With the start of a new year, many people “resolve” to start their own business or to provide products and services as a second or “side” job that result as additional compensation to them. However, most of the time, these individuals fail to consider or understand the risks to their personal assets that are associated with a business. This is precisely the time for entrepreneurs to formally establish their business by creating a business entity.
Once you've made the decision to formalize your business, you much decided what type of business entity to form. The limited liability company (LLC) is one of the most popular business structures as it offers a level of flexibility and legal protection that is attractive when starting a business. There are several steps you will need to take if you are interested in forming an LLC.
- 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. Your LLC's name needs to be unique to avoid consumer confusion. Next, states often require that the name of your LLC include one of the following at the end: “limited liability company,” “LLC,” or “Limited.” This requirement gives the public notice of your business structure. As simplistic as this step may seem, choosing an appropriate name is critical to the successful establishment of your LLC and also for allowing the owner to take advantage of the legal protections this type of business structure provides.
- Select a Registered Agent. In addition to selecting an appropriate name, you must select a Registered Agent. A Registered Agent is the party who will receive service of process and communication from your state's Secretary of State's office. Registered Agents must provide an address where important correspondence can be sent (i.e., the Registered Office). Typically, post office boxes are not acceptable addresses for a Registered Agent to receive these communications—rather, a physical address is 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 in a timely manner.
- File documents. Perhaps the most important step in creating your LLC is filing the required documents (i.e., the Articles of Organization) with the state's Secretary of State's office. The Articles of Organization typically include such information as the company's name, the Registered Agent's name and address, and the business's purpose. This information becomes public record, so be mindful of what information you are comfortable sharing with the world. Keep in mind that the Secretary of State imposes a fee to file these documents and may offer an “expedited” process, which allows your LLC to be open in a relatively short period of time. Lastly, any start-up costs and filing fees you incur are tax-deductible so you should develop a system of recordkeeping.
- 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, is provided by the Internal Revenue Service (IRS). After completing a successful application, the IRS assigns a unique number that links the identity of the responsible party to the business for income tax purposes. You may apply, and obtain, your LLC's Tax Identification Number online via the IRS's website (www.irs.gov).
- Open a business bank account. After your LLC's formation documents have been approved by the state and you have obtained a Tax Identification Number from the IRS, you will be ready to open a business checking account. This step must not be overlooked in order for you to enjoy the benefits and protections the LLC structure offers to its owners, which are called members. 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, the member (i.e., you) could be held personally liable for the LLC's debts and liabilities and your personal assets may be utilized to satisfy the LLC's outstanding obligations.
- Draft an Operating Agreement. To finalize the creation of an LLC, you must execute an Operating Agreement. This document outlines the rules and regulations governing the LLC on an ongoing basis.
Once your LLC is formed, it is critical to remember and adhere to your state's compliance requirements to keep your LLC in good standing. These requirements in Illinois involve the filing of an Annual Report with the Secretary of State's office and paying a required annual fee. Failure to comply with these requirements will result in the suspension of your LLC and put your personal assets at risk.
Please remember that the process of forming an LLC can be complicated and can involve complex legal documents and procedures. It is highly recommended that you seek the professional advice of an attorney when creating your LLC.