You’ve made the decision to start a small business. Working for yourself can provide the freedom and flexibility to build the life you want, but it can also be stressful. We’re here to make it easy. This post will show you how to form a limited liability company (LLC) in seven simple steps.
Before we begin, why do you even need an LLC? Because forming an LLC protects you and it protects your clients should anything go wrong.
It gives you liability protection so that your personal assets aren’t in danger.
Think of your feet as a small business. Forming an LLC is like wearing shoes. If you step on a nail the shoe takes the beating, not your feet. Don’t walk around barefoot.
An LLC protects you like shoes protect your feet. Don't walk around barefoot.Tweet This
It also gives your business a sense of legitimacy. People know if they hire your LLC they’re going through a registered business and not just some guy who promises he’ll do a good job.
This holds you accountable for your work and gives your clients peace of mind.
Forming an LLC isn’t necessary to start a business, as other entities do exist, but it can make life easier, especially when filing your taxes.
Don’t worry, LLC formation is a breeze.
How to Form an LLC?
We’ve convinced you to do things the legal way and go through the steps of forming an LLC. This will be a quick, step by step guide that will get you on your way to working for yourself in no time. Let’s jump to it.
1. Select the State in Which Your LLC Will Do Business
This is typically the state where you live. Some states (Nevada and Delaware, for example) have more business-friendly laws for LLCs but it’s typically not worth the extra fees and hassle.
We recommend you open the LLC in the state in which you reside and plan to do business. Don’t overthink this step.
If you plan on having brick and mortar stores in multiple states you’ll have to open a foreign LLC in each state in which you run a business.
2. Pick a Business Name
Naming your LLC is one of the most important decisions you’ll make during the whole process.
There are a few stipulations and tips to keep in mind when figuring out your LLC’s name.
- You can’t name your business something purposefully confusing like FBI LLC, or Official IRS LLC.
- You have to include the words “Limited Liability Company” or the abbreviation “LLC.”
- Your name also can’t already be a registered business entity. So, no naming your new LLC something that’s already taken. To do a quick name search type in “LLC name search (your state)” and your state’s website will come up. From there you can type in your preferred name and see if it’s taken.
- If your business relies on marketing and word of mouth you’ll want to name your business something easy to remember and spell. This will be your LLC’s legal name, so don’t name it something you’ll be embarrassed to use going forward.
3. File Articles of Organization for Your LLC
In order to physically create an LLC, you have to file Articles of Organization with your state. This is typically done with the Secretary of State, but not always.
Depending on the state you’re filing in, this paperwork might be referred to as the certificate of formation. Basically, it’s just a formation document, so don’t get thrown off if they call it a certificate of formation instead of articles of organization.
Go to your state’s website to file. You’ll have to pay a filing fee that varies by state. In New York the fee is $200, in Oregon, it’s $100. Your filing fee will be in that ballpark.
4. Appoint a Registered Agent
A registered agent is simply a third-party in your state who can represent your business during business hours. Basically, the government wants someone they can contact should the need arise.
This is all part of the transparency of making you a legit business and not just a guy off the street.
The registered agent is designated to receive correspondence from the Secretary of State and other official government notifications.
This can include tax forms and any notice of lawsuits.
It’s technically possible to serve as your own registered agent but this does put a lot of extra pressure on your shoulders. If you’re unclear about the responsibilities of a registered agent, it’s best to let a professional handle it.
5. Decide On the Management Structure
This is one of the most important steps in forming an LLC. You need to decide on the management and business structure your LLC will use.
You have two options, member-managed and management-managed.
Member-Managed: If you have a small number of LLC members, and you want them to be involved in the day to day control of the company, then you’d select to be a member-managed LLC.
This means each member of the company gets a say in what direction the company goes.
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Management-Managed: If you’ve got a large number of employees, or you don’t want each member to have a say in company direction, then it’s probably best to do management-managed.
6. Create an LLC Operating Agreement
The operating agreement is a legal document that outlines the ownership structure and what the members’ responsibilities will be. An operating agreement isn’t required in all states, but it’s a good idea to have one.
Note: If you’re planning on having a single-member LLC, an operating agreement might be unnecessary.
However, if you want yours to expand then it’s a good idea to insulate yourself from future headaches.
An operating agreement addresses several issues that can come up including:
- How ownership is structured
- How the company is to be managed
- Members voting rights
- The process for adding or removing members
- Any circumstances where the LLC may be dissolved
7. Get Your Regulatory and Tax Requirements Sorted
You’ll need to get an employer identification number if you have more than a single-member LLC, plan to get employees in the future or, elect to get taxed as a corporation as opposed to a sole proprietorship.
Think of this as the social security number for your business. This number will be used as your federal tax ID.
When I created an LLC I elected to get taxed as an S-Corporation. This meant I was required to get an employer identification number even though it was a single-member LLC.
Here’s a great article that explains the differences between an LLC and an S-Corporation.
You can get your EIN number for free through the IRS website. You can also fax or mail them a letter if you hate convenience.
After Forming Your LLC
Those were the steps to forming an LLC. What’s next? There are a few more things that you’ll want to do to make things easier down the road.
Open a Business Bank Account
Open a business bank account to separate your personal assets from your business assets. This makes filing your state and federal taxes much easier and limits your personal liability in the event you’re sued.
It’s incredibly important that your business assets don’t get muddled in with your personal assets. Not only will mixing these accounts make filing your taxes a nightmare but you’re putting your personal assets at risk.
Hire a CPA
Hire a certified personal accountant to run your books. Running a small business takes a lot of time and patience.
The skills needed to run the physical side of your business are often not the same skills needed to keep your books in line.
Many LLC owners find it well worth the money to hire a CPA to take care of this for them.
With a CPA you don’t have to worry about whether you need to file an annual report, if your tax returns are done correctly, or if your business license needs to be renewed.
I have a CPA running the books of my LLC and it’s worth every penny.
Acquire Necessary Permits or Special Licenses
Determine if you need any special licenses or permits. Not every business requires a permit or special license, but many do.
It’s one thing to fill out the paperwork to create a small business, it’s another thing to actually have the licenses and permits required to run your business.
It’s up to the business owners to make sure they’re in compliance with state and federal regulations. If you’re ready to get started with your own LLC, a company like LegalZoom is worth a look.