LLCs are a popular choice of business structure for small businesses. If you want to avoid the double tax of corporations, but want to protect your personal assets, an LLC may be right for you. For many small business owners, starting an LLC is something they can do on their own. Follow these 8 steps for starting an LLC.

9 Steps to start an llc

1. Pick a state

Choose the state you want to register in

LLCs are based on state law. Generally, you can form an LLC in any state (even if it’s not the state your business is in), but the laws of your home state will have some effect on your business whether that’s the state you register in or not. If your business is in a different state, you’ll have that state’s laws to keep in mind too. Some states’ laws are more advantageous to businesses than others. That’s why you’ll hear a lot about businesses being formed in Delaware. For most small businesses, those benefits are not enough to warrant forming your LLC in another state besides your home state.

2. Pick a name

Choose a name

Once you decide where you’re going to form your LLC, you need to choose a name. There are some restrictions, but you can mostly name your business whatever you want. It must contain some form of notation as a limited liability company (LLC, L.L.C.) and can’t show any indication that it’s a corporation (no corp., inc., etc.).

Most states have an online search option to see if a name is available in your state. It’s a good idea to also do a Google search and a trademark search. You can search the US Trademark Office here.

If using anything other than the actual name, even if you’re just leaving off the “LLC”, you need a Doing Business As (”DBA”). These are usually easy to apply for and the filing fees are generally modest. The length of a DBA varies by state, so be sure to check your state law to stay in compliance.

File Notice

Some states have an additional requirement to file notice. To file a notice, you must publish your intent to start a business, including the business name, in the newspaper for a set period. The states that require notice are: Arizona, Nebraska, and New York. If you are in one of those states, check your state laws for specific information regarding notice requirements.

3. File Articles of Organization

The third step to start an LLC is to file the formation document with the state. The Articles of Organization is the document you file with the Secretary of State that registers your LLC. It may be called something else in other states. Most states have an online process for filing that makes the process easy. There are a few terms you’ll want to know, but other than that the process is straightforward.

Organizer

This is the person who is starting the company. It’s usually a member but doesn’t necessarily have to be. 

Registered agent/address

This is the person who will receive any legal papers on behalf of the business. This is a matter of public record, so keep in mind if you use your home address here, it will be available for anyone to find. You cannot use a PO box for this-it must be a physical address. If you are not comfortable using your home address, you can rent an executive suite, mail drop service, or use a registered agent company.

Business address

This is the address where business is conducted. This can be a PO box and it will be a matter of public record as well.

Purpose

Common language is to be formed for “any lawful purpose”.

4. Get tax ID numbers

Federal

You need to obtain an EIN from the IRS. EIN stands for “employer identification number”. It’s essentially a social security number for your business.

There are companies that will do this for you, but it is not difficult, and you can do this yourself.  You can apply directly through the IRS here.

To apply for EIN you need:

• Business name & address
• Responsible party 
• Social Security number
• Date formed
• Type of business

You will also have to choose the type of entity. This tells the IRS how your business will be taxed. Generally, single member LLCs are taxed as sole proprietorships and multi-member LLCs are taxed as partnerships.

State

You need to get state tax ID numbers too. In some states, these are assigned automatically and in others you’ll have to proactively apply. In Kentucky, when a business is formed with the Secretary of State, the Kentucky Department of Revenue will send out a letter with information on how to register for state tax accounts.

5. Create Operating Agreement

An Operating Agreement is a document that governs how the business will be managed. A written Operating Agreement is usually not required to form an LLC nor does it usually have to be filed with the state, but every LLC should have one. Even single-member LLCs. Your Operating Agreement needs to include all the important information about how you will run your business as well as some other important language to make sure the members’ (that’s you!) personally liability protection is preserved. If you want to save time and make sure it’s done right, grab an Operating Agreement Template in our shop, so that you can be done with this requirement and not have to think about it again (or at least until there’s a major change in your business). 

One of the great things about LLCs is the liability protection it offers its members. This means that only the business assets are subject to business debts (unless you personally guarantee them) and business liabilities, like lawsuits. But, to have the full protection, you have to make sure to run the business as a completely separate entity.  

Having an Operating Agreement is one thing you need to do to show you intend for your business to be separate from you. This is important even if you are a single-member LLC. It may seem silly to create a document that says how you’ll run your business when you’re the only one who will be working in the business. But, it’s necessary to show the business is separate and avoid “piercing the corporate veil”.

One purpose of business law is to protect consumers, so there’s a concept in the law called “piercing the corporate veil”. Some people create LLCs to avoid liability for their debts or lawsuits. They keep minimal assets in the business but have significant personal assets. In that case, someone they owe money to or who was injured while using their product would try to “pierce the corporate veil”.

This essentially means they’re trying to get at the personal assets of the LLC member so they can recover what they’re owed from the business. Because of this, maintaining the LLC as a completely separate entity from yourself is very important. One thing to help prove your LLC is separate from you personally is to have an Operating Agreement. Your Operating Agreement should include language indemnifying its members from business liabilities. 

GET A SINGLE-MEMBER LLC OPERATING AGREEMENT IN OUR SHOP

Single-member LLC

If you’re a single member LLC, you still need an operating agreement, but it doesn’t need to be as detailed as a multi-member LLC operating agreement. There are things that need to be included like capital contributions, the share of profits/losses, method of accounting, how you’ll go about adding new members, who can take out loans, etc. (not a complete list). Operating agreements should also indemnify its members from business liabilities.

