal Tax ID Number is issued by the IRS to business entities. It is also known as an EIN, or Employer Identification Number. For simplicity, we will refer to it as the EIN. An EIN is to a business what a Social Security Number is to an individual. It basically identifies your LLC to the IRS. Even though it is called an Employer Identification Number, it does not mean that you have to have employees. What Are EINs Used For? EINs are used for: Opening business checking, savings, or investment accounts. Filing taxes. Handling employee payroll (if applicable). Obtaining business lines of credit or business loans. Obtaining credit cards in the name of the LLC. Applying for business licenses. Wait For LLC Approval You must wait until your LLC is approved by the state before obtaining your EIN. You do not want to have any issues with an EIN assigned to the wrong LLC (dealing with the IRS to cancel an EIN is a pain in the neck).

13 What Does an EIN Look Like? An EIN is similar to a Social Security Number in that it has 9 digits. To differentiate an EIN from an SSN, there are 2 digits followed by a hyphen and then 7 more digits. An EIN will look like this: How Much Does an EIN Cost? An EIN is free. No, really, they re completely free. You can obtain an EIN from the IRS. Unfortunately, many websites will charge you $50 $100. (We show you how to obtain your EIN for free when you join the LLC Formation Course: How to Obtain an EIN EINs can be obtained in 3 ways: by mail, by fax, or via the IRS s online application. An EIN by fax takes 4 days. Too long. An EIN by mail can take up to 4 weeks. Way too long. An EIN by online application takes 15 minutes. Your EIN will be issued immediately after you answer all of the questions in the online application. You will then be able to save and print your new EIN, as well as your Confirmation Letter. Make sure to save copies of these and keep them with your LLC documents. Have Your SSN or ITIN Ready You will need to have the member(s) SSNs or ITINs ready before you begin the online application. If you are a US citizen you will use your SSN (Social Security Number). If you are a foreign national you will use your ITIN (Individual Taxpayer Identification Number). If you are a foreign national and do not have your ITIN, you will first need to apply for one prior to getting your EIN. If you need to apply for your ITIN, please contact the IRS: How do I Get the Online Application? Important: Unless your LLC has been approved, do not fill out your EIN application. You have a few options: Pay a website to get your EIN (although it s actually free).

14 why would you do that? Go directly to the IRS.gov website (and fill it out yourself): (EIN)-Online Or watch our step-by-step video and learn how to navigate the IRS.gov website correctly. - see The LLC Formation Course: Already Have an EIN for Your Business? If you already have an EIN, it s most likely attached to a Sole Proprietorship. (This is quite common.) You ll need to close out that EIN and get a different one for your LLC (after your LLC is approved). Here s how to close out an EIN: Annual Report **Short Answer: Your state will require you to file an Annual Report in order to keep your LLC in compliance, your contact information updated and your LLC in good standing. Fees and due dates vary by state.** Once your LLC is formed, paperwork with the state is not over. As a part of the ongoing requirements for your LLC, your state requires that you file an Annual Report and pay a filing fee every year. The Annual Report can take many names: Annual Report Annual Statement Statement of Information Periodic Report Biennial Statement Decennial Report And more And not all Annual Reports are annual. Some may be required to file every year, some every 2 years, and some may be fortunate enough to only have to file every 10 years. It just depends on your state and their requirements. Since most states refer to the report as the Annual Report, we will do so as well just for simplicity. The Purpose of the Annual Report The purpose of the Annual Report is to keep your LLC in compliance and in good standing.

