Have you been looking to start a business in Rhode Island, but you’re unsure as to how to? Or are you a sole proprietor of a business and is looking to safely expand? Well, an LLC Is the perfect solution for you. Starting an LLC could seem intimidating for someone looking to start one for the first time, not to mention it could be confusing for someone not from Rhode Island.
This is because the procedures for starting an LLC varies from state to state and country to country. Although the steps for starting an LLC in Rhode Island are rather similar to other countries or states, it should be noted that some key differences should be looked into when starting a Rhode Island LLC.
This article is here to assist you in learning the appropriate steps needed to start an LLC here in Rhode Island, regardless of where you’re from. We will first be explaining the benefits of starting an LLC here in Rhode Island, followed by the steps to starting an LLC in Rhode Island, and lastly, some frequently asked questions when it comes to a Rhode Island LLC.
Benefits of a Limited Liability Company (LLC) in Rhode Island
Starting an LLC in general presents a lot of great benefits for the business. This is no different when it comes to starting an LLC in Rhode Island. Below are some of the benefits of starting an LLC here in Rhode Island.
Freedom to customize your small business
An LLC offers a degree of flexibility that cannot be matched by most other business models. Regardless of size, an LLC is flexible enough to accommodate businesses of varying sizes. This is because starting an LLC involves the drafting of an operating agreement that can be tailored to the needs of your business.
This quite literally means you can write your own rules to suit the needs of the business.
Raising angel capital for the business
LLCs have become one of the best entities for raising angel capital (start-up investments of up to $500,000). This has made the LLC business structure popular among smaller investors. What about venture capital firms? Well, most venture capital firms prefer to invest in corporations due to familiarity, they are also not allowed to invest in LLCs due to stockholder rules.
Protection of real estate
One of the most notable benefits of an LLC is the ability to hold real estate. An LLC comes with dual liability protection that shields the investments of average joe’s like you and me from lawsuits. This is especially useful for those who tend to get in trouble and is likely to get sued.
The protection from an LLC protects your assets such as real estate from being liquidated. This means that your real estate investments held under the LLC are protected from claim settlements.
Protection of personal assets
Another great benefit of an LLC is the protection it offers to your assets. Personal assets are assets you hold under your name. Some examples of personal assets are your bank account, your car(s), and your mutual funds, stocks, and bonds.
An LLC can protect all these assets from a lawsuit. This gives the LLC owners peace of mind that their personal assets are safe from personal lawsuit claims.
Ability to change profit distributions
This is one of the more unique aspects of this business structure. The profit payouts of an LLC can be disproportionate to the actual ownership percentages. This gives you and your business partners the option of choosing how much profit/loss you will receive. In most cases, people will opt to take more profits and losses.
This might seem a bit counterintuitive, but there is a good reason for this. By taking more profits and losses, you provide incentives for investors to invest in your company. An example of this would be having the investor contribute to all the capital, and varying the profit distribution so that he gets 100% of the profits until his investment has been paid back.
In some cases, you could provide interest as well to further incentivize investors to invest in your Rhode Island LLC.
Segregation of Assets
The segregation of assets in a business is crucial. By segregating the business assets into individual LLCs, you protect them from your company’s creditors or other people that wish to sue you. An LLC does not always protect your assets. Your business may be protected from your personal creditors, but what’s protecting it from its own creditors?
If your LLC gets sued, the assets of the LLC can be seized and liquidated. In some cases, the court may put a lien on your company and then freeze your assets so that you have no access to your operating capital, and will lose the ability to write and receive funds from clients.
Starting an LLC in Rhode Island in 2021
Now that we’ve gone through the benefits of forming an LLC in Rhode Island, let’s get to the steps. Please keep in mind that this article may be comprehensive but it is by no means an all-encompassing guide to starting Rhode Island LLC. We still recommend you do more research, even after reading through this article.
