Creating an LLC File Your Paperwork

Structuring your business as a limited liability company, or LLC, takes a little more paperwork than operating as a sole proprietorship. Here’s a look at the important documents needed in creating an LLC.

Register a business name.  LLC formation begins with choosing a business name. First check your state’s business registry to confirm that the name you want isn’t already taken. Your chosen name should include “LLC.” Know that there may be certain words, such as bank or insurance, that are prohibited from use when creating an LLC business name in your state.

File articles of incorporation.  Also known as articles of organization, this simple document provides some basic information such as your business name, address, and the names and contact information for all the LLC’s owners. If you have a registered agent who can accept legal notices on your company’s behalf, you’ll include their contact info here as well. You also must identify one member who will be the LLC’s managing member.

In most states, articles are filed with the Secretary of State’s office. Find out your state’s requirement at the federal web portal: Business.gov's Business Incorporation page.

You must also disclose whether your company can issue private shares to its owners, and if so, the value of those shares, if any. There is typically a fee for filing your articles of incorporation. In some states, you may need to publish a notice of your company’s formation in a local newspaper.

Create an operating agreement.  In most states, an operating agreement is not a required document, but it’s highly recommended that you create one, especially if your LLC has more than one member. The operating agreement outlines how your LLC will be governed.

Among the details commonly described in an operating agreement are:

• How profits will be distributed and losses handled
• When and where important company meetings will be held
• The ownership stake of each member
• Each member’s voting rights and other powers
• Each member’s responsibilities and duties
• The agreed-upon rules for buying or transferring ownership interest if a member seeks to leave or dies

Once it’s signed, the operating agreement is a binding contract between the LLC partners. It does not need to be filed with the state, but it should be kept in a safe with other important business records.

Obtain licenses and permits.  Once you file your articles of incorporation, your business will usually need to obtain state and local business licenses or permits. The local licenses needed may vary depending on the type of business your LLC will operate.

Know your benefits.  Operating your business as an LLC offers some distinct advantages. One of the most important pluses of an LLC is that the structure helps shield the member-owners from personal responsibility if the company causes damage to people or property, or issued. Sole proprietors don’t have this protection.

In addition, LLC members avoid the double taxation that owners of a corporation must pay, once at the company level, and then again on their personal income taxes. In an LLC, the income is simply reported on the members’ personal income-tax forms. Also, members don’t have to pay self-employment tax on the business income they receive, except for the managing member.

One final bonus of creating an LLC is that the paperwork is less burdensome than it is for a corporation, so legal costs tend to be lower.