Six key steps to launching an LLC, where mindful decision-making meets professional guidance to forge a solid foundation for entrepreneurial success and sustainable business growth.
Embarking on an entrepreneurial journey demands careful decision-making, particularly in selecting the appropriate business entity. The Limited Liability Company (“LLC”) is often a favored choice, given its combination of flexibility, legal protection, and a host of benefits including personal asset safeguarding, adaptable tax options, and managerial ease. It is essential for potential business owners to not only weigh these benefits, but also assess the business needs, anticipated growth, and the relationships among the founding members. To navigate this terrain, seeking experienced legal counsel and consulting tax experts is invaluable. Ensuring that the LLC aligns with your business vision, backed by professional guidance, lays the foundation for lasting success and growth.
Each state has its own specific process for forming an LLC, though they tend to be broadly similar across states, this discussion is centered on Michigan.
Step #1 - Choose a name
To form an LLC, you must select a business name that complies with state regulations. The name you select cannot be the same as or even too similar to any other LLC’s name; it must be unique to avoid consumer confusion. States, including Michigan, usually mandate that your LLC's name ends with "Limited Liability Company", "LLC", or "LC". Most commonly, "LLC" is used. This requirement gives the public notice of your business structure. As simplistic as this step may seem, it is critical to successfully establishing an LLC and being able to take advantage of the legal protections this business structure provides.
If the desired name is unique or crucial to the business, you might consider filing an application to reserve it. Name reservations usually last for a set duration, like 6 months in Michigan.
Step #2 - Select a registered agent and office
In addition to selecting an appropriate name, you must select a registered agent and office within the state you are forming your LLC. A registered agent, commonly referred to as a statutory agent, is the party appointed to receive service of process and communication from the state. Registered agents must provide an address where important correspondence can be sent. Typically, post office boxes are not acceptable places for a registered agent to receive these communications—rather, a physical address is usually required so the agent can receive service of process. When deciding who should serve as the registered agent, keep in mind that the registered agent will typically be the first person to whom the state reaches out if any issues arise with your LLC. As a result, it is important to ensure that your registered agent consistently checks incoming correspondence and relays that information to you as the business owner.
Step #3 - File documents
Filing the necessary documents is a crucial step in establishing your LLC. Typically, you'll submit the articles of organization (sometimes called the certificate of formation) to the secretary of state. In Michigan, this is done through the Michigan Department of Licensing and Regulatory Affairs, specifically the Corporations Division. These documents include details like the company's name, registered agent's name and address, and the purpose of the business. You can often file online, such as with Michigan's Corporations Online Filing System ("COFS") at (https://cofs.lara.state.mi.us/corpweb/LoginSystem/ListNewFilings.aspx).
Remember, this data becomes public, so only include information you're okay with being accessible to everyone. There's usually a small fee for filing (greater if you want expedited filing), but these initial expenses and filing fees are tax-deductible.
Step #4 - Get a tax identification number
Another essential step in starting an LLC is obtaining a Tax Identification Number. Your LLC’s Tax Identification Number, also known as an Employer Identification Number (“EIN”), is provided by the Internal Revenue Service (“IRS”). An EIN is a unique nine-digit number assigned to businesses for tax identification purposes. This can be completed on the IRS website (https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-number-ein-online). Once approved, you'll get an EIN Confirmation Letter, also called the CP 575 Notice. You can choose to receive this notice online or through the mail. Generally, the online method is faster, and you can get the notice almost instantly. However, it is important to ensure you save this document immediately after viewing it, as you'll need it for your records.
Step #5 - Draft an operating agreement
As you work through the steps of forming an LLC, another pivotal move, albeit not always a mandatory one, is drafting an operating agreement. Think of this as the blueprint for how your LLC will function. This vital document outlines the workings of the LLC, the interactions between its members and managers, and ensures everyone is on the same page. The operating agreement delves into key areas such as:
Capitalization: How is the business funded?
Membership: Who are the members, and what are their rights and responsibilities?
Management: How is the company managed, and who makes the decisions?
Distributions: How are profits and losses shared?
Conflict: How will disagreements between interested parties be resolved?
Some states may even require you to submit this agreement along with your articles of organization. Even if not obligatory, having an operating agreement is a wise decision to avoid potential misunderstandings or disputes down the line.
Step #6 - Open a business bank account
After you have filed your LLC’s formation documents with the state and obtained a Tax Identification Number, you will be ready to open a business checking account. This step must not be overlooked in order to enjoy the benefits of an LLC. Maintaining this separate business checking account prevents you from commingling your personal funds with the business’s funds. Failure to maintain this separate business account could result in losing the business’s limited liability status because of a legal concept called “piercing the veil.” If this happens, you could be held personally liable for the LLC’s debts and liabilities.
Often times banks will require a copy of the articles of incorporation, EIN, certificate of assumed name (if applicable), and operating agreement. For LLCs that have more than one member, in addition to requiring a copy of the operating agreement, they will require information and a form of identification from each member who has a 25% or greater ownership interest. Even for single-member LLCs, although an operating agreement must not always be technically required, it is best practice and advisable to have and is much easier than attempting to educate and convince financial institutions as to why one is not required.
Once your LLC is formed, it is critical to remember and adhere to the compliance requirements to keep your LLC in good standing. These requirements vary by state but often involve some form of annual reporting. In some states, for example, Michigan, you may also be required to pay an annual fee. Failure to comply with these requirements will result in the suspension of your LLC and put your personal assets at risk.
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The process of forming an LLC can be complicated and involves complex legal documents and procedures. If you need assistance forming an LLC or any other type of business structure, we can help! Schedule an appointment to talk with us today.
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