Martina felt like she was going in over her head. After all, she only had a pet-grooming business. Why would she need an LLC? But she was thinking of buying a mobile unit for her business. And she could even see leasing a storefront someday, where she could add retail sales to her pet grooming. She’d read that if she was going to sign leases and operate vehicles, she should have an LLC. So, she’d gone through the steps, one by one. When she was done, she was surprised at how quick, easy, and inexpensive it had been. Martina could already feel a new energy, and she also had a bunch of new ideas for her business.
Formation
As mentioned above, your state’s LLC act will govern how you form your LLC. Most states follow the Uniform LLC Act, especially as to these formation basics. You form an LLC by filing articles of organization with the state, under which at least one person becomes a member. Technically, filing your articles of organization with the state forms your LLC. But in practice, you must also promptly adopt an operating agreement, which you don’t file with the state but instead keep among your own business records. Your execution of those two documents, (1) the articles of organization filed with the state and (2) the operating agreement kept among your business records, form your LLC.
Nomenclature
You might have already hesitated over the peculiar names of these two documents. They might sound both familiar and different to you. The articles of organization with which you form your LLC are very like the articles of incorporation with which you would have formed a corporation. And the operating agreement with which you complete your LLC’s formation are very like the bylaws with which you would have completed formation of a corporation. An LLC’s articles of organization have the same function as a corporation’s articles of incorporation. And an LLC’s operating agreement has the same function as a corporation’s bylaws. It’s just that the names are different. Get used to the different names. Articles form your LLC, and the operating agreement governs its operations.
Documentation
So, where do you get the articles of organization and operating agreement you need to form an LLC? You may, of course, retain a local attorney who will help you prepare the documents. You can also find documents for sale online. You can also find free templates online. And your state business corporations bureau’s website likely includes a handy form for the LLC articles of organization, one that the bureau would prefer you use. This book includes its own patterns. My recommendation is that you go to your state’s website for the LLC articles of organization form and try to complete it. If it seems clear enough to you, then you’ve probably got what you need. As to the operating agreement, look at the forms in the back of this book and any you find online. Once again, if they seem clear enough to you, you’ve probably got what you need. Otherwise, consult a skilled local attorney.
Consultation
You may wonder whether you should retain an attorney to help you form your LLC. Forming an LLC is not simply a matter of preparing and filing documents. You should instead give some thought to what you put into the documents. This book is helping you do so. So, too, could an attorney. As an attorney and educator of attorneys, I’d be the last one to say you don’t need an attorney. Having an attorney with whom you can periodically consult is a good thing. And it’s not just getting the right documents into the right form and place. You can get a ton of business value out of consulting an attorney. See the chapter nearer the end of the book on professionals whom you may wish to consult.
Organization
As indicated just above, your state’s corporations bureau likely offers an online form for the LLC articles of organization that you need to file. See, for example, Michigan’s online LLC articles of organization form at the end of this book, with clickable fields that you can fill out online. Enter your name and address for the bureau to return the original of the filed form to you. Choose a name for your LLC (see below). Leave the purpose clause blank (see below). Leave the LLC’s duration as perpetual because you don’t want your LLC running out of time and dissolving on its own. Enter your name and street address as the LLC’s resident agent (see below). Date, sign, and submit the completed document with the state’s modest fee ($50 in Michigan), and you’ve formed your LLC.
Identification
Under the Uniform LLC Act and the state acts that follow it, the name you choose for your LLC must include one of the statutory phrases identifying your business entity as an LLC. You can’t just call your business Ben’s Custodial Services. You need to add an LLC identifier like Ben’s Custodial Services LLC. You don’t have to choose LLC as the corporate identifier. You could spell it out as Limited Liability Company or Ltd. Liability Company, if on the odd chance you want an inconveniently long name. But you cannot use Company, Co., Inc., Corp., or similar identifiers you see associated with corporations. The Uniform LLC Act provides:
The name of a limited liability company must contain the phrase “limited liability company” or “limited company” or the abbreviation “L.L.C.,” “LLC,” “L.C.,” or “LC.” “Limited” may be abbreviated as “Ltd.”, and “company” may be abbreviated as “Co.”
Naming
The rest of the name you choose for your LLC is also important. Obviously, you want to choose a name that you like and with which you can readily identify. But also consider choosing a name that helps your customers or clients identify the business. You wouldn’t, for instance, want to name your car-detailing service Joe’s BBQ LLC. How about Joe’s Car Detailing LLC instead? Clearer, isn’t it? You don’t have to identify your business type in the name, but it can help. On the other hand, if you do identify your business type in the name, then you may unwisely restrict your customers or clients to a certain market if you decide later to offer other services. If, for instance, you expand your car-detailing service into used-vehicle sales, then maybe Joe’s Automotive LLC would be a better, broader name. If, though, you then expand your vehicle services into airplanes or real estate, maybe Joe’s Enterprises LLC would be better yet.
Searches
Before filing your LLC articles of organization with the state’s corporations bureau, do an online name search in the bureau’s corporations database. If you choose a name already taken, the corporations bureau will reject your articles of organization, delaying your LLC formation. You’ll have to resubmit with another name. You’d be surprised at how many names are taken. Don’t expect to find alphabetically preferred names like AAA Managers LLC or A1 Construction Services LLC still available. But you may only need the smallest distinction in names for the corporations bureau to accept your name. If, for instance, you insist on using your family name but it’s already taken, adding a comma before the LLC may be enough for the bureau to accept it. An alternative is to add a geographic identifier like a city, region, or state name such as Martin Supply of Topeka LLC, Black Hills Custodial LLC, or Alabama Electrical Supply LLC.
