Elizabeth Gonzalez is a legal and regulatory writer with more than seven years of experience as a contributing editor for HR Specialist and BLR’s HR Insights. She is also a content strategist, web copywriter, and fiction writer with publications ranging from Engineering News-Record and Construction Business Owner to Best American Nonrequired Reading.
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Forming an LLC can protect your personal income and assets. But how do you get started, and what documents must you file to take your business to the next level?
A sole proprietorship is the simplest and most common type of business, but it's also the riskiest. Every day that you run your business, your personal assets are on the line.
As your business acquires employees, property, and assets of its own, it makes sense to separate your personal life from your business life. Forming an entity such as a limited liability company, or LLC, shields your personal assets from business debts and liabilities.
Let's take a look at the business documents required to set up an LLC.
An LLC is a legal business entity formed by one or more owners, known as members. Unlike a sole proprietorship, an LLC has rights, responsibilities, debts, and assets separate from those of its owners.
An LLC is a relatively simple business structure, with profits from the business passing through to the members' personal income based on their share of ownership. Any number of members may elect to create an LLC, and members may be added or removed as the business grows.
There are three major advantages of forming your business as an LLC.
A primary motivation for forming an LLC is to shield yourself from legal and financial liability for your business. As a sole proprietor, your personal assets may be seized to satisfy business debts or legal judgments. Forming an LLC protects your personal property and income from those risks.
The profits from an LLC are passed through to the owners' personal income for tax purposes, just as they are with a sole proprietorship or partnership. This is simpler to manage and generally results in lower taxes than corporations.
LLCs may elect to be taxed as S corporations instead, giving owners tremendous flexibility in managing their tax burdens.
An LLC may be managed solely by its members or by anyone appointed to serve as manager. This gives you the flexibility to retain control and actively manage the business in whatever way you'd like.
The following summarizes the documentation requirements for creating an LLC. Depending on the nature and location of your business, you may be able to skip one or more steps.
If you don't already have one, you'll need to obtain an Employer Identification Number (EIN) for your business via IRS Form SS-4. You can download the form to file by mail, or simply apply online and receive your EIN immediately.
Your EIN is used on tax forms and other official documents to identify your business.
Before filing any LLC formation documents, you will need to choose a name for your LLC and run an availability search to determine if it's already taken. You can usually run a name availability search on the website of the secretary of state or corporations bureau.
Generally, states have specific rules for ensuring that a business name differs enough from those of existing businesses to qualify.
For example, Utah specifies that using a plural form of a word is not enough to distinguish one business name from another. If the name "Mad Rebel" is taken, you cannot choose "Mad Rebels."
Besides availability, you must check whether your name is permissible. Each state has unique naming rules including prohibited and restricted words.
In Utah, for example, you cannot use the word "Thrift" in a business name without requesting permission from the Department of Financial Institutions. Each state also has specifications for including corporate designators such as LLC in your business name.
Once you have a viable name, you may file a name reservation form with your state (though it’s not required) to hold it while you file your LLC paperwork.
You can usually find all of these materials on the secretary of state website.
To form your LLC, you must submit to the state articles of organization, also called a certificate of organization (or certificate of formation in some states). You can generally download the appropriate form from the secretary of state website.
When filing your form, make sure to include the correct number of copies. Often, you're required or permitted to submit two copies, one for the state to keep and one to stamp and return for your records. Failing to include the prescribed copies is a common cause of rejected filings.
Each state has its own requirements, but articles of organization generally include the following:
Each state provides forms for articles of organization, like this one for an Illinois LLC. Image source: Author
An operating agreement, also known as a company agreement, establishes the ground rules for running your LLC and the rights and responsibilities of its members. It also confirms how profits and losses will be distributed among them. Usually, members receive profits as income based on their share of ownership.
Operating agreements are not usually required by states as part of the formation process, but they are essential for establishing how your LLC will be governed. All members must sign the document to validate the agreement.
If you want to write your own operating agreement, you can find samples online, but since this is the legal foundation of your business, it makes sense to get input from legal counsel before signing. Generally, operating agreements include the following:
States need to have accurate, up-to-date records on businesses operating within their borders. To maintain them, most states require LLCs to file periodic reports to confirm basic information about their operations.
States use a wide range of names for these reports, including annual reports, statements of information, franchise tax reports, business entity reports, and annual certificates.
They are often due annually or biennially following the year of formation, but in some cases, they're due less frequently. Pennsylvania, for example, collects them every ten years.
A few states, including Alaska, California, Nevada, and Washington, require LLCs to file an initial report or statement of information at the time of LLC registration.
In many states, your LLC will need to register with the department of revenue for one or more tax types. These may include general business entity taxes, employer taxes, and sales and use taxes.
Usually, tax registration requirements and forms are included with business formation resources in the state's business portal.
Most states include tax registration in their business formation resources. Image source: Author
Depending on the nature and location of your business, you may need one or more business licenses. Typical licenses for small businesses include the following:
In most cases, you can apply for licenses online through the state corporations division.
With all of these documents, it pays to be meticulous. Missing a detail can result in rejected paperwork, sending you back to start over and delaying your approval. Getting sound legal and financial advice as you form your business is a wise investment.
You should retain founding documents for the life of the business. A document management system can simplify the process tremendously.
Forming an LLC is a major milestone in your company's growth. It marks the beginning of your business as a separate entity from yourself, with assets, liabilities, and responsibilities of its own.
Make it official the right way, with careful paperwork and a plan for future filings that meets all of your state's documentation requirements.