How To Set Up Your Own LLC - 4 Essential Steps

By: Attorney Bob Montgomery

Its a common misconception among many people that just filing LLC papers with the State Filing Office or Secretary of State is all that is required to form an LLC. However, that can be a serious mistake. Setting up an LLC (or corporation) is a process requiring 4 essential steps. Each step is essential. If you miss any of the 4 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).

The 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 official step in setting up an LLC is to file Articles of Organization (sometimes called a Certificate of Organization) with the State Filing Office (SFO). Each state also requires you to pay a filing fee. Most states require you to use the form they provide which you can get from the SFO.

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.

Special Note: Each LLC must name a registered agent and set forth a registered address in the Articles of Organization filed with the SFO. The registered agent is a person or company which can accept delivery or service of legal papers for the LLC. The registered agent also receives notices and official mail from the SFO for and on behalf of your LLC.

Most business owners act as their own registered agent so long as they have an actual street address in the state where the LLC is filed. There are companies that provide this service also.

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.

It is especially important to have some form of organizational meeting soon after the initial Articles of Organization are filed with the State Filing Office (SFO). The minutes of a typical Organizational Meeting would usually include such items as the approval and ratification of the Articles of Organization and the Operating Agreement. Other important provisions 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 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. This is fairly self evident but each separate legal entity, such as an LLC or corporation, requires a new or different federal tax identification number (EIN). The EIN is obtained from the Internal Revenue Service (IRS). This is true because the entity is considered separate and apart under the law from the individual owners. The exception to this rule with LLC's is when you have a one person LLC. When an LLC is owned and operated by just one person, that person has the option of reporting LLC income on his personal tax return and he/she can just use his/her own social security number.

A new EIN# is obtained by filing form SS-4 with the IRS. You can get the form from a post office that has tax forms, from an accountant or you can now apply online. Online is probably the easiest and fastest way to get a new EIN#.

Set Up A Separate Bank Account for the LLC. This is essential. A lot of business owners ask why they can?t continue to use the same bank account they used before forming the LLC ? when they operated their business as a sole proprietor or partner. Again, the principle behind liability protection is that the LLC is a legal entity, separate and apart from the individual owners. A separate legal entity requires a separate bank account.

One of the important issues a court looks at in deciding questions about your liability protection if your business is ever sued, 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 a basic overview of the essential steps required to get your LLC fully organized.

If you organize and operate your LLC properly, you are entitled to limited liability protection. This invaluable protection provides a shield between business debts or obligations and your personal assets. The principle is that the LLC is a legal entity separate and apart from its owners. If a lawsuit is filed against you, you need to be able to prove or demonstrate that you have operated the LLC as a separate legal entity.

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Before starting your LLC, check out all the facts about the "4 Essential Steps," from Attorney Bob Montgomery

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