The 5 Basic Steps to Forming an LLC

A Limited Liability Corporation, or LLC, protects your personal liability from business debts much like a standard corporation does. Unlike a corporation, however, the LLC is a pass-through tax entity, and your business taxes are simply reported as personal income. For these reasons, establishing an LLC has become quite popular, ever since the concept of an LLC was first introduced about 20 years ago.

Forming an LLC is not difficult and involves 5 basic steps:

1. Choosing the Name

Choosing a name for your LLC is arguably the most difficult part of forming a company, especially because many names are already trademarked. The Secretary of State's office usually contains a corporations division that deals with LLC formation and filing. Find out from this office what name you can use for your LLC. You may also be able to reserve your LLC name for a small fee until you finish the process of establishing the company.

2. Submitting Articles of Organization

While the name may sound daunting, submitting Articles of Organization usually involves simply filling in the blanks or checking off boxes on standard forms. Likely information to be collected includes the name and address of the LLC, its owners and the name and address of the Registered Agent (the person who will receive court documents in case there is a lawsuit against the LLC). Articles of Organization may also be called the Certificate of Organization or the Certificate of Formation. Most states charge a small fee (usually $100) when you turn in Articles of Organization, although some states, such as California, charge as much as $800.

3. Publishing a Notice of Intent

Once your Articles of Organization have been approved, the state may require publication of those Articles of Organization and notification of LLC formation in a newspaper. If this is the case for your state, you will need to publish your intention to form an LLC over several weeks in a local newspaper. Once these weeks have passed, you can submit an affidavit of publication to the state office where you submitted your Articles of Organization.

4. Creating the Operating Agreement

An operating agreement is hardly, if ever, required by law; however, it is in your LLC's best interest to have one. The operating agreement lays down the ownership rules for the LLC and its operation and may include such declarations as each member's ownership percentage, responsibilities, voting rights and how business profits and losses will be assumed. There may also be "buy-sell" provisions set in place that stipulate how members can sell off or buy stakes in the business. This is essential if one member should die or become disabled. Once all LLC members have signed the operating agreement, the LLC becomes a legally recognized business.

5. Obtaining Licenses and Permits

As a business, you will probably need to obtain a business license (i.e., tax registration certificate), an employer identification number and a seller's permit. Other items may include building permits, professional licenses, certificates and zoning permits.