LLC formation: How to form an LLC in different US states

A limited liability company is a business structure that is very similar to that of a corporation. The difference between these two is that the liabilities of a limited company are much less than that of a corporation. In the United States, limited liability companies are new ways to help small business owners and employees gain the major benefits by owning corporations. A limited company does not have shareholders and they are not required to meet at shareholders meetings. The following are some of the common steps to form an LLC in different US states:

Choosing a proper name for your LLC
To form an LLC in any of the US states, the first thing to be done is to choose the name of your LLC and be sure that it complies with the rules of the particular state’s LLC division. The name has to be different than any other LLCs filed and also must end with an LLC designator. Until you file the articles of organization, you can reserve a name for your LLC for a limited period of time.

Need to file articles of organization
The LLC filing office demands the articles of organization from your company once you are done with the name of your organization. There are some basic documents that are required to file the articles of organization also known as the certificate of formation or certificate of incorporation.

Filing fees while submitting articles of organization
To submit the articles of organization, you are required to pay a filing fee. This can be considered one of the small disadvantages of forming an LLC compared to a partnership business or a sole proprietorship. The minimum fee that is charged by most of the states in the United States is around $100.

Required Registered Agent
A registered agent is very important for forming an LLC in the United States. The name and address of this person, usually a member of your LLC, has to be registered under state laws in the LLC filing office who will act as an ‘agent for service of process’ for any future lawsuit involving your LLC.

LLC operating agreement
The state laws demand that an LLC operating agreement must be prepared embodying the rules for the ownership and operation of the business. This is not filed with the LLC filing office.

License and Permits for an LLC
The license and permits are the last but most important step in forming an LLC in the United States. This generally includes the business license, tax registration certificate, a seller’s permit, a federal employer identification number and a zoning permit.

The pros and cons of forming an LLC

As the name suggests, an LLC is a limited liability company and those companies forming under the umbrella of this type of organization are afforded limited liability. This company design helps to keep the personal liability of a business owner separate from the business. It is a new business concept in the United States that offers the benefits of a corporation while eliminating some of the complications. Existing business owners sometimes wish to change the way they conduct business and thus switch to forming an LLC for business.

The pros of forming an LLC
Before opening an LLC or converting your existing business to an LLC, you must look for the benefits that you would be getting as well as the extra costs involved. The benefits are to be calculated on the basis of the present economic condition and not forecasts. It is advisable to consult an attorney to calculate the tax and look into the legalities of forming the LLC. It is also advisable to hire a certified public accountant for counseling on the financial benefits of forming an LLC.

Forming an LLC also assures that the business can avoid double taxation such as sometimes happens with corporations. A corporation is taxed and according to that, the corporation must also file taxes. In corporations, the individual members of the corporation are taxed on what they earned. As a result of this, members of the corporation can wind up paying double taxes while the LLC has to pay only once.
There is no restriction for the organizational structure of an LLC. Forming an LLC also helps a new business in establishing creditability with potential employees, customers, partners and vendors.

The cons of forming an LLC
The primary con of forming an LLC is the expense involved in forming the organization. To form the LLC, the articles of organization must be filed under the state government rules and regulations along with the filing fees in accordance with state laws. Sometimes LLCs have to pay annual report or franchise tax fees. Thus the cost of forming an LLC can be more than a partnership, sole proprietor or entrepreneurship.
The other disadvantage of forming an LLC is that it is difficult to transfer ownership. Since an LLC is a new business category, there are few case laws or legal precedents, unlike corporations. The record keeping requirements after the formation of an LLC is also a bit more stringent compared to that of a corporation.

Terms of an LLC operating agreement

The formation of a limited liability company also demands the operating agreement, the terms of which vary depending on the state rules. Sometimes, changes in handling your LLC also require changes in the operating agreement with approval from the members of the board of your LLC. The state law in all states restricts the right to change few general conditions and rules associated with Limited Liability Company.

An LLC operating agreement is equivalent to a stockholder’s agreement of a corporation or partnership’s agreement.
Operating agreement and its restrictions on members of the company
The operating agreement prohibits members of an LLC to transfer or get in the way of any portion of their interests in the company. These operating agreements must contain rules stating occasions on which the members of the company can transfer their interests in the company. Unless the operating agreement holds policies to restrict its members from transferring interests in the company, the members are free to transfer interests and thus assign personal profits from the organization.

Operating agreement and the admission of new members
The operating agreement has explicit rules to state how and when a potential member can become an actual member of a corporation. The terms and conditions that must be stated in the operating agreement for admitting an additional member must be with the consent of all members of the organization, and each manager must identify the person as a certified member with a written statement. This operating agreement can also alter the general rule and prove to be a stumbling block for the admission of new members.

Operating agreement and setting of rules for allocation of profits and loses
The operating agreement must have policies and rules by which profits can be allocated among members of the LLC according to the manner they share the actual investment distribution. The losses must also be allocated in the same manner under rules of the operating agreement. Other than these, the owners would receive the same amount of profit even though they did not share the same amount of investment while forming the limited liability company.

Operating agreement and setting rules for distribution of money
There must be rules and policies stating the nature of distribution of money among the members, usually the owners of an LLC. Without the rules for distribution among members, unequal shares of profit as well as losses may occur.