1. Choosing a Name for the Rhode Island LLC
As stated under the Rhode Island Law, the name of a Rhode Island LLC must end with the words “Limited Liability Company” or suitable abbreviations such as “LLC”, or “L.L.C.” with or without punctuation. You are free to use upper or lower-case abbreviations depending on your preference.
Similar to other states, when you form an LLC, The name chosen for the LLC must be distinguishable from the names of other business entities that have already registered their name with the Rhode Island Secretary of State.
If you are unsure if the intended name of your LLC is in use by another business entity, we recommend you check. You can check the names of existing business entities and check the availability of the desired name for your LLC through the business name database of the Rhode Island Secretary of State.
Once you have done so, you may begin using the name immediately. If you do not wish to do so, you have the option to reserve the name for 120 days by filing a Reservation of Entity Name (Form 620) with the Corporations Division of the Rhode Island Secretary of State. The reservation form can be filed either via mail or online.
It should be noted that you do not have to use the official legal name of your LLC that is registered in the Articles of Organization when you do business. Well, then what do you use? You have the option of using a fictitious business name. A fictitious business name is also known as a trading name or DBA (Doing Business As) or an assumed name.
To do this in Rhode Island, you must register the fictitious name with the Rhode Island Department of State (Form 624B). This is important to protect consumers when doing business with you. By registering your fictitious business name, you make it available publicly and allow consumers to see who is behind it.
This could instil some confidence in them when doing business with you if they know your business is reputable. Alternatively, a fictitious name gives you the flexibility to appeal differently to the public.
An example would be if your LLCs legal name is “The Business Group LLC”, a more suitable name for a cafe could be “Business Cafe”. This gives you the ability to appeal to the market that your business intends on doing business in. This form can be filed online or via mail.
2. Appointing a Resident agent
Also known as a registered agent in most states, we will be using these terms interchangeably in this article. Though it should be noted that in Rhode Island, the appropriate name for a registered agent is the resident agent. All LLCs in Rhode Island must have an agent for service of process in the state of Rhode Island.
The resident agent is simply an individual or business entity that has agreed to accept legal papers on behalf of the Rhode Island LLC in the event it is sued. The registered agent must be a resident on Rhode Island or a business entity that is authorized to do business in Rhode Island. The registered agent can be any person who is at least 18 years old.
The registered agent must have a physical street address in Rhode Island. Not only that, but the registered agent must be available during normal business hours to accept service of process. It should be noted that P.O. Boxes or shipping/ postal company addresses do not meet the requirements of a registered agent and therefore should not be used as the LLCs registered agent.
An LLC that is not able to maintain a registered agent may be fined and face a possibility of losing its status as an LLC. Failure to name a reliable registered agent could result in the LLC not receiving notifications of lawsuits that are filed against the company.
LLCs have 2 options when it comes to appointing a registered agent. They could appoint a suitable individual to act as the registered agent. They could also appoint a commercial registered agent. Appointing a commercial registered agent does have some added benefits as well as some additional cost.
Some of the aforementioned added benefits include reducing the risk of default judgement and administrative dissolution, protecting your privacy and being able to maintain a flexible schedule and location.
3. File LLC Articles of Organization
A Rhode Island LLC is created by filing Articles of Organization (Form 400) with the Rhode Island Department of State. Among things that must be included in the Articles of Organization would be the name of the Rhode Island LLC.
Secondly, you must also include the name and address of the appointed registered agent for your Rhode Island LLC. Third, you will also have to include if your company will be treated as a partnership, a corporation, or disregarded as an entity separate from its member(s) for federal income tax purposes.
Furthermore, the address of the principal office of the Rhode Island LLC must be stated. If you do not know the address at the time of filing the Articles of Organization, you can simply just state “not yet determined”. Fifth, you will have to include how the LLC will be managed.
This can be done by checking boxes available on the Articles of Organization. Depending on which option you choose, either member-managed or manager-managed, the following steps will apply. If the LLC is to be managed by a manager or a group of managers, you will have to list their names and respective addresses if known.
