Sometimes people believe that just filing LLC papers with the State Filing Office is all that is required to set up an LLC. That's a big mistake. Setting up an LLC (or corporation) is a process requiring 4 essential steps and each step is essential. If you miss any of the steps, then the limited liability protection provided by the LLC structure may be at risk.
- STEP NO. 1: Check A Name and Make Filing With State Filing Office
- STEP NO. 2: Prepare Organizational Minutes
- STEP NO. 3: Prepare & Adopt An Operating Agreement
- STEP NO. 4: Obtain New Employer ID (EIN) & Set Up a New Bank Account
Step 1: Check A Name and Make Filing With State Filing Office.
Check A Name. Once you have decided to form an LLC, you need to choose a name. Almost any name will work so long as it is not the same or deceptively similar to a name being used by another entity (corporation or LLC) that is filed with the State Filing Office (SFO).
An LLC name must end with the words Limited Liability Company or an abbreviation such as LLC or L.L.C.
File with State Filing Office. The first formal step in forming an LLC is to file a document called Articles of Organization (sometimes called a Certificate of Organization) with the State Filing Office (SFO). You must also pay a filing fee. Most states have a form they require you to use. The SFO provides this form.
In most states you can now file online. You can also mail the form to the SFO together with the filing fee (or) deliver it in person to their office.
Important Note: Every LLC must name a registered agent and list a registered address in the Articles of Organization filed with the SFO. A registered agent is simply a person or company which can accept service of legal papers (service of process) if your company is sued. The registered agent also receives notices and official mail from the SFO for and on behalf of your LLC.
It is common practice for a business owner to act as their own registered agent so long as they have an actual street address in the state where the LLC is filed. You can also hire a company to do this for you.
Step 2: Prepare Organizational Minutes.
In a corporation the directors and shareholders traditionally hold meetings and prepare minutes (written record or notes) of the meeting. There is no legal requirement for the LLC members to hold meetings and prepare minutes of the meeting. However, it is still a wise business practice to document important business decisions. This is one factor that helps show or prove that the LLC is being operated as a separate legal entity.
Some form of organizational meeting should be held soon after the initial Articles of Organization are filed with the State Filing Office (SFO). Typical minutes of an Organizational Meeting would include such items as the ratification and approval of the Articles of Organization and the LLC Operating Agreement. Additonal provisions could include a statement concerning who is managing the LLC and each Member's percentage of ownership in the LLC.
Step 3: Prepare & Adopt An Operating Agreement.
The members or owners of the LLC should prepare and sign or adopt an Operating Agreement. (Actually, this step could come 2nd - there is no required order) Even though Operating Agreements are not required by the state, this is one of the most important steps in maintaining your liability protection and preventing disagreements between the members.
The Operating Agreement is an essential document in the organization of your LLC. It sets forth the rights, duties and obligations of the members of the LLC. It also sets forth whether the LLC will be managed by the members (owners) or by certain other individuals or entities.
In addition to being a legal agreement between the parties involved in the LLC, the Operating Agreement helps strengthen the limited liability protection in the sense that it shows you have completed the organization of the LLC and are in compliance with the process. It helps show or prove that your LLC is being operated as a separate legal entity. This is true even though you may only have a one person LLC.
Step 4: Obtain a New Employer ID No. (EIN) from the IRS & Set Up a New Bank Account. Obtain a New Employer ID No. Each separate legal entity, such as an LLC or corporation, requires a new or different federal tax identification number (EIN). This is true because the entity is considered separate and apart under the law from the individual owners. The EIN is obtained from the Internal Revenue Service (IRS). The exception to this rule with LLC's is when you have a one person LLC. A one person LLC has the option of reporting LLC income on his/her personal tax return and he/she can just use his/her own social security number.
You file form SS-4 with the IRS to get a new EIN. Online is probably the easiest and fastest way to get a new EIN#. You can also get the form from a post office that has tax forms or from an accountant.
Set Up A Separate Bank Account for the LLC. This is essential. Many business owners wonder why they can't continue with the same bank account they used before forming the LLC. Again, the principle behind liability protection is that the LLC is a legal entity, separate and apart from the individual owners. All separate legal entities should have a separate bank account.
If your business is ever sued, one of the important issues a court looks at in deciding questions about your liability protection is whether the LLC owners have co-mingled their personal and business funds and assets.
Summary of 4 Essential Steps
This information was prepared as an overview of the essential steps required to fullu organize your LLC.
The proper organization and operation of your LLC is essential for you to get limited liability protection. This protection provides a shield between business debts or obligations and your personal assets. The legal principle is that the LLC is a legal entity separate and apart from its owners. If your business is sued, you, need to be able to prove or demonstrate that you have operated the LLC as a separate legal entity.
About the Author:
Before forming your LLC, be sure to get all the facts about the "4 Essential Steps," from Attorney Bob Montgomery
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