One of the most important things to consider when starting a business is its structure. Some entrepreneurs opt to incorporate as a sole proprietorship or corporation. Others choose to form a limited liability company, or LLC. Compared to other business entities, setting up an LLC provides flexibility and liability protection.
With an LLC, the owners (or members), are not held personally responsible if the LLC becomes bankrupt or faces a lawsuit. But, keep in mind that different states have different sets of rules when it comes to setting up an LLC. It’s important to do your research first to make sure you understand the state regulations.
Interested in forming an LLC? Here’s a step by step guide for getting started.
1. Choose a name for your LLC.
One of the first things to consider when setting up an LLC is coming up with a business name. This name should be unique, easy to remember, and adhere to state regulations. It should also attract the attention of potential customers. Follow these guidelines.
- Make sure to know your local Secretary of State’s restrictions when choosing a name for your LLC. For instance, some states will not allow words such as corporate, bank, city, or insurance to be used in the name of an LLC.
- The name should be different from other LLCs on file. Conduct a trademark name search first. This ensures your trademark is unique and does not violate another company’s mark.
- Once you have the appropriate name, file a trademark application to reserve the name. Remember to pay the application’s filing fee, too.
- The name of your LLC will be registered once you file your articles of organization.
2. Designate a registered agent.
Starting an LLC involves choosing a registered agent, or a statutory agent, on behalf of the business. They will receive all the documents and notices necessary for the LLC. A registered agent organizes this paperwork. Then, they give it to the business owner in a private, discrete manner.
Who can be a registered agent?
In general, anyone who is at least 18 years old can be a registered agent. Registered agents must be a resident of the state you do business in and have a physical street address. Third party companies that provide registered agent services may also act as an RA. Look for a registered agent who has a working knowledgeable of corporate filings, and can accept unlimited forwarding of government mail.
3. Set up an operating agreement.
This serves as a roadmap for how your business will operate as an LLC. Most state laws do not require an LLC to have a written operating agreement. However, this document is an important part of setting up a successful LLC. An operating agreement covers essential rules and regulations that will keep your operations running smoothly. Some of these include the following:
- Members’ rights and voting power
- The ownership interest of each member
- Management or allocation of revenues and losses
- How to conduct business meetings and take votes
- Business management
- Roles and responsibilities of business owners
- Provisions for when a member wants to sell his or her interest, passes away, or becomes disabled
4. File an annual report.
Annual reports are filed yearly with your Secretary of State’s filing office. This document keeps a record of any changes and yearly business activities within the business. You’ll need to include the name and address of the LLC, name and address of the registered agent, names of the members, and business purpose in the annual report.
5. Get licensed.
Before you can open your doors for business, you’ll need to obtain the proper business licenses and permits. Apply for an employer identification number (EIN) before hiring employees, too.
6. Publish a notice.
Some states, like Arizona, Nebraska, and New York, require new LLCs to publish a notice of your intent to open an LLC in your local newspaper. Typically, the notice will need to be published several times over the course of a few weeks. The newspaper will then send you an affidavit of publication, which you can show to the LLC filing office.
7. Obtain the right insurance.
LLCs may allow owners to carry less liability, but it’s still essential to have the right insurance. It will serve as your safety net to ensure that your business continues to operate should an unforeseen accident happens.
Most states also require companies to carry insurance. For example, regardless of your business structure, most states mandate businesses with at least one employee to carry workers’ compensation. In addition to legal requirements, insurance will mean you’re covered against cases of property damage or third-party bodily injury.
Different types of insurance cater to a specific business need. Here are a few popular types:
- General liability insurance – This is also known as business liability or commercial liability insurance. General liability insurance policies protect your LLC against financial losses due to claims associated with bodily injury or property damage. It covers medical expenses and rehabilitation treatment costs.
- Professional liability insurance – Does your business provide professional or consulting services? Consider purchasing this policy. It protects your LLC against losses in case someone files a claim regarding an error or mistake made when offering professional services.
- Workers’ compensation insurance – If an employee gets sick or injured at work, this coverage will take care of the medical and rehabilitation expenses. It also covers the salaries lost while an employee recovers. On the part of employers, workers’ compensation insurance can also protect your business against lawsuits filed by employees.
Set up an LLC.
Many business owners prefer starting an LLC because of its flexibility. However, several factors come into play when setting up an LLC. Make sure to know the rules and regulations of the state you’re operating in to stay compliant. Then, you can focus on your business and how to make it a success.
Emily Lazration is the Content Marketing Specialist at CoverWallet, a tech company that makes it easy for businesses to understand, buy and manage commercial insurance online. She has written for several outlets including Inc., Ooma, and Fundera covering small business news and advice.