Many aspiring entrepreneurs and business newcomers are likely to face a number of challenges when it comes to form an LLC. For one, what type of documentation do you need to fill? And is there a correct way to submit it? What about state licensing? Is assigning a registered agent unavoidable?
All these and other pertinent questions will be expanded on below, and even if you plan to hire a reliable online LLC service instead of going at it alone, learning more about the basics is never a bad thing. Now let’s look at the seven basic steps standing between you and your new LLC.
1. Choose an LLC Name
Choosing an appropriate name for your LLC is not only a matter of abiding by the naming guidelines of your state but also a key point for brand recognition and the success of your marketing strategy. Not to mention that this name will appear in all documents, business cards, ads, and registries.
The guidelines for naming an LLC tend to vary from state to state, though the core rules do not diverge much. The main rule is to ensure the chosen name is not already in use in your state.
Some jurisdictions also warn against using business designations that don’t describe your entity (such as including words like ‘bank’ or ‘hospital when an LLC does not operate in those fields), descriptors implying an affiliation with government structures, or any profanity.
As soon as you approve your business name, be sure to register it before it could be taken by someone else. Fortunately, it’s possible to reserve the name before you finish your LLC formation, though the states that allow this also ask for a reservation fee.
You’ve probably heard of business name search tools provided by most formation services, but those overseeing the formation on their own won’t be left floundering: most state websites offer such tools for free.
Please remember that these search tools may not cover other government bodies, so it would be best to cross-check the name with other databases, namely the Secretary of State, the IRS, and the U.S. Trademark Office.
If everything checks out, go ahead and reserve or register the name in your state in order to proceed to the next step.
2. Designate a Registered Agent
The need for a mediator is a common occurrence in most business practices, some of which can be suspiciously redundant while others are more than justified.
Most states legally require owners to designate a registered agent for their LLCs in order to have clear lines of communication with your company at all times.
While a registered agent can be almost anyone, even yourself, it’s generally recommended you hire a professional service. There is one main reason for this: availability.
An agent must be able to receive important notices from the government, other companies, and private individuals during all standard business hours on all workdays without exception.
This means that if you assign a family member or act as your own agent, there is a chance of you missing important notifications and documents like service of process, rendering your business non-compliant.
Not knowing about a potential lawsuit against your company does not exempt you from responsibility in the eyes of the court.
A professional registered agent will mediate all correspondence and make sure you won’t miss any deadlines (such as annual reports or tax returns).
It may seem like a neat way to save money, but you are likely to face consequences that are more costly than avoiding this step altogether. Failing to comply with state requirements or missing court dates may eventually lead to severe fines or even the dissolution of your company.
As already mentioned, many states allow you to designate yours, your friends or members of your family as your company’s agent.
Again, on paper, it may seem like a good option to be more frugal than hiring an expensive lawyer or assigning the duty to your accountant for an extra fee, but it should be reiterated how important the agent’s availability is.
Most industry specialists recommend using an inexpensive third-party registered agent service provider instead of spending vast sums on attorneys who tend to charge more for this service.
Aside from the pricing, a professional service will save you from the need to make your personal data public (name, address, etc) which is a requirement for anyone acting as their own registered agent.
Third-party services will also allow you to travel, use your days of vacation leave, and generally use your time more freely.
Pro tip: Some online LLC formation services include free registered agent subscriptions in their formation plans. You can go with either IncFile or ZenBusiness if you want to get up to a year of free registered agent service.
3. File With Your State
Now that you’ve made the first concrete steps towards establishing your company, it’s time to start compiling the actual paperwork that goes into LLC formation.
The key piece of documentation involved in this process is called Articles of Organization, though some states refer to it as the Certificate of Organization or Certificate of Formation.
Though it might sound intimidating at first, the articles are actually fairly straightforward as far as state forms go. They must include relevant information about your LLC and other legal bodies that work in conjunction with it.
Keep in mind that the nature of required information, as well as the form’s filing procedure, depends on the state. Still, most of these state forms share a few basic points:
- Entity’s name
- Entity’s physical address
- Entity’s field of operation
- Registered agent information
- Information pertaining to company owners/members (varies by state)
The average filing procedure includes downloading the forms from your Secretary of State website and following the online instructions provided by the state.
These templates should then be submitted to your SOS office via post, though some states allow other types of submission such as online filing and fax or in-person delivery.
Certain states even make online submission compulsory. All in all, be aware of your state’s guidelines to avoid rejection and the need to resubmit the articles. After all, nobody likes starting from scratch.
Those who do actually prefer drafting their own operational guidelines instead of following a template could compose and file their own forms.
It should be noted that this course of action can be risky, and if you don’t include certain mandatory points, your articles may be rejected by the state.
And if you want to go through with this anyway, don’t be afraid to keep it simple—there is no need to use flowery language, instead try to focus on the clarity of your writing.
4. Get an EIN
Taxation is an integral part of all forms of business whether you operate on federal or local levels. Depending on your business type and the state of primary operation, you may be expected to pay more than just your basic federal tax.
This is where an Employer Identification Number (EIN) comes in. It acts as your company’s federal tax identification number similar to the way you use your Social Security Number for personal taxation and tax returns.
