How To Form an LLC Yourself (in 7 Steps)
Do you need to form an LLC but you’re not familiar with the specific compliance requirements? We wrote this guide specifically for entrepreneurs like you to find answers to your tough questions.
Quick Note: If at any point you need help forming your LLC, we recommend checking out our list of the 7 best LLC formation services that will take care of the paperwork for you.
1. Choose an LLC Name
As with many facets of formation, the guidelines for naming your LLC vary a bit by state, but in general, you need to follow a few basic rules. First, your name needs to be original and can’t match the name of any other LLC on file. Also, there’s also certain words you can’t use which vary by state — usually terms like Bank or Insurance that apply to specific business types.
One word of caution is that until your business name is officially approved by your state of formation and you complete your formation filing, the name can still be taken by another LLC. It’s a first-come first-served world. However, many states do allow you to reserve your company name for a nominal fee until you complete the process of forming an LLC.
Most state resource websites have name availability checks for free, and you can also conduct a name check request by mail. For some business types, you may need to run a secondary check with the Department of Revenue, Secretary of State, or U.S. Patent and Trademark Commission.
Once you pick your LLC’s name and verify its availability with the appropriate government entities, you’re on to the next step.
2. Designate a Registered Agent
A registered agent is a third-party entity that receives official government documents on behalf of your LLC. These documents can include anything from lawsuit notifications to correspondence with the Secretary of State.
When a company, individual, or government entity seeks formal contact with your business, they will send any relevant documents to your registered agent, who makes note of the receipt and forwards the mail to you in an efficient manner.
On the surface, a registered agent sounds a bit like a “middle man for middle man’s sake.” However, without a registered agent, a noncompliant business owner could hide behind the excuse of not knowing anything is wrong, or that anyone is trying to contact them. On the other hand, a company that hasn’t done anything out of line could be sued without ever knowing.
The registered agent provides a happy medium so that there is verifiable proof that all relevant documents were both delivered and received. Your registered agent is required to be available during all standard business hours to notify you when they receive a document on your behalf. In addition, they keep you informed of upcoming state filing deadlines.
Failure to designate a registered agent can result in stiff fines, and you could fall out of good standing with the state. That’s why it’s so important to have a registered agent lined up from the start.
Even in states where you can serve as your own registered agent, it’s still a good idea to have a third-party company or individual handle it for you. If you serve as your own registered agent, you’ll need to be available during all business hours and your personal address will likely become publicly available.
Furthermore, a registered agent service helps you ensure you never miss an important document because you were away from the office. In short, even if your state doesn’t require you to hire an external registered agent, there are plenty of reasons why it’s still highly advisable.
3. File With Your State
Once you’ve picked a name and designated your registered agent, it’s time to prepare and file your articles of organization (or whatever your state calls the LLC formation documents). These are relatively simple documents that require basic information about your business — things like contact info for your new LLC, the name and address of your registered agent, etc. Essentially, this is the step where you officially form your LLC.
As with many other steps in the LLC formation process, the exact details tend to vary a bit from state to state, but in general the following items are nearly universally required:
- Name and address of your LLC
- Nature of business conducted by your LLC
- Name and address of your registered agent
- Names of owners and members of your LLC
To help you draft your articles of organization, most states have templates — or at least instructions — on their official Secretary of State websites. You can even write them yourself from scratch in bullet-point form, as long as all the information requested by your state is included in a reasonable manner. It doesn’t have to be fancy, but it does need to be in writing.
After you prepare these forms with your info, you’ll need to mail them to the Secretary of State’s office along with any applicable filing fees.
4. Get an EIN
Now it’s time to acquire a federal tax ID number, also known as an Employer Identification Number (EIN). Think of an EIN as a Social Security Number for your company. Most businesses need an EIN because it allows you to hire employees, open business bank accounts, file taxes, and more. In fact, pretty much the only common business type that doesn’t require EIN obtainment is a sole proprietorship with no employees.
Beyond the compliance requirement, an EIN provides some valuable assurances for your company. One of the key features of an EIN is that it prevents you from having to use your personal Social Security Number for business purposes, which is obviously a serious privacy matter. In addition, you often need to use an EIN to acquire your business licenses and permits, or conduct certain types of business banking transactions.
To get your EIN, you can either fill out and mail the physical forms, or simply apply online at IRS.gov. The process is rather simple, and if you apply and gain approval online, you can use your EIN immediately.
5. Create an Operating Agreement
In an LLC operating agreement, you’ll lay out the structure of your business, outlining ownership rules and operational standards.
