How to Form an LLC

A limited liability company, or LLC, is similar to a partnership but has the legal protections of personal assets that a corporation offers without the burdensome formalities, paperwork and fees. The exact rules for forming an LLC vary by state.

All new LLCs must file so-called articles of organization with their secretary of state’s office. This is usually just a short form that asks for the names of the LLC and its members and their contact information. The filing fee can range from $30 to $200. A few states also have other registration requirements. You can find the rules and fees involved at your secretary of state’s Web site. Or use FindLaw’s online guide to state corporations offices.

Though it’s often not required by law, you should draft an operating agreement for your LLC that spells out the details of the business arrangement, including members’ percentage ownership, roles, rights and responsibilities. Having such an agreement can help protect the LLC structure if it’s challenged in court and prevents you from having to default to state operating rules.

You don’t have to hire a lawyer to set up an LLC, since state requirements are usually self explanatory. But it’s a good idea to have one read over paperwork and your operating agreement to make sure your interests are protected.

Even though most states don’t require any annual paperwork or administrative procedures, you should document major business proceedings and lay out some formal procedures — like one meeting a year — to help protect your LLC status.

Some states charge annual fees and taxes that can diminish the economic advantage of choosing to become an LLC. Among LLC advantages: pass-through taxation – meaning the profits and losses “pass through” the business to the individuals owning the business who report this information on their own personal tax returns. The result can be paying less in taxes, since profits are not taxed at both the business level and the personal level. Another plus: Owners aren’t usually responsible for the company’s debts and liabilities.

California, for instance, charges an annual $800 LLC tax along with a $900 to $11,760 annual fee based on a business’s total annual income exceeding $250,000.