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Before you jump into forming an LLC, take the following three important matters into consideration.
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Limited liability companies (LLC’s) are an extremely common type of business entity structure. Both experienced entrepreneurs and first-time business owners enjoy the tax flexibility and limited liability protection offered by LLC’s.
Although the exact process of forming an LLC varies by state, the high-level steps are easy to accomplish. Still, don’t let the ease of starting an LLC lull you into a false sense of security. Before you jump into forming an LLC, know there are a few significant considerations to make.
Choose the Best State in Which to Form Your LLC
LLC’s are formed (or “organized”) at the state level. The state in which you decide to organize the LLC depends on your specific needs and plans for growth, privacy, and legal protections. The LLC formation documents primarily include articles of the organization that creates your LLC. An LLC is a legal entity created within the state you reside in and mixes aspects of a partnership and corporation.
Most business owners organize their LLC’s in the state where they live and initially plan to conduct business. The reason is simple: Most small businesses don’t have complex management structures. Therefore, they don’t see massive tax benefits from organizing elsewhere. For these small business owners, the LLC is a simple way to have an entity separate from themselves, while providing products and services to their community.
Some businesses do have additional complexities, such as outside investors or plans for immediate expansion. Since LLC filings are a matter of public record, other business owners choose their state with a focus on privacy. Still others form in a state with a history of business-friendly case law, such as Delaware.
By forming in another state, an LLC typically must foreign qualify in your state from the outset. This increases the amount of paperwork, setup fees, and ongoing maintenance costs. However, it could be worth it, depending on your business model.
Ensure Your Company Name Is Available
Your company name is your chance to make a great first impression with the public. The right name tells a story about your brand, product, and values. As a result, you may spend hours deciding upon an ideal name before forming an LLC.
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Before you commit to a name, however, be sure to do your due diligence. No matter the state, if another company is already using a name you’ve chosen, or if your name is too similar, you’ll have to choose another. And it goes without saying that the business name you want to use cannot be misleading or vulgar.
As you review your list of potential company names, conduct a name availability search in your state’s database of registered entities. Look to see whether a similar company name already exists. If the search doesn’t reveal a conflict, you stand a good chance of securing the name. Of course, the ultimate approval comes from the state examiner who reviews your articles of organization for forming your LLC.
Company names are registered with each state. Just because a name is available in your state, this doesn’t mean it’s available across state lines—even in neighboring states. Because of this, you’ll need to repeat the process of confirming name availability in each state. Many entrepreneurs conduct this research beforehand to avoid conflicts once they have formed their company.
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Appoint a Reliable Registered Agent When Forming an LLC
In every state, LLC’s are required to designate a registered agent to receive time-sensitive legal and government notices. The registered agent is listed on your articles of organization. Moreover, the state won’t approve forming your LLC without one.
The registered agent’s role is straightforward, at least on paper. The agent maintains a physical address in the state during regular business hours. Then, the agent forwards any documents it receives to the business it represents.
In general, individuals may serve as a registered agent, but there are concerns with this approach. This is because anyone who serves your LLC with legal papers will contact the registered agent first. So, even something as simple as running an errand or taking a vacation can result in a missed delivery. This can potentially cause severe consequences for a business.
Even if this registered agent is in the office, most business owners would prefer not to receive service of process in front of their employees, customers, or family members. Plus, as the company grows, it will have to designate an agent in each new state. This is a requirement few individuals can meet. Entrepreneurs may be better served choosing an LLC registered agent that ensures their company meets state requirements and reliably receives documents.
Your company’s state of formation, name, and registered agent have long-term impacts on how your business operates and grows. Regardless of your experience level, do your research. Also, seek advice from qualified legal counsel when needed. By doing so, you’ll find fewer issues—and happier customers—down the road after forming your LLC.
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