Guidance on How to Set Up an LLC

by David Carnes
Many states allow one-member LLCs.

Many states allow one-member LLCs.

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The basic process for establishing an LLC, also known as a limited liability company, is simple -- file the Articles of Organization and pay the filing fee. A number of other considerations also come into play, however, such as choosing an appropriate name, determining the capital contributions of the members, selecting a tax structure and creating an operating agreement. LLCs are governed by the laws of the state where it is formed.

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Naming Your LLC

Two legal considerations should govern your choice of a name for your LLC. First, make sure the name is not already in use in your state, by conducting a business name search on the website of your state's Secretary of State. Second, comply with state law concerning the identification of an LLC as a limited liability entity. This will usually require you to add certain words or abbreviations to the name, such as "limited liability company," "LLC" or "Ltd."

Paperwork

File a form called Articles of Organization with the Secretary of State of the state in which it is organized. The Articles of Organization form is typically short and simple -- you will have to supply the LLC name, the names of its members, the name of its registered agent, its legal business address and certain other pertinent information such as the amount of capital contributions by each member. Some states supply their own forms. The registered agent is the person to whom all communication from the state government is directed. He need not be a member of the LLC, but must be a resident of the state. Many states do not allow an LLC to use a post office box for a legal business address. You will have to pay a filing fee of up to several hundred dollars.

Tax Structure

The IRS will tax single-member LLCs as sole proprietorships; in other words, the LLC itself is completely disregarded for tax purposes. LLCs with multiple members are taxed as partnerships, meaning that LLC members are taxed on the LLC's income in proportion to their right to receive profits, regardless of whether or not profits are actually distributed to members by the LLC. An LLC may elect to be taxed as a corporation, which may result in lower tax rates under certain circumstances.

Operating Agreement

An LLC operating agreement sets out voting, management and financial policies. It is invaluable in the event of a dispute between members, but is not required by any state as of November 2010. An LLC operating agreement resembles a partnership agreement. Some states allow LLCs to file copies of their operating agreement with the Secretary of State in order to head off any dispute concerning the authenticity of the original agreement.

Limited Liability

A new LLC should set up a bank account in the name of the LLC as soon as it is formed, and refrain from co-mingling personal funds and LLC funds. The LLC must hold itself out to the public as a limited liability entity, so that potential creditors cannot reasonably rely on the personal assets of LLC members to satisfy any claims against the LLC. Otherwise, a judge might strip the LLC of its limited liability status.