Multi-member LLC

If you have a multi-member LLC I cannot stress enough the importance of having a detailed, well-thought-out operating agreement. When you’re just starting, you don’t want to think about things going wrong. But, it’s important to think through these issues before there’s a problem. It will save you a lot of time, money, and headache.

A multi-member operating agreement should include capital contributions, share of profits/losses, accounting, and adding new members. But it should also be specific about what each member is allowed to do, what they’re not allowed to do, and how they’ll make decisions. A good agreement should be beneficial to all parties. It also needs to be sufficient to protect you and the other members if something happens.

6. Start accounting

When you’re just starting out and not making much (or any!) money, it seems like you can let the accounting stuff slide. It’s important to keep track of everything right from the start. The first thing you should do is open a bank account, then start keeping track of all your business income and expenses. As your business grows, you may want to invest in some accounting software or the services of a bookkeeper and/or CPA. 

Business bank account

It’s important to have separate bank accounts for your businesses. 1) This makes keeping track of your accounting so much easier without having to wade through all your personal expenses and 2) Having a separate bank account is another step to help protect you from “piercing the corporate veil”. You will use your EIN to open this account, though many banks will also want your personal social security number.

Your business bank account should ONLY be used for business expenses. If you’re paying yourself, that’s fine, but before you use any of the money for personal expenses it needs to leave your business account.

Income

You also need to create a system to keep track of your income. You will need this information for tax purposes and it is so, so much easier to keep track as you go than to have to go back at tax time and piecemeal your income together (ask me how I know). This is an aspect of running my business I do not enjoy, but I have to make myself do it because putting it off just makes it harder to deal with later.

Expenses

You also need to keep track of your expenses. Most business expenses are deductible on your tax return. Start-up expenses count too. It is important to keep good records of all your expenses in case you ever had to prove those to the IRS.

This is something that should really be done daily or weekly. It’s hard to remember that you spent $20 at the post office a few months later. Using your business accounts to pay for expenses will make it easier to keep track of.

Hiring help

If you are paying anyone to work in your business, whether employee or independent contractor, you also need to make sure you keep excellent records of their pay for your business tax returns as well as to have the information ready to submit to them for them to claim the income on their tax returns.

7. Apply for licenses & permits

Federal

There usually aren’t federal licenses or permits required when starting an LLC. However, there are some industries that are regulated by federal law and require federal licenses. Some of these include: agriculture, alcohol, broadcasting, transportation. If you’re doing business in one of these you need to research what you need at the federal level. 

Depending on your state, you probably have various licenses you need to register for. There are some industries that are regulated by federal law and require federal licenses. Some of these include: agriculture, alcohol, broadcasting, food businesses, transportation.

State & local

Some states require a general business license to do any kind of business in the state and some don’t. For all states, the type of business you have determines what licenses and permits you need. Some common ones include: 

• Occupational licenses
• Alcohol or food licenses
• Environmental licenses
• Home Occupation permit
• Sales Tax permit

If you don’t know what licenses are required in your state, a good place to start is doing a quick Google search for your location and type of business. After you’ve gotten somewhat of an idea of what may be required, it never hurts to call your Secretary of State or state licensing boards. In my experience, these people are very helpful. If you call and the person isn’t helpful, try calling back and talking to someone else. I’m always amazed at the different responses I get from different people working for the same agency. 

8. Consider insurance

One of the main reasons people choose to start an LLC for their business is the liability protection. And, an LLC does protect personal assets, but does not protect business assets. Having insurance to protect your business assets is a good idea. If not, you risk losing everything you’ve worked so hard for. If you’re doing business from your home, check with your home owner’s insurance to see if your business is covered by that policy.

9. Keep up with business filings

The final, and ongoing step, to start an LLC is to keep up with your business filings. To keep your business in good standing, an annual report needs to be filed with the state. The fees for this vary quite a bit. The process is generally pretty easy, you just have to make sure you renew by the deadline. It’s a lot easier (and less expensive) to stay in compliance than it is to have to go back and reapply. If you have business licenses or permits, find out how often those have to be renewed as well. Some may be annually, or every 5 years.

It can be a lot to keep track of, but it’s important to stay on top of it. Your state may have other things that need to be renewed annually. Make a list of the different renewals you need and how often they must be renewed. Go ahead and add these to your calendar now so you don’t have to worry about forgetting.  

An LLC is an easy to manage business structure and it protects your personal assets. It is a good choice for a lot of small businesses. Some situations are more complex than others and require an attorney. But for many LLCs, especially single-member LLCs, you can do it yourself. The steps to forming an LLC are:

1.      Choose your state 

2.    Choose a name

3.   File Articles of Organization

4.      Set-up tax accounts

5.      Create Operating Agreement

6.      Start accounting

7.      Obtain licenses & permits

8.      Get insurance

9.      Keep up with business filing

 

Disclaimer:  This site, and all information contained herein or through communication with me, is intended as legal information only.    I am an attorney, but I am not your attorney, so nothing on this site, nor any communication with me, shall create an attorney-client relationship.  I am not liable for damages or losses based on any action taken, or inaction, based on the information contained on this site.  All areas of the law are fact specific and there is no substitute for legal advice from an attorney licensed in your jurisdiction who is familiar with the specific facts and circumstances of your situation.