Fact checked for accuracy by Billie Anne Grigg, a bookkeeper and Mastery Level Certified Profit First Professional.
Forming a limited liability company, or LLC, is a big decision. The process of getting it done requires many steps, which can be confusing and frustrating. But, with the correct information and guidance, it doesn’t have to be.
Creating an LLC protects your personal assets if your business goes through a lawsuit. It makes the business the liable party rather than any individual who works for or owns part of the company. There are many other reasons why forming an LLC might be beneficial to you, so it is essential to understand the ins and outs of getting one set up.
Because an LLC is a specific type of business entity created by statute in most states, it must meet requirements and go through necessary procedures before gaining approval and recognition.
Below, we’ll walk you through every step to form your LLC. If you’d like some help setting up your LLC, check out our recommendations for the best LLC services too.
Select Your State
The first step in setting up your new limited liability company is choosing which state to form the LLC. This choice depends on several factors, including where your company will conduct business, what taxes are imposed by that state, and how much paperwork is involved.
Visit the business entity sections of your state government’s website and look for a document called “Forming a Limited Liability Company” or similar. Usually, this form will be a downloadable PDF file.
It is also possible to have your limited liability company formed outside your home state. The first and most obvious reason is to reduce the legal fees and costs you would incur if you were to do so in your home state.
Another reason for choosing another state to set up your LLC instead of your home state is to take advantage of that state’s business-friendly legislation and climate toward businesses owned by foreign investors.
The disadvantages of incorporating outside your home state are double taxation. In addition to state taxes on profits, there may also be state taxes on income. Another disadvantage is compliance. You have to keep track of the laws in each state. One state will have different laws compared to if you organized in another.
There are few practical benefits for most LLCs to incorporate outside their home state. If this is something you are considering, it’s worth discussing with a qualified advisor.
Name Your LLC
To ensure you don’t infringe on any other business name, you should conduct a name availability search for your desired LLC designation. Depending on what state you’re in, this might be required before you register your LLC.
You’ll also need to adhere to any specific rules for your LLC name. In many states, the business name must end with an LLC designator (i.e., Limited Liability Company or Ltd).
Get a Registered Agent
A registered agent is required for all LLCs and is responsible for receiving official state and federal documents on behalf of a company. This person must have a physical street address in the state where the LLC is registered.
An LLC can also act as its own registered agent for documents sent personally or by certified mail.
If your LLC decides to act as its own designated agent, you should ensure you can receive official documents at the contact address provided.
If you want someone else to be your registered agent and not have to worry about it, read about our top picks for the best registered agent services.
File Articles of Organization With Your State
The articles of organization are filed with your Secretary of State’s corporate filing office, depending on the state in which you reside and will conduct business as an LLC. These documents establish an LLC and its rights, powers, duties, and liabilities.
Filing requirements might differ by state but typically include the following:
- Articles of Organization: Describes the name, type, and management of the LLC.
- List of Initial Membership: A list that consists of each member’s name and their percentage of interest in the company.
- List of Managers: This list should contain at least one manager or member to whom other members gave authority.
Choose Between Member vs. Manager Management
You can choose between a member-managed LLC or a manager-managed LLC when forming your limited liability company.
A member-managed LLC describes a business where all members take part in the company’s operations. Only designated members, certain nonmembers, or a combination of both are made responsible for managing the business in an LLC with a manager-managed structure.
Manager-managed LLC members can include passive investors who aren’t involved in the company’s day-to-day operations.
Most LLCs are structured so every member is responsible for operating the business. Member-managed is the approach you should consider if you want all members of your LLC to participate in the operational and production aspects of the company.
Sometimes, a manager-management structure might be preferable. This structure is most common when members want to be passive investors and not take on management duties.
By default, LLCs in most states are member-controlled. So, if you don’t specify a management structure for your LLC in your documents of incorporation or operating agreement, it will be treated as a member-managed entity.
Create an LLC Operating Agreement
It is necessary to have an operating agreement for your LLC. It is a legal document that establishes how your LLC will be operated and includes information such as how the LLC is managed and the firm’s business members.
An operating agreement is crucial because it allows you to control your business, protect yourself from personal liability, and clarify business arrangement details to all LLC members.
It’s essential to make sure you have an operating agreement because state laws will govern how your company operates without one.
Get an EIN
An EIN, or Employer Identification Number, is assigned by the Internal Revenue Service to identify a business entity. It is an identifier for tax purposes, and any company with employees must obtain one of these numbers.
If you have a single-member LLC, you won’t need an EIN unless your business has employees or you elect to have it taxed as a corporation rather than a sole proprietorship (disregarded entity). All multi-member LLCs are required to have an EIN.
