Getting a business off the ground is hard work. But it's only part of the battle. There are some legal hoops to jump through too.
One of the first steps is registering your business a separate entity, like a limited liability company. There are obvious advantages to doing so, such as protecting against personal financial liabilities should anything with the business go wrong. There can also be tax advantages with an LLC, or it can be a stepping stone before moving to incorporate.
Filing the paperwork and learning what forms are necessary for approval can be seem daunting if don't know where to begin or if you're just starting your first businesses with limited resources.
In fact, the process was so frustrating for entrepreneur Matt Horwitz that he decided to quit his job as a web designer to build LLC University, a tutorial site that helps others through the process. He makes money off the national site by linking to recommended services. Since 2010, he's built step-by-step guides for the approval process, which can be more confusing in certain states compared to others.
"It took me six months to create a course for Pennsylvania, it took me three months to create [ the course for] Florida, and at that point I knew I wanted to go national," he says.
Luckily, despite the differences in costs and protocol across state lines, the best practices are generally maintained. Here's what Horwitz recommends it will take to get it done right, which took one New York-based CNBC Make It reporter as little as an hour and a half to complete.
1. LLC Name Search
Your LLC name will have to be unique. Search your desired LLC name on your state's Secretary of State website to make sure it's not already taken. The name generally should end with an allowable designator. In New York, for example, that means ending with "LLC," "L.L.C." or "Limited Liability Company."
2. Registered Agent
A registered agent is a person or company who agrees to receive legal mail, like a subpoena or complaint, on behalf of your LLC. While you could technically serve as your own registered agent and use your own address, it increases your odds of getting spam mail and other unsolicited messages. That's part of the reason why online filers like LegalZoom and incFile offer the service for a charge. In New York, things are different. By default, the Secretary of State is the Registered Agent for all companies (unless you choose otherwise).
3. Articles of Organization
This is the document that officially forms your LLC with the state. It can go by other names in certain states, such as Certificate of Organization or Certificate of Formation, but is always filed with the office of the Secretary of State. In New York, it costs $200, which is higher than the $135 average LLC filing fee across the US, according to Horwitz. The form can generally be can filed online for instant approval or mailed for approval in a couple of weeks.
4. Operating Agreement
An LLC Operating Agreement is where you will list the owners (called "members") of your LLC, as well as how much of the business they own. It's possible to have just one member with total ownership, or you can have multiple members and split the ownership any way you'd like.
5. Employer Identification Number
Part of the reason people file for an LLC in the first place is to set up an independent entity that's separate from their personal finances. Key to this is the EIN, or Employer Identification Number (also referred to as a Federal Tax ID Number). It is assigned by the IRS after your LLC is approved. The number is used to identify your LLC for reporting purposes with the IRS. In just minutes, an LLC approved at the state level can receive an EIN online from the IRS for free.
6. Opening a business bank account
To open a bank account for your LLC, you'll need your Articles of Organization (or similar document), the LLC's EIN, and generally two forms of identification. It's a crucial step that is necessary to fully finish the process of creating a separate financial entity for your business. Operating an LLC with a personal bank account all but defeats its purpose, according to Horwitz.
7. File Annual/Biennial Reports
Most states will have an annual report requirement that essentially requires keeping your LLC's contact information up to date with the Secretary of State. Some states, like New York, have a biennial requirement that costs $9 to file every two years by the end of your LLC's anniversary month.
Completing these steps would normally complete the process of forming an LLC. Certain states, however, have more hoops to jump through. New York, Arizona and Nebraska, for example, all have laws that pre-date the internet requiring LLCs to publish notices in local newspapers. Notifying the public with newspaper ads in New York for six weeks, as required by state law, can cost over $1,000 in more expensive counties, according to Horwitz, or more than five times the cost to file the LLC in the first place.
After all that, you've successfully formed a legal LLC. If you're ever unsure about any of the steps in your state, consider calling the respective office of secretary or seek help from an attorney.
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