An LLC, or a limited liability company, is a business structure that separates the owner’s personal assets from the business’s liabilities. There are quite a few benefits to forming an LLC, including but not limited to personal asset protection, fewer formalities, and adaptable management options. Because of this, LLCs are especially common among small business owners and entrepreneurs. To take advantage of these benefits, understanding how to form an LLC correctly from the start is important.

Select a state for the LLC

One of the first steps in the LLC formation process is deciding which state to register the business in. While it is legally possible to form an LLC in any state, most owners choose to set up their LLC in the state where the business primarily operates. In most cases, this is the same state where the owner lives.

If a business owner decides to form an LLC in one state and operate it in another, their company must be registered in both states. Also, formation fees, annual reporting requirements, taxes, and LLC laws vary widely from state to state. Before selecting a state to form an LLC, the business owner needs to review these details as well.

Name the LLC

The next step to start an LLC is choosing a name for the business. Every state has its own rules and requirements for what a business owner can name their LLC and how. However, a common requirement among those is that the name must end with terms such as “LLC” or “Limited Liability Company,” to maintain clarity. Also, states require the name to be unique and distinguishable from other registered businesses. Names that are too similar to existing companies or organizations are usually not allowed. To avoid any such issues, when choosing a name, the business owner can conduct a name availability search through the state’s records.

Get a registered agent

A registered agent is among the most important entities in an LLC. The business owner is responsible for receiving official documents, such as tax notices, legal papers, and communications, from the state on behalf of the company. While an LLC owner can serve as their own registered agent, it is better to appoint an agent through a professional registered agent service. Among the many reasons this is beneficial, an important one is that a registered agent must accept all legal and state documents during regular business hours at a physical address within the state. For a business owner, this might not always be possible. Also, appointing a dedicated registered agent ensures that important documents are handled reliably and that compliance deadlines are not missed.

Set a management structure

There are two options for an LLC’s management structure. The first option is that of a member-managed structure. In this format, an LLC is run by all its associated members. The second option is a manager-managed structure, wherein the LLC’s owners appoint a few managers to run the business. Many states require LLCs to declare their management structure when filing for formation.

Design the operating agreement

An operating agreement outlines how the LLC functions and how its decisions are made. It also defines ownership percentages, responsibilities, profit distribution, and procedures for handling major changes. All LLC owners must come together to draft this agreement with complete clarity. Even LLCs owned by a single owner should have an operating agreement. It allows the owner to plan for future or potential situations, such as ownership changes or the point at which they can no longer manage the business.

File the articles of organization

Articles of Organization are the set of formation documents of an LLC. They include basic information such as the LLC’s name, principal address, purpose, registered agent’s details, and management structure. Once drafted and compiled, these need to be filed at the Secretary of State’s office. As soon as the state approves the LLC, it is legally recognized as a business entity.

Get the EIN and licenses

The formation is not complete unless the business is registered with the IRS. For that, the LLC needs an Employer Identification Number, or EIN. This number is used to open business bank accounts and handle tax filings.

In addition, the LLC may need to register with state tax agencies and obtain required licenses or permits. These can include general business licenses, employer registrations, or professional licenses, depending on the nature and location of the business.