Even if you are not required to get an EIN for your LLC, having one could be beneficial. For example, many banks will not open a business bank account for an LLC without an EIN, and having an EIN also protects your personal SSN (probably the most compelling reason for businesses not required to get an EIN to get one).
You can apply for an EIN by completing an application on the IRS website or faxing in a completed Form SS-4. Once the application is approved, your LLC will be issued an EIN by mail.
Important Steps After Forming Your LLC
Several things need to happen after you form your LLC. The following are some steps you might need to consider.
Write a Business Plan
A business plan is a document that forecasts and describes the nature and activities of a business. It typically includes an executive summary, an introduction, markets and market research, products or services, organizational structure (ownership), financials (cost/revenue projections), and appendices.
There are templates available for you to use as a guideline, or you can work with a business consultant to develop your business plan.
Get a Domain Name and Social Media Handles
A domain name registrar or website host will provide you with the basics to get your online presence up and running. You will need a domain name, hosting service, and a website builder or web designer to create a website.
Create your company’s social media profiles on Facebook, LinkedIn, Twitter, Instagram, and any other relevant platforms for your industry.
At a minimum, you’ll want to reserve a domain name and social media profile pages for later use.
Get an Accountant
Unless you are well-versed in how taxes work for operating an LLC, hire an accountant.
The IRS typically treats single-member LLCs as disregarded entities, while multi-member LLCs are viewed as partnerships. The requirements, benefits, and filing requirements differ for each tax status.
An accountant will advise you about what makes the most sense for your specific circumstances.
Open a Business Bank Account
One of the main benefits of being an LLC is that you have limited liability protection. To avoid commingling your personal finances and assets, you want to keep business finances and assets separate.
Setting up a bank account for your LLC can also make it simpler to gain business credit. Staff will be able to conduct banking for the company, and your firm will appear more professional to vendors and customers.
To open a business bank account, you should have your LLC formation documents and your tax ID number.
Get a Business Credit Card
An LLC business credit card is advantageous for several reasons.
It helps keep track of your company expenses, which is valuable for tax purposes. Using a business credit card also helps protect the corporate veil when you use it for all company expenses. And regular use with timely payments will help build business credit.
Register for State Taxes
The differences in each state’s tax rules are a good reason to hire an accountant to help in this area. An accountant can provide proper recording of your expenses and income and provide tax planning solutions so you won’t have to worry about unforeseen tax problems.
You could be obligated to pay state sales and use tax, employment tax, or business income tax. Temporary disability insurance or unemployment insurance also might be required.
Research and Get All Required Business Licenses and Permits
You might need permits and licenses from the state or municipality to operate in the local jurisdiction legally. Each industry is different, so it is vital to identify the requirements for your type of business.
A local office of the state or city government should help you with the specific requirements for your type of business.
Researching and obtaining all necessary permits and licenses will keep you in compliance with laws relating to your industry.
Get Business Insurance
Your business insurance needs will vary depending on the type of business you operate and whether you have any employees.
General liability insurance is the very least amount of coverage required. However, it’s also a good idea to take out commercial property insurance, workers’ compensation insurance, business owner’s insurance, or professional liability insurance (E&O).
Consult with an insurance broker to determine the type of coverage you need.
Research Requirements for Hiring Employees
When hiring employees, you need to follow specific guidelines and regulations. For example, you must keep accurate records, pay taxes, and provide employees with safe and healthy working conditions.
When hiring employees, LLCs must take steps to inform employees about company expectations and workers’ rights.
Write Down Your Ongoing Compliance Requirements
Maintain a list of requirements, such as filing an annual report, reporting any changes in registered agent, ownership, or business address.
It is essential to maintain compliance with LLC regulations because if you don’t, your company could lose its good standing with the state. That could mean being assessed fines and even lead to the state dissolving the business entity.
However, LLCs don’t have as many ongoing regulatory compliance issues as larger corporations, making them less challenging to maintain.
Follow Income Reporting Rules
The simplest way to handle the income and expenses of a single-member LLC is to report the company profit and loss numbers on an individual 1040 tax return using Schedule C.
For multi-member LLCs, it can be more complicated. It would be best to have rules set up in your operating agreement for how members should report their shares of business profits at tax time. For example, a four-member company might have equal shares, with each member reporting 25% of the company’s earnings on their K-1 and tax return.
The Last Word
Establishing a new business entity is a lot of work. It’s important to follow the necessary steps and get all your paperwork in order before you start operating to avoid any unwelcome surprises further down the line.
With less stringent ongoing compliance requirements, LLCs are a popular choice for small businesses. Following the steps laid out in this article will help you get your limited liability company set up so it’s ready to go when you open your doors.
Questions? Let us know. For more tips on getting your business off the ground, read our guide on how to start a business and the formation guides below on other entity types.
Filed under: Advice Columns