15 Additionally, it keeps the state updated with your LLC s contact information. If you fail to file your Annual Report, the state will automatically dissolve (shut down) your LLC. Your Annual Report will include your LLC name, your office address, your Registered Agent information, and an LLC Number from your Secretary of State. The LLC number is just a number that your state uses to reference your LLC. The easiest way to understand it is to think of it like your LLC s driver s license number. Filing Fee and Due Date Filing fees and due dates for the Annual Report vary by state. Filing fees can range from $9/year up to $800/year. Some Annual Reports are due every year. Some Annual Reports are due every 2 years. And, some Annual Reports are due every 10 years. Again, it all depends on your state and its requirements. How to File and Pay Your Annual Report Generally, there are two ways you can file your Annual Report with your state. You can file by mail or you can file online. If you file by mail, you will fill out your Annual Report with a blue or black pen by hand (or you can fill it out on your computer). Next, you will make a copy for your business records and then mail it to the State along with a check or money order to pay the filing fee. If you file online, you will prepare and submit your Annual Report on the State s website and pay the filing fee with a debit or credit card. Regardless of what option you choose, it is important that you file your Annual Report on time. Most states will send you a reminder to pay and file your Annual Report prior to the deadline, but not all states do this. For that reason, we recommend that you keep a repeating reminder on your calendar. Consequences of Not Filing If you don t file your Annual Report on time, the state will charge you a late fee. If you continue to ignore this requirement, the State will automatically dissolve (shut down) your LLC. Some states are stricter than others, so it s best not to push your luck here. Where do I get my Annual Report?

16 Many people file their Annual Report themselves after their LLC is formed. If you have formed an LLC: But you are not sure how to get your Annual Report from the state, you can visit your state s website and contact them for guidance. - Click here for links to all 50 states: If you hired a company to form your LLC, then you need to verify whether they will file it on your behalf (and charge you to do so), or if you need to file it on your own. Remember, just because you paid a company to form your LLC, the Annual Report is ultimately your responsibility in order to keep your LLC in compliance and in good standing. If you have not formed your LLC yet: Don t worry, you only have to file your Annual Report AFTER you form your LLC. If you hire a company to form your LLC, just make sure to find out whether they will file your Annual Report for you or if you need to do it yourself. If you join our online course, we ll show you how to file your Annual Report. We ll also give you the specifics on filing fees and due dates for your state. In summary, it is important to make sure you file your Annual Report on time, so your LLC remains in compliance with your state. LLC Taxes **Short Answer: Be smart. Don t be an idiot and try to do your taxes yourself. Hire a professional. ** Depending on your type of business, you will need to register your LLC with the state s finance department. You will also need to file annual state income taxes as well as other tax documents depending on the structure of your business and whether or not you have employees. Calculating your tax obligations can be complicated and if done improperly can negatively impact your LLC. Hire a Professional We recommend that you get help from a tax professional once your LLC is formed. Hiring a tax professional will not only help you keep your LLC in compliance with the state, but it will also give you an advisor to go to for other business questions. Whether your business turns a profit or loses money, you will still need to file tax documents every year. This is not something to be taken lightly. If you want to run a serious business and not get into trouble with the state,

17 you should get assistance in filing your taxes properly. How to Find a Good CPA/Accountant A referral from a friend or someone else you trust is usually the best way to find someone to do your taxes. You can also ask co-workers, acquaintances from local clubs or organizations, your neighbors, and other business people. You could also ask your Twitter, Facebook, LinkedIn or other social media friends and maybe find a trusted name from a friend of a friend. You would just type into your social media account, Hey, I just formed an LLC. Anyone know a good accountant? If you can t get a personal referral, then try doing a search online for accountant or certified public accountant and looking for someone with a strong track record. Look for Compatibility You should also want someone who s a good fit for your company, makes you feel comfortable, and is willing to answer all of your questions. It should be someone you like personally as well as professionally. It s okay to take your time to find the right person. We recommend talking with at least 2-3 people before making your final decision. For more information, or to learn how to form your LLC, please visit us online: About LLC University We are a team of legal professionals and business formation experts who are passionate about empowering entrepreneurs. We got fed up with the lack of transparency in the LLC industry, so we decided to take matters into our own hands and created online video courses that teach people how to form their LLCs. Since 2009, we ve taught thousands of entrepreneurs and real estate investors how to form their LLCs and protect their personal assets. We care about our customers, not just the bottom line. Matt Horwitz & Shelley Losito Co-founders of LLC University LLC University is a registered trademark of Cascada & Associates LLC. Cascada & Associates LLC is an educational company and does not provide legal, tax, or financial advice. For legal, tax, or financial advice specific to your business needs, we encourage you to consult with a licensed attorney and/or CPA in your state.