A manager or manager as defined in the Articles of Organization is a person or persons designated by the members of an LLC to manage the limited liability company. Whereas a member is a person with an ownership interest in the LLC with the right and obligations as stated in chapter 7-16 of the Rhode Island Limited-Liability Company Act.
Moving on, you will also have to state the date that the LLC Articles of Organization will become effective, be it upon the date of filing or a later date. In the event you choose for the article to come in effect on a later date, it should be noted that the later date must not exceed 90 days of filing.
Lastly, an Authorized Person MUST sign and date the form. An Authorized Person is an individual that is limited to filing the articles and naming the initial members and managers of the LLC. The status of an Authorized Person has nothing to do with being a member or manager of an LLC.
When it comes to filing the LLC Articles of Organization, it should be noted that there is a filing fee of $150. This filing fee can be paid by mail via check made payable to the Rhode Island Department of State or in-person via cash, credit card, or check at the Division of Business Services.
4. Prepare an Operating Agreement
Though an LLC Operating Agreement is not required in the state of Rhode Island, it is still highly advisable that an Operating Agreement be created. You may be wondering, if an operating agreement is not required by the state, why should an LLC draft one? Well here are some of the reasons and benefits as to why an operating agreement is a must-have for any Rhode Island LLC.
As the business grows, the LLC might start looking into hiring managerial staff to take care of the day-to-day business operations, giving more time for the members of the LLC to look at more business development opportunities.
The LLC operating agreement can help define the role of the managerial staff and designate the authority and compensation for when and if the managerial staff wants to leave the company.
Avoiding default state-imposed rules
An LLC that does not have an operating agreement will be bound by the default rules of the state that it is bound to, in this case, Rhode Island.
Separating professional and personal identities
In the event of a lawsuit, having an operating agreement could help the court determine if the LLC is an entity separate from you, hence maintaining the liability protection offered by the LLC.
In essence, the LLC operating agreement serves as the primary document that establishes the rights, powers, duties, liabilities, and obligations of the members among themselves and the LLC. It is important to keep in mind that the LLC operating agreement is not an external document.
The LLC operating agreement is an internal document that does not have to be filed with the Department of State or the Secretary of State.
5. Obtaining an EIN
Provided the LLC has more than a single member, the LLC must then obtain its own IRS Employer Identification Number (EIN). If the LLC does not have any employees, it is still required to obtain an employer identification number.
On the other hand, if the LLC does not have more than one member, the single member of the LLC must acquire an employer identification number if they have employees. Furthermore, if the owner(s) of the LLC have decided to be taxed as a corporation, and not a sole proprietorship, they will also have to file for an employer identification number.
6. File Annual Reports
An LLC in Rhode Island regardless of local or foreign that is authorized to do business in the state must file a Limited Liability Company Annual Report (Form 632) with the Rhode Island Secretary of State.
This report as suggested by the name must be filed each calendar year between September 1st and November 1st, beginning with the year following the year in which the LLC’s original Articles of Organization were filed with the Secretary of State.
This annual report can be filed online or via mail. It should be noted that there is a filing fee of $50. If you’re worried that you might forget about filing this report, fret not as a courtesy reminder will be mailed to your resident agent before September 1st of each year. You are also expected to follow up with your resident agent regarding the filing of this report.
Failing to file the annual report could result in the revocation of your Certificate of Organization as stated in section 7-16-41 of the Rhode Island Limited Liability Company Act.
Frequently Asked Questions (FAQ)
How much does it cost to form a Rhode Island LLC?
The Secretary of state charges $150 to file the Articles of Organization. If you wish to reserve your Rhode Island LLC name, it will cost you an additional $50. Though filing all the relevant forms by yourself is the cheapest option to form an LLC, the filing process itself could be complicated if you’re not one of the appropriate amounts of research.
As a result, you may end up missing some important forms that may lead to complications with your Rhode Island LLC. If you’re looking for other options, you could opt to hire a lawyer to assist you in forming your LLC in Rhode Island.
