After coming up with a business idea, creating an LLC is often the next step to starting a business. But many new business owners are worried that forming an LLC will take too long. How long does it take to set up an LLC?
“…for most companies, it will only take a few days to set up an LLC.”
The good news is that, for most companies, it will only take a few days to set up an LLC. Much of this depends on how complicated the LLC is going to be. Let’s examine the actual steps to setting up an LLC to understand the time it will take.
Step 1: The Preliminary Phase
Before someone forms an LLC, there are a few items they may want to address. It’s usually a good idea to understand what the LLC will provide, who the owners are, and what the company’s name will be.
The Business Idea
First and foremost, is there a fleshed-out business idea? It’s a good idea to understand how the business will work before spending the time and money to form an LLC. Some things to think about include:
- What product or service will the LLC provide;
- How it will provide the product or service; and
- What is the LLC’s value proposition?
Knowing the answers to these questions before forming an LLC is not mandatory, but it can help.
Who Will Own the Company?
It’s also a good idea to understand the company’s ownership structure before it’s formed. If there is more than one member, then it is important to figure out how ownership will work. The last thing a new company needs is for the whole thing to collapse due to infighting over how much each member owns and controls. Figuring these items out beforehand saves a lot of grief down the road.
Finally, It’s time to come up with a name. The company will have to have a name when it files its formation documents. It’s better to start thinking of one now than waiting until the last minute and possibly having the name rejected for being too similar to that of an existing entity.
Step 2: Filing the Certificate of Formation (Articles of Organization)
Once the owners are ready to form their LLC, they will file a certificate of formation (or articles of organization, depending on the state). This document is what legally creates the LLC.
The certificate of formation is filed with the Secretary of State (or another state office, again, depending on the state). In my experience, the turnaround time for a certificate of formation to be approved is usually just a few business days. This will depend on how busy the department is and if there are any issues with the certificate itself.
The certificate of formation will require some information about the new company. In most states, the following information will need to be provided:
The Company’s Name
As I mentioned earlier, it’s a good idea to figure this out before the certificate is filed. Typically, the company’s name cannot be the same or extremely similar to an existing LLC or corporation in the state. The name also will usually need to have some variation of “LLC” or “company” in the name, depending on the state.
Member-Managed vs. Manager-Managed
Another important item is deciding whether the LLC will be member or manager-managed. A member-managed LLC is run by its members directly. In a manager-managed LLC, the members appoint a manager (or managers) to run the company. Note that members can appoint themselves as managers. Because of this, most elect the be manager-managed.
Registered Agent
Finally, the company will need a registered agent and registered address. Contrary to popular belief, being the “registered agent” does not mean a person has any ownership or control over the LLC. Instead, this is a person or company designated to receive service of process and other official notices. The registered agent can usually be any person or entity in the state. Many companies choose an attorney or a registered agent corporation instead of a member or manager for privacy reasons.
Once the certificate of formation is filed and accepted, the entity is considered “alive” for legal purposes. However, there are a few more items to take care of.
Step 3: The Operating Agreement and Other Items
The last step involves creating the operating agreement (sometimes called “company agreement”) and handling other business items.
Operating Agreement
The operating agreement (company agreement) is like an owner’s manual for an LLC. It outlines the rules and procedures for how the LLC will be run and is essential for resolving disputes between members. The operating agreement should include the following information:
- The types of officers the company will have (president, secretary, etc.) and their responsibilities;
- How profits and losses will be distributed;
- Voting rules for members and managers; and
- How the membership interest can be bought and sold.
The agreement will go over more items, but these are some of the essential terms that will be covered. Sometimes members will also have membership agreements with one another to cover certain issues between members.
Employer Identification Number (EIN)
Another item on a new LLC’s to-do list is obtaining an EIN. This is an identification number the company will use when filing items with the IRS. A company hiring employees or paying excise taxes will need an EIN. Most banks will also require the company to obtain an EIN before opening an account.
Meeting of the Managers
Unlike a corporation, most LLCs are not required to have regular meetings of the company. Just because it’s not required doesn’t mean it’s a bad idea. Having meetings of the managers or members can be helpful for a company.
An initial meeting or a manager’s written consent can take care of some essential tasks. The managers can elect the officers of the company. They can also authorize the managers or officers to take specific actions, including opening bank accounts. Many companies also use the initial meeting to confirm the members’ ownership of the company.
Business Licenses
Depending on what type of business the company will be involved in, it may need to obtain certain licenses. This will depend greatly on the state of formation and what the activities of the business will be. Some possible licenses may include:
- Sales permits;
- Occupancy permits;
- Health permits; and
- Environmental permits.
Companies that offer certain types of professional services such as law firms, medical providers, and engineering firms may also need to meet specific requirements in their state.
How Long Does It Take to Set Up an LLC? It Depends
The actual process of forming an LLC usually only takes a few days. I have even seen companies have their certificate of formation approved within two or three business days. But to say that this is the only thing that needs to be considered is misleading.
The process of properly setting up an LLC can take time. Some LLCs are relatively simple and will not require much work. Others have more complicated ownership structures or licensing requirements. It may take a little longer for those companies to get everything set up.
Still, one of the main advantages of an LLC is that it is relatively easy to set up and get going. Often, a little extra time taken to do things the right way can prevent a disaster later on. As always, please remember this article does not provide legal advice. Please talk to an attorney if you need help setting up an LLC.