Why LLCs Are The Best Business Structure For Entrepreneurs
Without a doubt, for most entrepreneurs, a Limited Liability Company (LLC) is the best business structure available. In this blog post, I’m going to talk all about the benefits of forming an LLC and what you need to do to get your LLC up and running. I have a blog post that explains the four main business structures and the five things I think that all entrepreneurs need to consider when deciding on a business structure. I would suggest that you take a look at that post before reading further.
Why did I choose an LLC for my company?
With an LLC, small business owners are able to take advantage of several of the beneficial features of the three other business structures, such as management flexibility, limitations on personal liability, pass-through taxation, and legitimacy. Every state in the nation allows for the formation of both single and multi-member LLCs and the process is fairly quick and simple. While you can and you should research your state’s specific rules for forming an LLC, there are some general components to forming an LLC that are applicable to most states.
Before I jump into the general steps for forming an LLC, I need to make sure that you understand that there are some businesses that cannot be structured as an LLC. For instance, those in the financial services, banking, or insurance industries cannot organize their businesses as LLCs. Also in some states, certain professions in fields such as medicine, architecture, law, accounting, or engineering, must comply with specific rules and restrictions when forming an LLC. Those states require businesses to form what’s called a professional limited liability company, PLLC. Be sure to do your research on your state’s requirements for your industry. By far, most of you reading this post probably don’t fall in either of those categories. But on the change you do, I want to make sure that you understand there are some limitations to what an LLC can do depending on your industry.
What do you need to get your LLC off and running?
Articles of Organization. Most states require businesses to file what is generally known as an Article of Organization. This is typically done in the secretary of state’s office or whatever entity in your state that handles these sorts of filings. While most states call this document an Article of Organization, some states use a different name for the document like “Certificate of Formation.” While the name and the requirements for the document may vary from state to state, for the most part, the following information must be included in your Articles of Organization: (1) Business Name; (2) Registered Agent; (3) Management Structure; (4) Business Purpose; (5) Principal Place of Business; (6) Business Duration; and (7) Business Organizer.
Don’t Panic!
Before you go running away and clicking off this post, I recognize that this list may seem long and cumbersome. I promise that as we go through each of these items, you will see that it’s not so bad and it’s super easy to do. So let’s go ahead and get into it.
Business Name: It’s fairly obvious, but you need a name for your business. It seems simple enough, but you need to make sure that you check with your state to see if the name you’ve chosen for your business has not already been taken by someone else. You will not be allowed to register a business name that is the same or very similar to a pre-existing business in your state. Now, I know you probably think you have a unique idea for a name for your business, but if you go to register that name with your state and you find that someone already has that name, you’re going to be out of luck on that one. That happens more often than you know. So my suggestion is that because most states allow you to reserve a business name, go ahead and do it. It’s a small fee to reserve that name. If you’re not ready to pull the trigger on registering your business formally, at least you know that you’ve got that name reserved for you when you’re ready. Additionally, remember that most states require your business name to include some indication that the business is an LLC, which is usually accomplished through the suffix of the name. Examples of popular suffixes are: Limited Company, Ltd. Co., and LLC. Just check with your state’s rules when naming your business to make sure that you’re on track.
Pro Tip: When selecting your business name, you have to think beyond your state and look to see if your business name is being used in other parts of the country. Because the Internet and social media have made the world much smaller, you have to be concerned with potentially violating trademark law when selecting a name for your business. For example, let’s say you want to name your Atlanta-based craft store, “Jessica’s Craft Creations” but there’s already a popular online craft seller based in Portland, Oregon, called “Jessica’s Crafty Creations.” You may need to pick a different name or you could be at risk for a potential trademark infringement lawsuit. However, if “Jessica’s Crafty Creations” is a different industry from yours (i.e. she designs craft-style homes and you sell customized crafts), you might be okay to use the name. Ultimately, your goal in selecting a business name is to not create what lawyers like to call the “likelihood of confusion” between your business and someone else’s.
Registered Agent: A registered agent can either be a business or an individual designated to receive service of process when a business entity is a party in a legal action such as a lawsuit or summons. In other words, it is the person or business chosen by your company to receive official paperwork on its behalf. As the business owner, you can be the registered agent for your business, or you can use a company that will act as your registered agent for your business. For instance, I am my own registered agent for JWM Designs, but it’s really up to you if you want to be a registered agent for your company. So as long as the person or business is located within the state where your business is located and has a physical address for the agent to be served, you’re good to go.