Though this may not be the most wallet-friendly option, it will no doubt ensure a smooth process. Lastly, another option that you could consider is looking at LLC formation services available online. These options are generally cheaper and could come with some added benefits.
Is a Business License Necessary in Rhode Island?
Well, this question is subject to the type of business you intend to operate in Rhode Island. Your Rhode Island LLC may need to obtain other local and state business licenses depending on your type of business.
If you are unsure about the types of business licenses you need, you could check with the clerk of the city where your LLC’s primary place of business is located. In regards to the state license, it is advised that you consult the Licenses, Regulations, Permits, and Forms section at the Rhode Island government website (RI.gov).
Can a Foreign LLC do Business in Rhode Island?
For a foreign LLC to do business in Rhode Island, it must register itself with the Secretary of State in Rhode Island. Before doing business in Rhode Island, you should ensure that the name of your LLC is available in Rhode Island by checking in the Rhode Island business name database.
A foreign LLC must also appoint a resident agent in Rhode Island that has a physical address in Rhode Island for service of process. Once again, the resident agent can be either a resident of Rhode Island over the age of 18 or a business entity authorized to do business in Rhode Island.
To register your foreign LLC, you must file an Application for Registration (Form 450). This file unlike the other forms in this article must be filed by postal mail. Accompanying the completed application should be a certificate of good standing or legal existence from the home state of the LLC.
It should be noted that the certificate of good standing or legal existence must not be more than 60 days old.
How Do I Get a Certificate of Good Standing in Rhode Island?
You might be wondering, what is a certificate of good standing? Do I need one? A certificate of good standing is a state document that verifies that your business was legally formed and has been sufficiently maintained.
Well you do not necessarily need a Certificate of Good Standing to run your business in Rhode Island, there are some instances where having a Certificate of Good Standing may be beneficial (e.g. registering to do a business in other states, opening a business checking account, etc.).
There are 2 steps when it comes to obtaining your certificate of good standing in Rhode Island. Essentially, you can obtain your certificate of good standing by requesting it from the Department of State. Below is a more detailed breakdown of how to get a Certificate of Good Standing.
Step 1 would be to ensure that your business is compliant in Rhode Island. How does one do this? It is really as simple as staying up-to-date with your licenses and permits, state taxes, and annual reports.
Step 2 is simply ordering your Rhode Island Certificate of Good Standing. Once you have ensured that your business has remained compliant with the state of Rhode Island. You can order your certificate of good standing from the Rhode Island Department of State. This can be done online, in person, by phone, or by mail. You can file the request with the Division of Business Services.
After you have obtained your Certificate of Good Standing, it will not expire. However, most entities that request to see your Certificate of Good Standing will have their own guidelines for the validity of your Certificate of Good Standing.
Can I form a single-member LLC in Rhode Island?
When it comes to forming an LLC in Rhode Island, the single-member LLC is no different from the multi-member LLC. The steps needed to form an LLC are the same as listed above. A drawback of forming a single-member LLC is that you will not have the additional flexibility when it comes to filing a tax return.
How Do I Dissolve my LLC when I am Done?
When you wish to close your business and cease all operations, you will want to properly dissolve your LLC to limit the chances of lawsuits and government fees. Similar to forming an LLC, some steps must be considered when you intend to dissolve your LLC.
Among the important steps would include voting to dissolve the LLC, filing the proper dissolution forms, cancelling out-of-state registrations, and possibly getting a tax clearance. It is advised that you do further research about dissolving LLCs as it could become a complex task for someone inexperienced.
Once again, we would recommend you contact your lawyer regarding this matter or seek an LLC Formation service. By following these steps you are guaranteed to limit your liabilities.
Starting a business correctly doesn’t have to be difficult. With over 15 years of experience consulting new businesses and start ups, Matthew is probably the best person to help you set a strong foundation for your business.