Steps Involved in Starting an LLC
OK, so I’ve read a bunch of start-up books by now and have dealt with my share of forms, so I will try to outline the steps involved in starting up (at least, initially) an LLC. Some stuff maybe a repeat from some of the other posts, but I am doing it for the sake of completeness. A lot of this could be found online and in LLC formation books, but some things, no one seems to mention. As always, all instructions are from New York State’s perspective. Do research on differences applicable to your state. Here we go:
- Follow the instructions in the previous post and check if your business name is taken in the state database, then fill out the Articles of Organization, and fax/mail it to the Dept of State with a $200 fee.
- Within two weeks, you will receive an LLC/LLP Request for Information form from the NYS Dept of Taxation and Finance. It will ask you how you want the LLC to be treated (sole proprietorship/corporation if you’re alone or partnership/corporation if you have two or more members), along with your Tax ID, your LLC’s NAICS business code, and addresses/social security numbers of your other LLC members. Make sure to think ahead before filing for an LLC, because you have 15 days to complete and return this form. I go into details on different LLC classifications and how to get your EIN number in other posts.
- As a newly formed LLC, you now have 90 days to create your Operating Agreement (OA). This agreement outlines all the rules that members follow throughout the life of the partnership; it’s similar to Corporate By-Laws of a corporation and is a compilation of procedures and guidelines for the entire operation of an LLC. The OA discusses such things as initial capital contribution, distribution of shares, voting method, meetings, sale of property/shares, etc. I will go into more detail on this in a separate post, as there are a number of clauses that simply must be included. I will only note that this is an internal document and is not submitted anywhere. However, it must be signed by all members and will be used by the IRS if there is a judgment against you. While some states allow an oral agreement, New York States required a written one.
- Since you should now have your LLC filing receipt from the state, your Tax ID, and your Operating Agreement, you can now go to your favorite bank and ask them for the required forms to open up a company bank account. The forms are involved, so be prepared to think this through, as they really drill you. I will go into account opening procedure in a separate post.
- Once you open the bank account, deposit the initial capital into it, for the amounts outlined in the Operating Agreement. Remember, you need to submit adequate initial capital so the court, in an event of bankruptcy/default/lawsuit, will not pierce your corporate veil. What that means is that if you don’t put in adequate initial capital (let’s say you and other members put in a total of 1K), and then you take out a number of loans and hire a bunch of workers to do work and declare bankruptcy on the company, you cannot hope that the fact that it’s a Limited Liability Company will protect you personally. The court will find that your initial capital was not enough to complete the work and will pierce the “limited liability” portion and go straight for your assets. Do not end up in this situation!
- Besides the Operating Agreement, you are also required by the New York State to post notices of a newly formed LLC in two newspapers, as designated by the county clerk. You have 120 days to do this and you have to run these “public notices” for six consecutive weeks. There are tons of websites out there that will do this for you for around $300 (not including actual filing fees). Do not do this. I thought of doing this myself, until I realized that the actual filing fees are so high that wasting another $300 to have someone else do this for you is just ludicrous. I will outline how this is done; it’s not that difficult.
- Call the NYS county clerk at 646-386-5955, and ask for Estor Mendel (between 9AM and 2:30PM EST).
- Estor will ask you to fax over your LLC filing receipt that you’ve received from the state when your LLC was registered. I believe the fax number is 212-374-5790, but she will tell you the number. One of your assigned newspapers will be the New York Law Journal (it’s mandatory for all LLCs) and the other you will have to call Ester back in 3-4 days for, and she will tell you then.
- The New York Law Journal has a website for LLC formation here: www.publicnotices.law.com/NYLawyer/. You go there, fill out your LLC information, and submit it to them. It takes them up to a week to respond. They will tell you that the flat fee for a notice is $723, but that’s not true. That’s only if you fit yours within 15 lines, and their lines are so small that it’ll likely go over. It’ll be different for everyone, but mine ran me $1,200. Yes, $1,200 for one notice. Anyway, they will email or fax you a scanned proof of your ad and you have to consent to it being placed in the paper.
- Your second newspaper will be designated by the county clerk. Mine was the WestSider publication, which I’ve never heard of before. After some digging online, I’ve finally got in contact with them and was able to place my ad (same wording) for about $600.
- Once you finish your 6 week run and pay for the postings, both newspapers will send you Affidavits of Publication. You then file the affidavits with the state (each costs $25) and, thus, complete your legal requirements for LLC formation. Detailed state instructions on Affidavit filing could be found at: www.dos.state.ny.us/corp/affidavitsnewspub.html. As these are rather large expenses, I highly recommend that you pay for publication fees from your newly formed corporate bank account, to keep things seperate and to be able to write them off as business expenses later on.
- As for as State Tax Department is concerned, you must file form IT-204-LL within 30 days after the last day of the tax year, or before January 30th of calendar year filings. Nothing that I’ve read has mentioned this, and so, receiving this form on January 26th, when my company was formed two weeks before the end of the year, with a deadline of January 30th, came both as a shock and a surprise. This form is an LLC State filing fee. The fee is $100/year/LLC member (minimum is $500, maximum is $25,000), or, for a single-member LLC that is reported as a disregarded entity (more on this in a separate post), the fee is $100/year. I discuss the details of this form in a separate post.
- You will also have to file a number of tax forms, for both state and the IRS, as the April 15th deadline approaches. I will discuss these in a separate post, as well.
OK, these are the basics, and if you follow the steps, you should be officially up and running. Please note that LLC formation is not as easy or as cheap as most books and websites will have you believe. A ton of sources will tell you that LLCs are really easy/quick to start and are so much better than S corporations, etc. While that may be true in some cases, forming a company - any company - is neither cheap nor easy. In my experience, it costs about $2.5K just to register an LLC in New York State, not to mention, a significant amount of time, planning, and thought.
July 21st, 2008 at 1:24 pm
Great post! I am in the process of setting up my LLC in NYS and this is very informative. Covers everything the NOLO books don’t tell you ;). Thank you for sharing this info!
December 9th, 2008 at 4:37 pm
Nice! Just the info I was looking for, without the sugarcoating
Boyy, 2.5k is quite a lot of money for a bootstrapped startup, but if its got to be done, its got to be done…
Thanks for the nice article.
September 10th, 2009 at 7:17 pm
Hi! I was surfing and found your blog post… nice! I love your blog.
Cheers! Sandra. R.
November 23rd, 2009 at 3:50 am
I’ve been active in taxes for longer then I care to admit, both on the individualized side (all my working life-time!!) and from a legal point of view since satisfying the bar and following up on tax law. I’ve rendered a lot of advice and righted a lot of wrongs, and I must say that what you’ve posted makes utter sense. Please uphold the good work - the more people know the better they’ll be equipped to handle with the tax man, and that’s what it’s all about.
February 17th, 2010 at 1:41 am
I debated starting a small online business. How should I try to find multiple loans ???
February 17th, 2010 at 6:00 am
Hi everyone,
Thank you all for your comments. Sorry I haven’t updated the blog in forever - I will start again soon, I promise! Skelton, in response to your question: have you checked out Small Business Administration (www.sba.gov)? Also, there are a number of peer-to-peer lending sites, such as http://www.prosper.com, http://www.peer-lend.com, etc. Hope that helps!
Warm Regards,
Dimitry