Management Structure: Designating how your business will be managed is required by most states as part of filing the organizational documents for your company. Whether you are a single-member LLC like me or a multi-member LLC, meaning you have more than one owner, you need to decide whether your business will be member-managed or manager-managed. In most states, the default management structure is member-managed. The main difference between the two forms of management relates to whether the members (“owners”) handle all management related matters within the business, or whether the members (“owners”) formally create a role of manager that is separate from the ownership. For example, whether you are a single-member LLC or a traditional LLC, you can appoint someone, like a fellow owner yourself or a complete outsider, to manage the business. The manager will have broad authority to act on behalf of the company for things like hiring, firing, entering contracts, or other day-to-day management of the company. Under this form of management, the members (“owners”) preserve control over important aspects of the business, like selling the business, amending the operating agreement, or removing someone’s ownership interest in the company. My company, JWM Designs, is a single-member LLC and I have it set up as a manager-managed company. Personally, I think that manager-managed LLCs are more beneficial and sometimes they’re actually necessary when you have multiple members of the LLC. I especially find this to be true in instances where friends and family go into business together. It may be a good idea to have a neutral third party at the helm of the business.
Business Purpose: While most states do not require you to state the specific purpose of your business, depending on your industry, like a professional limited liability company, you may have to provide more specific information. Typically, you can include a general statement like “The company’s purpose is to engage in any lawful activity which an LLC may be organized under the laws of the state.” For the most part, you can be more or less specific with the statement depending on your industry. I use a very generic statement in my articles of organization, and it was completely fine.
Principal Place of Business: A principal place of business is the main location for your company. All states require that you provide an address for your company’s principal place of business. If your business is operated out of an office or a location outside your home, you can use that address for your paperwork. However, if you’re like me and your business mostly operates online and you work from home, then this becomes a little tricky. For my business, I rent a post office box and list that as the principal place of business mailing address for JWM Designs. I know some entrepreneurs use their home addresses, while others rent a mailbox from stores like UPS or FedEx. It really depends on your personal comfort level and preference as to which route you should choose. If you decide to use a post office box, you need to make sure that your state allows a P.O. box to be used as the principal place of business address for your company.
Business Duration: Some states require that businesses include the expected duration of the business; that is, how long you plan for the business to operate. For most of us, we want our businesses to last forever. If so, I would suggest putting things like “in perpetuity” or “perpetual” in response to this question. Additionally, a few states limit to how long an LLC may exist, but those limits can be extended with additional filings. In some instances, a business may be formed for a specific task or purpose, and it would be better to include a more exact time of duration for the business. For example, let’s say you want to plan a large event and you need to form an LLC for liability purposes specifically for this event. Once the event passes you won’t have any need for the LLC and so you set the duration of the LLC to dissolve once the event has passed. That is a common reason for putting that a specific duration on your articles of organization.
Business Organizer: Once you’ve gathered all of the above information, you need someone who to put all that information together on the required form and submit it to the correct office. This person can be you, a lawyer, or co-owner. The organizer can be anyone who is authorized by the business to act on behalf of the business. The organizer is simply required to sign and date the Articles of Organization when they’re submitting them to the state.
Bonus – Filing Fees: Each state requires a filing fee associated with formalizing a business, and you’d need to be prepared to pay it at the time of filing. The costs vary by state and you will need to check with your state to see what forms of payment they will accept. Some states allow you to pay the fees online while others require a cashier’s check. Additionally, some states also require you to publish that you have or you plan to form an LLC in your local newspaper. Yes, there is a fee associated with publishing the announcement but its typically less than fifty dollars.
One other thing that should be created at or around the same time that you file your Articles of Organization is the LLC’s Operating Agreement. Although an operating agreement is not required in order to form an LLC, it is just as important. Operating Agreements provide a detailed roadmap for how your business will operate. This is extremely important if you’re forming a multi-member LLC. In a separate blog post, I will discuss in more detail what things I think need to be included in every operating agreement no matter the size of your company.
Do I Need A Lawyer?
You may be thinking, Jenn, shouldn’t I just hire a lawyer to do this for me? And you most certainly can, but it’s not a requirement. For some of you just starting out, you may not have the resources to hire an attorney to do this for you. And I don’t want you to delay registering your business because you can’t afford to hire an attorney. My goal is to give a general overview of the process so that you can decide for yourselves if you can do it on your own. I encourage you to look at your state’s specific rules and requirements for filing the articles of organization and then get moving.
Why is choosing to wait to register your business a bad idea?
As I mentioned in my prior video on business formation, the biggest reason I encourage all entrepreneurs to file the necessary paperwork to form their business is liability. Protect your future by taking this very easy step. If you want to be taken seriously and move your business to the next level, you cannot afford to wait.
Recap: All states have laws that authorize the formation of single and multi-member LLCs and each requires the filing of articles of organization, although some may call it a different name. To file your articles of organization, you need to know your business name, your registered agent, your purpose, your management structure, your principal place of business address, your expected duration for the business, and your business organizer. You also need to know if your state has any special rules or restrictions for your specific industry.
Your action steps: Your action steps are to research the specific requirements for your state and to get to work on making sure you have what you need to file your forms and get registered. If you have questions, please let me know and I will do my best to get those answers for you. I hope that after reading this post, you now have new tools in your arsenal to be able to get your business registered. I am all about growing your business and I’m super excited about building your legacy. Together, we are Legacy Builders. So let’s build together.
