There are several kinds of business ownership available to the aspiring entrepreneur, each with their own array of strengths as well as weaknesses. Therefore, as a small business owner, you will need to make a choice – one that will ultimately depend on a variety of factors, such as the type of business you operate, the number of partners involved, the amount of capital available, and your level of entrepreneurial experience.
One such ownership model is a limited liability company (LLC), a highly flexible and resilient legal structure. Unlike partnerships and sole proprietorships, an LLC is a separate entity that minimises the risk carried by you, the owner. It also comes with other additional perks, such as tax benefits.
However, these advantages come at the cost of simplicity, as well as the ease of setting up. Regardless of your location in the world, you will need to follow a very specific set of steps to set up and establish your own LLC. The exact laws governing the formation of an LLC may vary by jurisdiction – and it's worth looking into the various intricacies of what each location can offer – but, overall, the basic procedure is relatively universal.
This is how to start an LLC:
1. Choose Your Location Wisely
Often, forming a company abroad is not an option that aspiring entrepreneurs consider, but it is certainly something that you should consider. As mentioned, different jurisdictions can offer different pros and cons unique to your situation, so if you can afford to be flexible, then you may want to check up on the local laws pertaining to LLCs in different areas. Since there are many procedures involving registration, fees, licensing, and documentation, you may be able to save time and money by opting for a more favourable jurisdiction.
Of course, in most instances, business owners register their company in the state or country where their business is going to be based, but don't automatically assume that this should be the default position. If your company is going to be involved in interstate or cross-border commerce, then you may have to register in multiple locations, depending on local laws, so keep that in mind, too.
2. Pick a Name for Your LLC
As with incorporation, choosing a name for your LLC involves more than just brainstorming a catchy epithet. Your name will need to be unique, with the prefix "LLC" (or similar, depending on your registration location); there are also several restrictions that you will need to keep in mind while doing so.
Firstly, it should not be a name belonging to another business registered as an LLC, be it in your own state/country, or a major foreign corporation/MNC. Your local registering authority will maintain an online database of names that are already taken by other businesses, so be sure to check beforehand.
Also, conduct a trademark check to ensure that another party does not already own the name you want. Again, there are online databases where you can obtain this information. It's also a good idea to check if the web domain for your chosen name is available (as well as social media handles) as if they are not, then this can cause issues – and additional expenses – for your marketing plans further down the line.
Secondly, bear in mind that there are often laws preventing the use of specific terms, such as "corporation", "bank", and "insurance" without first having the correct licensing. Certain jurisdictions will also apply other restrictions to distinguish from any governmental associations; for instance, in the UK, you cannot use terms such as "British", "English", "Welsh" or "Scottish" in your company name.
3. Select a Registered Agent
A common requirement for LLCs in many jurisdictions, a registered agent is responsible for receiving all documents, lawsuits, and official communications on behalf of the business. Usually, there are no strict qualification requirements for this position – any competent individual above the age of 18 should suffice – but you will need to appoint one.
4. Create an LLC Operating Agreement
Although this an optional requirement in many locations, it's still a good idea to create an operating agreement for your LLC. A roadmap for the future operations of your business, it is designed to outline the critical structural components, such as ownership agreements, voting rights of members, sharing ratio on profits/loss, the conducting of GBMs, corporate governance, and rules of ownership succession.
As mentioned, this agreement is not a mandatory document in most jurisdictions. It is entirely for the sake of internal clarity within your new business, but in the long run, it will help avoid potential conflict and confusion within your organisation.
5. File the Requisite Paperwork With the Relevant Authorities
Unsurprisingly, this is the most critical step involved in the creation of an LLC. In nearly all jurisdictions, an authority or regulatory body exists at the state, regional or national level that has been tasked with the handling of LLC registration. Often, this is an official of a Secretary rank (or a specific department) at whose office you have to file documents known as the Articles of Organization.
The purpose of these documents is to provide the following information about your LLC to the government:
- The name and address of the LLC
- The proposed duration of existence (usually left as "perpetual")
- The name and address of the registered agent, if available
- The objective behind forming the LLC (nature of business)
It is up to you, as the owner of the new business (and legally defined as the person setting up the LLC) to personally file all the paperwork with the relevant authority. You will also likely be required to pay small registration and administrative fees.
6. Obtain Certification, Licenses and Tax Registration
Once you have complied with all the registration requirements and formalities, the authorities will approve the process and provide a formal document denoting your formation. This will be in the form of a certificate that formally acknowledges the existence of your LLC. After receiving this from the relevant authority, you can then proceed with the other formalities involved in setting up your new business.
These steps will depend on the kind of business you are establishing and the industry that you will be operating in but, generally, the most important are those related to tax and municipal law compliance. Unlike sole proprietorships and partnerships, LLCs can have rather complicated tax obligations; therefore, you will need to register with the local tax authority (or follow whatever direction that jurisdiction's governing body gives you in this regard).
Finally, there are also various local and state laws related to the running of specific types of businesses that you will have to comply with. In some sectors, you may need to obtain additional permits, licenses, or other formalities to operate legally; you will need to set up a separate bank account for your LLC, too.
Although the details inevitably differ in different locations, these are the six primary steps that you need to follow to create your own LLC. Despite the added sets of hoops that you have to jump through compared to other forms of ownership, LLCs are relatively straightforward to establish.
Arguably, the biggest issue lies in ensuring that you have completed and submitted the required paperwork accurately and correctly, as any wrong move can prove to be costly later on. But with the right amount of diligence concerning your research and preparation, you can easily set up an LLC and formally realise your business dream.
What else should prospective entrepreneurs consider when setting up an LLC? Let us know your thoughts and experiences in the comment section below.