While the operating agreement is not part of the package you need to send to most states, it is a crucial step to get these items written down in an official capacity. Regardless of the nature of your business, your operating agreement should include the following:
- The identities and roles of each LLC member or owner
- The members’ rights, responsibilities, voting power, and percentage interests
- Allocation plans for any financial profits and/or losses
- Outline of LLC management structure
- Guidelines for holding meetings and taking votes
- Buy-sell provisions to determine a course of action to replace a member, if necessary
There are several reasons an operating agreement is helpful, especially in situations where you’re forming an LLC with a business partner (or partners).
The LLC operating agreement will clearly define what roles and responsibilities are assigned to each partner, which could prevent some misunderstandings down the road that you certainly want to avoid. Even for sole proprietorships, it’s nice to have an LLC operating agreement because it can help your case if your limited liability status is ever challenged in court.
In short, while in most states you don’t technically need an operating agreement for an LLC, it’s such a simple document that can help you in several ways that there’s no good reason not to have one.
6. Create a Financial Infrastructure
At this point, it’s a good idea to get a handle on your company’s financial matters, starting with the opening of a business bank account. This is a must for any new business owner, because it keeps your business and personal income and expenses entirely separate.
Not only will this account come in handy for streamlining your business finances, but it’s also another step that develops the legitimacy of your company. For example, if a customer wants to write you a check, it’s much more professional to have them write the name of your LLC rather than your personal first and last name. Or how about when you’re paying invoices — does it look better to pay with your personal debit card, or to use business checks or a company credit card?
In addition to your new bank account, it’s highly recommended that you invest in accounting software. The last thing you need is for your business to have any uncertainty regarding financial matters, which an accounting program can help you keep an eye on without being too complex, or demanding too much of your time. This will also help you organize your employee info, protect you from audits, assist with tax responsibilities, and more.
Accounting software is a godsend come tax time, because every single expense you’ve incurred for the entire fiscal year is accessible in one convenient place. That means you won’t miss any potential deductions because you’re missing receipts, or because you kept multiple ledgers, etc.
7. Handle Taxes, Licenses, and Permits
The vast majority of businesses require at least one license, permit, or tax registration to maintain compliance. There are thousands of separate licensing jurisdictions in the United States, and each one has specific requirements based on what type of business you conduct. Keep in mind that you might need licenses from your state, county, or municipality — make sure to check at all levels of government within your jurisdiction.
To determine what kinds of licenses you’ll require, refer to your state of formation’s official website. Most state sites have extensive requirement guidelines for business licensing and permits.
Once you figure out which one(s) you need, acquire your applications, fill them out, and mail them in to your state’s Secretary of State office. You should have your licenses and permits in hand in less than a week after they receive your documents, for most business types in most states.
Additionally, if you have employees or sell taxable goods/services, you’ll need to complete registration with relevant government entities in order to properly file your company taxes. It’s best to get these issues ironed out early on in the formation process, rather than down the line when they could become serious problems for your company.
It’s important to keep in mind that there are some ongoing compliance requirements for LLCs. In other words, there’s a bit of maintenance required to remain in good standing down the line — long after forming an LLC. The two most common examples of maintenance documents are annual reports and Certificates of Good Standing.
Annual reports typically are rather simple documents that keep your state of formation in the loop regarding important changes to your company. For example, you might need to submit an annual report that lists your LLC’s address, whether ownership is domestic or foreign, the name and personal address of at least one LLC member, etc. It’s nothing terribly complicated, but it’s crucial to keep the state regularly updated regarding the tentpole structural elements of your business.
Certificates of Good Standing
Certificates of Good Standing may also be relevant to your business from time to time. These documents are issued by the state and give a brief overview of your company’s compliance status. Examples of situations that may require a Certificate of Good Standing include:
- Financiers considering lending money to your company
- Banks may need one to complete large transactions
- Potential investors or new business partners
- Renewals of licenses or permits
- Selling your business
- Registering to conduct business in an additional state
Obviously, annual reports are predictable in their timing, but you never know when you might need a Certificate of Good Standing. It’s advisable to keep one on hand, or at least familiarize yourself with the process to acquire one before you actually need to do so.
Forming your own LLC isn’t necessarily a difficult process in any one area, but managing all of these individual steps together can be a real hassle. That’s why we wrote this guide, so that you have a step-by-step plan to refer back to, ensuring you don’t overlook any crucial steps in the LLC formation process.
If you do find yourself wanting assistance at any point in your LLC formation, there are certainly service providers who can help you with any or all of these steps, while still saving you money over hiring a traditional lawyer. This is all stuff that you can do yourself, but help is there if you need it.
Regardless of whether you go the full DIY route or use a service, we wish you the best of luck throughout your LLC formation journey!