Once you have decided to form a limited liability company or LLC, you need to choose a name. Almost any name will work so long as it is not the same or deceptively similar to a name being used by another entity that is filed with the State Filing Office which is usually the Secretary of State's Office.

The name must end with the words Limited Liability Company or an abbreviation such as LLC or L.L.C. For example, you could have ABC Towing, Limited Liability Company or ABC Towing, LLC. The ending such as LLC or Inc is not considered part of the name when searching for availability.

STEP 2 - File Articles of Organization with State:

The first official step in forming an LLC is to file Articles of Organization (sometimes called a Certificate of Organization) with the State Filing Office and pay the required filing fee. Most people use the form provided by the State Filing Office and you can usually get one online.

Important Note: A lot of people think this is the end of the process. However, that can be a costly mistake. To fully complete the organization of your LLC, you need to follow the rest of the steps outlined below. If you don't, then the limited liability protection provided by the LLC may be at risk.

Another Important Caution: All legal entities like an LLC are required to name a registered agent and list a registered address in the Articles of Organization. A registered agent is simply a person or incorporated company who can accept service of legal papers if your company is sued or the person who can receive mail from the State Filing Office. You can act as the registered agent for your LLC if you want but there are some situations when this is not advisable. You can read more about this by checking the links below.

STEP 3 - Prepare and Sign or Adopt an Operating Agreement:

Once the initial form is filed with the State Filing Office, the organizers of the LLC should prepare and sign or adopt an Operating Agreement. Although not required by state law, the Operating Agreement is an essential document which sets forth the rights, duties and obligations of the members of the LLC, including who will manage the LLC and such other things as the division of profits and the distribution of income.

In addition to acting as an agreement between the parties involved in the LLC, the Operating Agreement also strengthens your limited liability protection in the sense that it shows you have completed the organization of the LLC and are in compliance with the process. It helps demonstrate that your LLC is being operated as a separate legal entity. This is true even though you may only have a one member LLC.

Operating Agreements are not provided by the State Filing Office. This is something you have to do. You may find some samples online but you need to be careful with boilerplate agreements. You can find a form by checking the links below.

STEP 4 - Conduct Organizational Meeting and Prepare Minutes:

One of the benefits of an LLC is that there is no legal requirement for the LLC to hold meetings and prepare minutes of the meeting like required with corporations. However, it is still a wise business practice to document important business decisions. In addition, it helps demonstrate or prove that the LLC is being operated as a separate legal entity.

It is especially important to have some form of organizational meeting soon after the initial Articles of Organization are filed with the secretary of state. Typical minutes of an Organizational Meeting would include such items as the approval and ratification of the Articles of Organization and the Operating Agreement, a statement concerning who is managing the LLC and each Member's percentage of ownership in the LLC. You can learn more about what types of items should be included in minutes by checking the links below.

STEP 5 - Prepare Written Documentation of Ownership Interests in the LLC:

Similar to shareholders in a corporation, owners of an LLC are most commonly referred to as members and their ownership interest is referred to as a Membership Interest. A Membership Interest may consist of any number of units of the LLC. However, the most important concept is that Membership Interests are usually described as a percentage of the whole (which is 100%) or as a sharing ratio of the whole or as a certain number of units.

Membership Interests in an LLC are often equated to a sharing ratio. For example, if a certain member of the LLC owns of the LLC then the sharing ratio would be 50/100. If he/she owns then the sharing ratio would be 25/100. Membership Interests may also be stated as a number of units similar to shares of stock.

A member's ownership interest in an LLC should be documented or put in wrting for several important reasons. First, membership interests determine certain legal rights such as voting rights and may be important for making distributions of income. Obviously, if you have a one person LLC, this issue becomes less important.

With respect to liability issues, if you have not documented ownership of the LLC, then a question is raised as to whether you are really operating as a separate legal entity. In other words, a legal entity like a corporation or LLC cannot exist and function without owners. A second reason is to avoid disputes between owners and possible breakups due to disagreements over income, management rights, etc.

Failure to document what each person owns or what each of them started with as far as an ownership interest is concerned, is a frequent casue of disputes in smaller companies if one of the parties decides to leave or sell his/her interest. Memories tend to dim and people often have a different perspective as to what they have put in or contributed to the business.

STEP 6 - Apply for a New Employer ID# (EIN) from the IRS:

This is fairly self evident but each separate legal entity requires a new or different federal tax identification number (EIN) from the Internal Revenue Service (IRS). This is true because the entity is considered separate and apart under the law from the individual owners. The exception to this with LLC's is when you have a one person LLC. When an LLC is owned and operated by just one person, that person has the option of reporting taxes on his/her own social security number or obtaining a new EIN #. If a new EIN# is required then you need to file form SS-4 with the IRS. You can do this online by checking the links below.

STEP 7 - Start A Separate Bank Account for the LLC:

A lot of people want to continue using the same bank account they used before for the business when they were a sole proprietor or partner. Again, the principle behind liability protection is that the LLC is a legal entity, separate and apart from the individual owners. A separate legal entity requires a separate bank account. This is very important.

In the event of a lawsuit against your business, one of the important issues a court looks at in deciding questions of liability is whether the LLC owners have co-mingled their personal and business funds and assets. In other words, do the owners pay for both business and personal expenses out of the same bank account. Obviously, if you are using the same bank account for your LLC and personal needs, then you will be co-mingling the funds. Another issue involves the use of LLC property for your personal use. This too, is a form of co-mingling.

You can help prove or establish the existence of your LLC as a separate legal entity by the use of a separate bank account and the paying of LLC bills only from that bank account and the paying of personal bills from a separate personal bank account

FINAL COMMENTS:

If you organize and operate your LLC properly, you are entitled to limited liability protection, which provides a shield between business debts or obligations and your personal assets. This is because the LLC is a legal entity separate and apart from its owners. If a legal action is brought against you, you need to be able to prove or demonstrate that you have operated the LLC as a separate legal entity. Since each case is decided on the individual facts unique to that case, there is no way to guarantee that a person will have the liability protection of an LLC. However, if you follow the steps outlined above, you put yourself in a much stronger position to insure the liability protection you want and deserve from your LLC.