Estate planning and business law attorneys often advise their clients to form a limited liability company (LLC). An LLC provides flexibility and protection from lawsuits for the LLC’s members. You can add value by helping your business-owner clients through this process. Your expertise will make a difference to the success of your clients’ businesses, especially when it comes to drafting their operating agreements.
If you are new to LLC formation or just need a refresher, read on to learn the six steps to forming an LLC, through the helpful experiences of Jane and Penny, two fictitious start-up business owners who have come to your office looking for guidance as they partner to open a new restaurant.
1. Choose a Unique Business Name
Choosing a name—the first, seemingly simple, step to helping a client set up an LLC—is crucial for the LLC to take advantage of the legal protections offered to this type of business entity. An LLC’s legal name must be used on its formation document (typically called the articles of incorporation or certificate of organization).
Jane and Penny say that they would like to call their business “Penny’s Pancakes,” because Penny is an experienced and locally known cook. You should first check with the appropriate state filing office to make sure their preferred name has not already been taken. This must be done to avoid market confusion. Next, you should make sure that the name complies with state regulations. For example, some states require the name to include “limited liability company,” “LLC,” or “Limited,” to give the public notice of the business structure.
2. Choose a Reliable Registered Agent
The next step is to select a registered agent (also called a statutory agent) who can receive official communications for the LLC from the secretary of state and service of process. Although the registered agent could be a third party that Jane and Penny hire to fill this role, you could advise Jane that she could act as the registered agent, which will allow Penny to focus on preparing her delicious pancakes. Jane’s trustworthiness, attention to detail, and business acumen make her a good candidate to handle the business’s correspondence, and she is available to receive service of process.
As statutory agent, Jane should receive mail at a physical address. Post office boxes are usually not an acceptable address for a registered agent, who must be physically present to receive service of process.
3. File Articles of Incorporation
You can advise Jane and Penny that one of the most important tasks in forming an LLC is filing the business’s articles of incorporation with the secretary of state in the state of formation. The articles of incorporation are part of the public record and typically include the name of the LLC, the name and address of the registered agent, and the purpose of the business.
Some states, including Delaware, New Mexico, Nevada, and Wyoming, do not require the names of the LLC members to be included in the articles of incorporation; however, most states do require disclosure of the members’ names. If Jane and Penny want to maintain privacy, they should form their LLC in a state that does not require the names of the members to be disclosed and choose a third party to act as their registered agent.
The fee for filing the articles of incorporation and other start-up costs are tax deductible.
4. Obtain a Tax Identification Number
You should next advise Jane and Penny to fill out an Internal Revenue Service (IRS) application to obtain a Tax Identification Number (TIN) for the LLC. This number allows the IRS to link the identity of the responsible party to the LLC for income-tax purposes. If necessary, you can assist your clients with these setup activities.
5. Open a Business Checking Account
Just as Penny’s Pancakes, LLC will have a TIN that is separate from Jane’s and Penny’s social security numbers, Penny’s Pancakes should also have its own business checking account that is separate from Jane’s and Penny’s bank accounts. This will enable Jane and Penny to keep their personal and business finances separate, which is important for recordkeeping and the overall success of the business. In addition, commingling business and personal assets is one of the factors that could result in an LLC losing its limited liability status, as a litigant could be able to pierce the corporate veil. If this happens, Jane and Penny would be personally liable for claims against the business, which is what an LLC is designed to avoid.
6. Draft the Operating Agreement
Drafting the LLC’s operating agreement is a task that you, as Jane’s and Penny’s attorney, should handle. Check to see if your state requires the operating agreement to be filed along with the articles of incorporation. This document will be the “constitution” of the business, so it is crucial that you meet with Penny and Jane before drafting it to ensure that it addresses the specific needs of their business. If their company does not have an operating agreement, it will be governed by the state’s default LLC statute—which is most likely not in the company’s best interests.
Once the LLC is formed, you should advise Jane and Penny that they must keep the LLC in good standing. Some states require annual reporting or payment of an annual fee. Staying on top of these requirements will protect the status of the LLC and, in turn, the business owners’ personal assets.
Also, be aware that starting in 2024, there will be a new reporting requirement for many LLCs pursuant to the Corporate Transparency Act: those that fall within the definition of a “reporting company” will be required to provide information about the LLC and its owners to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network.
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