new business

A Limited Liability Company (LLC) is a business entity that combines features of both corporations and partnerships. Specifically, an LLC offers the same limited liability protections as a corporation and, by default, is taxed like a partnership.

When someone forms an LLC, they are creating an entity separate from themselves. If this separate entity (the LLC) is sued, it is the entity—not the individual who created it—that faces the lawsuit. This is what limited liability means. The advantage of limited liability is that, with few exceptions, if the LLC is sued, the assets at risk are those of the LLC, not the individual’s personal assets.

A corporation, by default, first pays taxes on its net income, and then that income is taxed again at the personal level when distributed to the owners. An LLC, like a partnership, does not pay taxes directly. The LLC’s profits pass through to the owners (called members) and are taxed as personal income. This is known as “pass-through taxation” and only changes if the LLC elects to be taxed as an S or C corporation. Limited liability and pass-through taxation are the two main features that define an LLC.

Before you can form an LLC, you must decide on your business name and ensure it is not already in use. Fortunately, each state has an online database where you can search for available names. When choosing a name, you should also avoid restricted words or phrases and include a business entity identifier, such as “L.L.C.,” “LLC,” or “Limited Liability Company.”

In order for the state to grant you the privilege of forming and establishing a business (and begin the process of separating your personal identity from the LLC’s separate legal identity), it needs to ensure that anyone can contact your business for important matters, such as legal notices or court summons. To do this, you must identify and provide your registered agent’s information and office address in the LLC formation documents.

Because many communications sent to the registered agent are time-sensitive, it’s important to choose someone you trust to receive and promptly deliver these important messages.

Your registered agent must be regularly available to receive legal and state correspondence for your LLC at a physical address within the state (a registered office). This means that if you decide to be your own registered agent, your name and home or office address will become part of the LLC’s permanent public record. Hiring a registered agent service can help keep your personal information more private.

Now that you’ve made the important decisions, it’s time to submit the state form to create your LLC, commonly called the “Articles of Organization.” In most states, LLC formation documents are processed by the Secretary of State. Requirements vary by state, but generally, you must include at minimum your business name, your registered agent, and a signature.

The operating agreement is the document that governs the functioning of your LLC. It outlines how profits and losses are distributed, who owns what percentage of the company, how the management structure is defined, and much more. Everything is included in the operating agreement. This document is internal, so you do not need to file it with any state agency. However, it is not recommended to operate an LLC without one.

To maintain the limited liability of your new LLC, it’s essential to keep your personal assets separate from the business assets, which means you’ll need to open a business bank account. This is another factor courts consider when deciding whether to respect your LLC’s separate identity or disregard it, potentially holding you personally liable. The clearer the separation between you and your LLC, the better!

To open a bank account, you typically need some key business documents: your Articles of Organization, the operating agreement, and the EIN. Depending on the bank—and how clearly authority is defined in your articles and agreement—you may also need an LLC resolution authorizing the account opening.

Your business bank account isn’t very useful if it’s empty—your new LLC needs to be funded with capital contributions. Let’s say your business needs $10,000 to get started. Each member would contribute a portion of that $10,000 using their own money or personal assets to deposit into the new business bank account. In return, members receive a proportional ownership percentage in the LLC.

You can adjust these percentages at any time if any member wishes to make additional contributions later.

After forming an LLC, your state may require you to update or confirm your business information through a business renewal or report, such as an annual or biennial report. In some cases, these renewals or reports are combined with other state requirements. For example, Arkansas combines its annual report with an annual franchise tax. Some states, like Washington and Nevada, also require LLCs to file an initial report, which must be submitted when starting the business or shortly thereafter.