D/B/As
If you don’t want to use the designation LLC in your business name every time you advertise, then consider having your LLC file a certificate of assumed name, otherwise known as doing business as or a d/b/a. For example, your business North Bay Bond Trading LLC could file a d/b/a to advertise as simply North Bay Bond Trading. If you name your LLC as offering specific goods or services but then add different goods or services, consider filing a certificate of assumed name for a broader or different identifier. Thus, your business North Bay Bond Trading LLC could file a d/b/a to advertise as North Bay Securities LLC or just North Bay Financial Services. State laws require certificates of assumed name so that someone harmed by the business can find out who and where they are, by looking up the certificate. See the example certificate-of-assumed-name form at the end of this book.
Purpose
Articles of organization must include the LLC’s business purpose. But you may simply specify all lawful purposes state law permits. Doing so is wise, in case you later change or expand your original business purpose. Your LLC’s purpose clause restricts the activities your LLC may lawfully perform. You don’t want to have to go back and amend the articles of organization each time you change or add a purpose. If your LLC does something the articles do not cover, then other members of your LLC may object. The articles of organization form you use, like the example form at the end of this book, may already include your LLC’s broadest permitted purpose but invite you to specify additional purposes or limit the general purpose. Resist doing so, in case you later change your mind. You may find it better to leave the form’s presumed purpose clause alone.
Agent
You must specify a resident agent for your LLC. A resident agent is the person you designate to receive service of process, meaning the summons and complaint if someone sues your LLC. You, as your LLC’s organizer, are probably your best or perhaps your only resident agent candidate. If, for some reason, you are not often at home, at your business’s office, or at the other location you designate as the resident agent’s street address, then you may need to arrange with a relative or professional with whom you have a stable relationship to act as your LLC’s resident agent. You can also pay a service to act as your resident agent. The resident agent accepts service of the lawsuit and forwards it to you or the other responsible person you designate. You need a reliable resident agent because if the agent fails to timely act on a served court complaint, your LLC’s default to the complaint’s allegations may result.
Filing
Instructions for completing and submitting the LLC articles of organization form to the state’s corporations bureau should accompany the form. See the example form and instructions at the end of this book. You should receive the filed articles back soon. When you do, your articles should have the state’s identification number stamped on them and other indications of the fact and date of the filing. When you get the file-stamped articles of organization back from the state, retain the articles in your business file. Make copies of the articles to share with your bank, LLC members, contractors, suppliers, or anyone else who needs proof of your business entity. If you lose the articles, you can download and print a copy from your state corporations bureau’s website. The articles are a public document, viewable by anyone, so don’t feel the need to keep your articles confidential. They’re already out there for everyone to see.
EIN
Once you have received your LLC’s file-stamped articles of organization back from the state’s corporations bureau, complete IRS Form SS-4 to obtain an employer identification number (EIN). See the form at the end of this book. An EIN is like an individual’s Social Security number but for a corporate entity rather than an individual. Corporate entities don’t get Social Security numbers. They instead get EINs. Your LLC won’t be able to open a bank account, hire employees, issue or receive 1099s, and accomplish other business and administrative tasks without an EIN. An EIN is your LLC’s unique identifier with the federal government for tax and other purposes. Your LLC’s EIN may also serve as the unique identifier for state and local agencies and private entities that require a reliable number identifier. Once you have your LLC’s file-stamped articles of organization and an EIN, you’ll have everything you need to deal as a business entity with the outside world.
Operation
You won’t, though, have what you need to deal with internal LLC issues until you adopt an operating agreement. The operating agreement is the private document, not filed with the state, that you and your other LLC members, if you have any other members, negotiate and adopt to determine how your LLC will operate. Your state LLC act, like the Uniform LLC Act, provides what your operating agreement must and may include. Operating agreements can be lengthy and detailed, insofar as they attempt to address any predictable event that might come up, having to do with the LLC’s operation. As indicated above, you can find template operating agreements from a local attorney or services and searches online, and at the back of this book. A following chapter on LLC operation addresses what you might want to include in your operating agreement. If, though, you are operating your LLC as its only member, you may never look at your operating agreement after you adopt it because you’ll never have a disagreement with yourself. An operating agreement can be important or unimportant, depending on your business circumstances and, especially, whether you have other members joining you in the business. Adopt and keep on hand a sound operating agreement. You may never need it, but it’ll be there if you do.
Reports
State LLC acts, consistent with the Uniform LLC Act, generally require an LLC’s manager to file a brief annual report. Don’t sweat the annual report. The Uniform LLC Act only requires that your annual report confirm the LLC’s name, business address, resident agent and address, and manager or member. Annual reports do not require any financial information, although they typically require a modest annual fee ($25 in Michigan). Your state may send you the annual report form or an electronic notice as a reminder that your annual report is due. File your annual report anyway, with or without notice. Consider using tax season up to April 15th as a reminder. The modest fee for filing the annual report is tax deductible as a business expense.
Standing
If you do not file an annual report for your LLC, your state LLC act may provide that your LLC is no longer in good standing after a grace period such as two years. If your LLC is no longer in good standing, you may lose its limited liability. You may also lose its name to a new LLC. Once out of good standing, your LLC loses its right to protect its name in the state corporations database. If you forget or fail to file annual reports, your state LLC act probably permits you to catch up with them, although you may have to pay a larger catch-up fee ($50 in Michigan) than the fee you would have paid for filing the annual report timely.
Key Points
You form an LLC by filing articles of organization with the state.
You will need an IRS employer identification number (EIN).
You should adopt an operating agreement for your LLC.
You will need to file brief annual reports for your LLC.