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Set Up Your Own LLC With 4 Essential Steps

Jul 31, 2008
A lot of people think that filing LLC papers with the State Filing Office is all that is required to set up an LLC. However, that can be a costly mistake. Setting up an LLC (or corporation) is a process requiring 4 essential steps. Each step is important. To fully complete the organization of an LLC, you need to follow all of the steps outlined below. If you don't, 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. The first step, once you have decided to form an LLC, is to choose a name. Almost any name will work so long as it is not the same or deceptively similar to the name being used by another entity (corporation or LLC) that is filed with the State Filing Office or Secretary of State.

An LLC 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.

Some form of organizational meeting should be held soon after the initial Articles of Organization are filed with the State Filing Office (SFO). Typical minutes of an Organizational Meeting would include such items as the ratification and approval of the Articles of Organization and the LLC Operating Agreement. Additonal provisions could 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 is essential to the organization of your LLC. It sets forth the rights, duties and obligations of the members of the LLC. to each other and to the LLC as a separate legal entity. It also sets forth whether the LLC will be managed by the members (owners) or by certain other individuals or entities.

The Operating Agremeent is a legal agreement between the parties involved in the LLC. It acts to strengthen your 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 prove that your LLC is being operated as a separate legal entity. This is true even with a one member 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.

You file form SS-4 with the IRS to get a new EIN. Online is probably the easiest and fastest way to get a new EIN#. You can also get the form from a post office that has tax forms or from an accountant.

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.

If your business is ever sued, one of the important issues a court looks at in deciding questions about your liability protection 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.

The proper organization and operation of your LLC is essential for you to get limited liability protection. This protection provides a shield between business debts or obligations and your personal assets. The legal principle is that the LLC is a legal entity separate and apart from its owners. If your business is sued, you, need to be able to prove or demonstrate that you have operated the LLC as a separate legal entity.
About the Author
Before starting your LLC, check out all the facts about the "4 Essential Steps," from Attorney Bob Montgomery
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