Starting a new business is easy in concept. You file some papers, pay a fee, and there you have it—a new business! The reality is not so straightforward. Over the next few posts, I’m going to walk through all of the usual steps involved in setting up a limited liability company. After that, I’ll do a series on setting up a C-corporation and an S-corporation. Feel free to comment and ask questions.
You should know up front that this is a basic overview and every business is going to be slightly different. This is not legal advice. If you are going to start a new business, talk to a lawyer. Discuss the specifics of your situation. You can do this on your own, but you shouldn’t. You might screw up your company and create a mountain of unnecessary legal work. Proceed with caution.
Now let’s get down to business. Today we begin with LLC basics, picking a state, choosing a name, the Articles of Organization, and filing the papers. Next week will focus on operating agreements.
LLCs offer flexibility and pass-through tax. These are double-edged features. Flexibility is just another word for complexity. Since just about every feature of an LLC can be customized, LLC formation requires attention to detail.
Pass-through tax is no picnic either. Unlike the relatively simple tax on corporate income, LLCs are governed by a set of tax rules which can best be described as mind-numbingly complex. (For you. I love this stuff. It’s unhealthy.)
There are huge advantages to going with an LLC, you just have to be sure everything is set up right. Otherwise you’re in for financial disaster and quite possibly a call from the IRS.
You don’t want a call from the IRS.
For more LLC background information, and a deeper look at what makes LLCs unique, check out my post, What is an LLC?
Before you file anything, you’ll need to pick a state of organization. There are a number of reasons to choose one state over another, and that discussion is beyond the scope of this post. But, in general, you want to choose the state you live in, or Delaware.
Delaware is a known quantity. It has well-worn corporate and LLC law. Big companies setup shop in Delaware. They get into fights. They pay high-priced New York law firms to battle over miniscule nuances in the law. And that’s how well-worn law gets made. Delaware law is generally very flexible and friendly to entrenched interests. (That’s you, founder.)
If you want an easy answer—and especially if you ever plan to raise money from institutional investors outside your state—go with Delaware. Otherwise, do some research, talk to a lawyer, and find the best fit.
When you’ve come up with a name for your entity, make sure it isn’t taken in the state where you are organizing. Only one company can use a name. No matter what type of entity is using the name, if it’s taken, it’s taken. The state may even prevent you from using a certain name if they consider it to be “confusingly similar” to another name. So run a search through your secretary of state’s website. Make sure your name is available.
Now is also a good time to run a Google search for the name. Start thinking about trademarks. If you plan to expand beyond your state’s borders—if you have a web-based service or a growing company—make sure to research the name thoroughly. If someone else is using it, you could get boxed in and forced to re-brand yourself before you can expand.
If the entity name that you wanted is taken, consider using a different entity name and filing a “fictitious name” registration for the name you want. (Also known as DBA.) In general, you will be able to use a taken entity name as a DBA, so long as you aren’t infringing anyone’s trademark. Remember that most brand names you are familiar with are not the name of the business itself. Generally they are fictitious names or registered trademarks.
The Articles of Organization is the document that officially forms your LLC entity with the state. Very little is required on the Articles. The name of your LLC, the name of a statutory agent (a human being in the state who will get official company mail), and a signature: that’s about all that’s required in most states.
Articles of Organization are standardized documents. You can find you state’s Articles on your secretary of state’s website. Ohio’s Articles are HERE. Delaware’s are HERE. California’s are HERE. Google will help you find the rest.
As you can see, the Articles ask for very little information. A number of the lines are optional. Unless you have a very good reason for filling in an optional line, leave it blank. Adding extra information can only constrain your business and will potentially lead to headaches many years from now.
Filing is easy: Print out the Articles. Sign them. Make a photocopy. Write out a check for whatever your state charges. (In Ohio it’s $125.)
Drive to the secretary of state, or drop your Articles in the mail. If you include a duplicate of the Articles, most secretaries of state will timestamp it and return it to you. (Some may charge an extra fee. Most won’t.) Keep the timestamped copy for your records as proof that you filed.
In a week or two you should get an official certificate back from the secretary of state indicating that your LLC is now an official entity. If you can’t wait for the mail, keep checking the secretary of state’s website. It will usually show up there first.
At this point you have a limited liability company. Your entity exists under state law. You’re good to go!
This is where the difficult part begins. Next week we’ll dive into the operating agreement, the document that governs pretty much everything that happens to your LLC. It’s where the management rights and economics are written out. It’s where you make sure the company you’ve built is the company you want.