How Is an LLC Formed?

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In order to form a limited liability company, or LLC, the owners must choose a unique business name, file the articles of organization, create an operating agreement and obtain all applicable licenses and permits. Two other steps may be required: if employees will be hired, the business owners must ensure compliance with all federal and state laws, and if required by the state, the owners must also publish a public announcement of the business formation, as advised by the United States Small Business Administration.

The owners of an LLC, who are referred to as "members," must follow three guidelines in choosing a name for their business: the name must be different from any other LLC in the same state, the name must indicate that it is an LLC and the name cannot include any words which may be restricted by the state. Although filing an operating agreement is not a requirement in most states, the SBA recommends setting one up as a written record of how the company will be run, how profits will be distributed to the members and what specific duties each member is responsible for.

LLC's are not corporations, but they share an important characteristic with them by virtue of the liability protection they afford the LLC's members. If the LLC is sued, the members' personal assets remain safe from liability. Unlike a corporation, which carries the burden of double taxation by being taxed at both the corporate and the shareholder level, the LLC business format allows for pass-through income taxation in the manner of a partnership or sole proprietorship. All of the profits from the business pass through to the LLC's members and are taxed only once and at the individual tax rate.