How To Protect Your Personal And Business Assets By Forming A LLC
So you’ve spent endless hours trying to get your business off the ground. After several months you’re finally starting to make some business profit and you’re extremely happy that all your sweat and tears are finally paying off. Time to rejoice? Not quite. Now is the perfect time to take the necessary steps to protect your personal and business assets. There are many different directions you can take to achieve asset protection. The most common ones usually include forming a legal entity, buying business insurance, filing for trademark and copyright protection, and hiring a great business lawyer. A comprehensive asset protection strategy would incorporate all of the above. In this article we will focus on how to form a business legal entity, specifically the Limited Liability Company which is one of the most popular types of business entities in the United States.
Suggested Steps To Form LLC:
- Decide which state you want to form your company
- Pick a name for your LLC
- Decide on a registered agent to represent your company
- File Article of Formation with the Secretary of State
- Draft operating agreement and have all the members sign
- Publish your newly formed LLC in newspapers (for some states)
Note: A great resource for LLC formation is your desired state’s website for the Division of Commerce.
- Decide Which State You Want To Form Your Company
Every state has different laws governing the Limited Liability Company, LLC. Make sure to do thorough research on the pros and cons of forming in your desired state. Typically, LLCs are formed in your state of residence or they are formed in business friendly states like Delaware, Nevada, and Wyoming. One thing to keep in mind when incorporating in a state other than your state of residence is that you may need to file as a foreign entity in any state where you do business that is not your state of formation. For example, if you form a Delaware LLC, and do business in New York, you will most likely need to file as a foreign entity in the state of New York.
- Pick A Name For Your LLC
Every state has different rules and requirements for the LLC naming convention but typically the chosen LLC name needs to be a unique name that is not taken by any other LLC in desired state of formation, it must have the abbreviation “LLC”, and refrains from using certain prohibited terms such as “Bank,” “College,” “Institution,” etc. An example of a valid LLC name would be the following: Rainbow Bowling Alley, LLC.
- Decide On A Registered Agent To Represent Your Company
A registered agent is typically a responsible third party person that is registered in the same state where you formed your Legal Entity. This person is designated by your company to receive important paperwork and notices from the Secretary of State or Government Agencies. Additionally, if your company is served a lawsuit, your registered agent will be the person who receives notice. There are usually strict rules about who can and cannot be a registered agent. In some states, you can be your own registered agent and in other states it can be very difficult to qualify as your own registered agent. Check your state’s LLC Formation website for more details.
- File Articles of Formation With The Secretary of State Plus Filing Fee
The requirements for the certificate of formation for each state can be found on the state’s Division of Commerce website. Filling out the required paperwork typically consist of providing the business address, the contact information for the registered agent, and paying the state filing fee. Keep in mind that every state’s procedure differs so it’s important to read it carefully. The processing time after filing the articles of formation can take anywhere from a few days to several weeks depending on the time of year and availability of staffing resources.
- Draft An Operating Agreement And Have All The Members Sign Document
Depending on the state, an operating agreement may or may not be mandatory. An operating agreement is basically a legal document that stipulates ownership percentage, member responsibilities and duties, voting rights, dissolution procedures, and other fundamental terms. It is best practice that all LLCs have an operating agreement even if it is not required by the state. This is especially true for multi-member LLCs since the operating agreement will stipulate how the dissolution process will be handled.
- Publication Of LLC Formation In Newspapers
In some states, specifically New York, Nebraska, and Arizona, there is a requirement in which all newly formed LLCs are required to publish their newly formed LLC in local newspapers. This requirement is a bit outdated but the idea behind it stems from letting the public know that your LLC exists. So if you are forming an LLC in these three states make sure to check the required duration and frequency of the publication on your state’s website.
If this sounds daunting to you, don’t despair because there are many services like LegalZoom that can help you prepare an LLC for a fee. Additionally, if you are trying to form a more complex type of LLC such as a series LLC, it is recommended that you speak to a business formation lawyer.