I am always surprised when I receive panicked emails or calls from colleagues, friends and social media buddies who are stressed out by the idea of creating a Limited Liability Company (LLC). The panic seems to derive from fear of doing it in the wrong order, fear of doing it wrong altogether, fear of accidentally increasing their tax liability and just plain disdain for any bureaucratic process whatsoever. Some talk of using Legal Zoom to create their LLCs but are somewhat apprehensive about it (as well they should be; as I have said before, in my opinion folks are better off creating their LLC themselves than they are using an online form creation company).
The reason it surprises me is because these are often sophisticated entrepreneurs who have had success with undertakings much more challenging than creating an LLC. Yet, the paperwork involved in LLC formation sends them into a tailspin. Therefore, I figured it was high time I wrote a blog post for the benefit of anyone in a panic about creating their first Limited Liability Company.
Before I get into the details of LLC creation, I want to make it clear that the process may vary depending on the state in which you form the LLC and depending on the number of people who will own the company. I am going to provide you with a step-by-step guide that I have used to create single-member LLCs in a few different states. The process will undoubtedly be similar for solopreneurs in your state but since I do not have the time to create a step-by-step guide for every state, this will be somewhat of a generalization. (PS – Citizen Media Law Project has put together step-by-step guides for 16 states.)
The Step-By-Step Guide to Forming an LLC
Without further ado, here is the step-by-step process:
Step 1: Write down your answers to the following questions.
– What will you call the business? (Hint: Do a preliminary business name search on the SOS website, a Google search and a search on the USPTO trademark database as well, for good measure.)
– What physical and mailing address(es) will the business use?
– How many owners will there be and how much will each contribute to the business?
– How will the company be classified for federal tax purposes – as a disregarded entity (meaning its treated like a sole proprietorship for tax purposes), a partnership or a corporation? (Hint: if there's only one owner, disregarded entity is usually the way to go).
– Who will serve as the agent for service (meaning who should get the paperwork related to forming the business and in the event the business gets sued? Hint: you.)
Step 2: Go to your state's Secretary of State website and download the Articles of Organization form.
Your answers to the questions in Step 1 will help you complete the form (among other documents). Once you have completed the form accurately (I highly recommend reading the instructions), make a copy for your records and mail off the original along with a money order for the required filing fee.
Step 3: Obtain an Employer Identification Number (EIN) from the IRS.
This is fairly straightforward. The answers to the questions in Step 1 will help you fill out the IRS online form for EIN's. You get your EIN and a letter from the IRS to serve as proof of your EIN at the end of the form.
Step 4: File a Statement of Information or Publication in a Newspaper
This step varies depending upon the state that you are in. Some states, such as New York, require that you publish your LLC in a local newspaper or two. While other states, such as California, require that you file a Statement of Information within 30 days of filing your Articles of Organization. Check your state's Secretary of State website to see which step is next for you.
Step 5: Create the Organizational Documents
You will want to document the creation of your LLC and the manner in which it will be run. In some states, this is required, in other states it is not. Create an Action by Unanimous Written Consent (or First Minutes) which will document the what, where, when, why and how of your LLC's creation. Essentially this is where the officers of your business “meet” and record the formation actions.
The other document you may need (and want) is an Operating Agreement. The operating agreement covers topics such as the management structure, member contributions and percentages of ownership, how profits and losses will be allocated, voting powers, an exit plan such as a buy-sell agreement, etc.
The Action by Unanimous Written Consent and Operating Agreement are not filed with the state but instead are maintained along with other company records at company headquarters (i.e., the filing cabinet in your home office).
So Why Hire a Lawyer?
As you can see, forming an LLC is not rocket science. So why do people hire a lawyer? There are multiple reasons clients have hired me to form their LLCs. Some don't want to be bothered with all of the paperwork, others find its more cost effective to pay an attorney to handle their biz formation so they can focus on doing what they do best. Still others have complex situations such as employees or multiple members, that require legal advice and strategy as well as attorney drafted documents. Lastly, some biz owners don't know if they should form an LLC in the first place and need the advice of an attorney on choosing an entity.
However, solopreneurs can create their own LLCs if they will take the time to research the requirements in their state and follow the step-by-step process.
Photo courtesy of John Patrick Robichaud
