The requirements to form a limited liability company are determined by the laws of each state and the District of Columbia. Most jurisdictions adopt the Revised Uniform LLC Act, which results in a higher degree of uniformity among jurisdictions. However, some variations still exist among the states. When forming an LLC, you must apply the rules of the jurisdiction of the state in which you create the LLC.
Certificate of Organization
The initial stage of forming an LLC requires the submission of a certificate of organization for delivery to the respective Secretary of State or equivalent office. The certificate must include a business name and the address of the LLC’s designated office. As an owner, known as a member, you can use a home address if you are running the business from home. However, it is not necessary that the person who forms the LLC be a member. An organizer who does not have the intention of being a member has authority to create the LLC and deliver the certificate to the state.
A business does not become a legal LLC until a secretary of state files the certificate of organization. The mere delivery of the certificate does not officially create the LLC. The state will not file the certificate until at least one member of the LLC exists. An organizer may provide a statement in the certificate indicating that no member presently exists. In this case, the secretary of state will delay filing until it receives a signed statement indicating the date on which the first member joins the LLC. However, if the state does not receive this statement within 90 days of the certificate’s delivery, the certificate will lapse and become void.
Although only required by law in a few states, it is strongly recommended that the initial members of an LLC draft an operating agreement soon after the formation becomes effective. This document governs the relationship between members and between the members and the LLC. It also provides the scope of authority for managers of the LLC, the type of activities in which the business may engage and the procedures members must follow to amend the agreement. You must draft this document carefully as it will be binding on all members and cannot be challenged in a court unless its provisions are illegal.
If a state authorizes your business as an LLC, the Internal Revenue Service will automatically designate it as a sole proprietorship or partnership if at least two members exist. This designation is solely for federal tax purposes. An LLC is free to change the default designation immediately upon formation by filing IRS Form 8832. Completion of this form allows any LLC to elect corporate tax treatment or change the election back to a sole proprietorship or partnership. However, an election is effective for a minimum of 60 months before another election can be made. During those 60 months, the LLC and its members must adhere to the tax requirements of the respective entity. For example, an LLC for which you elect corporate tax treatment, must file an annual tax return on Form 1120 each year, irrespective of the amount of earnings, if any.