Acquiring an EIN is vital for business formation and management in cases of most entities with the exception of sole proprietorships. Aside from taxation, this ID number is used for opening business bank accounts, handling specific transactions, hiring employees, receiving permits, applying for licenses, and other operations.
An EIN will help your company remain compliant with local and federal laws as well as protect your personal data since in the absence of a federal tax ID you would be required to use your SSN instead.
The process of obtaining an EIN is not too complicated. You can do so by applying online via the IRS website or by printing out and mailing the physical form provided by the IRS. Online applications are processed immediately, so you are likely to receive your number faster than by sending your forms through post.
5. Create an Operating Agreement
The purpose of an operating agreement is to provide the necessary structure for your LLC such as outlining operational procedures and managerial duties, detailing rules of conduct for owners and their shares, clearly separating your company’s finances from your personal assets and much more.
Even though this step is not mandatory in most states, drafting this document will be of great help when dealing with potential financial concerns, inter-company conflicts, and legal actions in the future.
Some forms of business may require industry-specific details, but operating agreement basics remain the same for all companies across the board. They include:
- Owner/member information and their titles;
- Duties, rules of conduct, voting rights, and shares of all owners/members;
- Entity’s operational layout (owner- or manager-run);
- Procedures for profit distribution or compensation of losses;
- Accepted protocol for ownership/membership board meeting and voting;
- Buy-sell provisions instructions when replacing members or accepting new ones;
- Company dissolution plans and instructions for asset allocation.
To reiterate, an operating agreement is an internal document meant to establish clear boundaries for all owners and define the rules as per the shareholder agreement. While not a necessary requirement, the document will only make the operation of your LLC smoother and minimize internal disputes.
The agreement can benefit even sole proprietorships, primarily supporting the entity’s legal standing in the court of law as well as separating the entity’s assets from your personal ones. All in all, creating such an agreement can only be beneficial in the long run.
6. Create a Financial Infrastructure
A properly planned out infrastructure is a cornerstone of your company’s financial activity. Establishing proper channels with reliable banks and other structures is necessary for the correct and timely filing of your taxes and general transactions with other companies.
A good starting point would be opening a business bank account for your company to isolate your personal accounts from those of your business. Not to mention that a company with its own account brings out a certain degree of trust with potential customers and partners.
After all, issuing checks or making money transfers from under your company’s name and using company cards instead of your personal names debit cards are often perceived as more professional conduct.
After you’ve established a bank account for your company, now it’s time to think of how you will be handling your accounting. Most modern companies use professional accounting software even if you employ accounting staff or contract other CPAs.
And if you don’t plan on hiring an accountant in near future, it’s best to have the support of reputable accounting software instead of relying on your spreadsheet skills. This way you won’t miss any transactions and won’t have odd numbers at the end of your fiscal year.
Plus it’s possible to find software that’s both user-friendly and efficient, saving you time and the need to do any complex math regarding your salaries, purchases, fees, and taxes.
Speaking of taxes, if you have always struggled with filing your personal returns, dealing with your company taxes is bound to be even more convoluted. Accounting software can be of major help in this as well, helping you keep track of all transactions and producing accurate calculations for the fiscal year.
7. Handle Taxes, Licenses, and Permits
The final step touches primarily on LLC maintenance details and other related operational aspects. If you want to ensure your LLC is compliant and its activities do not risk violating the law, pay close attention to the requirements of your state’s related licensing boards.
Regardless of their field, most entities will be asked to obtain at least one permit and/or license to operate in the chosen state. The tricky part is to figure out what types of licenses your business might need based on its area of engagement.
It won’t be enough to get licensed only in one jurisdiction since federal, county, and municipal licensing is controlled by different governmental bodies each with its own set of requirements. Most state websites offer relevant information regarding local licensing, though in some cases you might have to contact specific licensing boards using your own judgement.
It’s easier to keep a list of all licenses and permits your business requires to make the application process more organized. The next step is to obtain the necessary forms (usually found on the state’s website), complete them according to guidelines, and send them to your Secretary of State’s office via post. The average processing time for general licenses is about a week, so you will probably receive the approved documents within that time.
As for your LLC taxes, they are determined based on the company’s structure and field of operation. Limited companies run by a single owner are listed as sole proprietorships, meaning it goes in your personal tax return on Schedule C via Form 1040.
LLCs owned by more than one individual are listed as partnerships, so every shareholder is required to file their return separately via Form 1065 on Schedule K-1.
Additionally, your company may be subject to specific taxation based on the type of goods or services it provides. If you have people on a regular payroll, provide taxable services or distribute taxable goods, your company may need to apply for relevant taxes in your jurisdiction.
Performing Regular Maintenance
Completing the formation process only marks the beginning of your future responsibilities. The success of your LLC is determined by the consistency of your actions that go into maintaining the company, from adhering to filing deadlines to overseeing other departments.
It’s true that certain documentation isn’t subject to renewal, such as the company’s articles of organization, but there are forms that have to be filed, reviewed or amended yearly or sometimes biannually.
Annual reports, for instance, are part of the compliance rules enforced by most states. Some jurisdictions also require Certificates of Good Standing to determine company viability.
The main purpose of drafting annual reports is to inform the relevant governmental body of any changes that may have occurred in your company since the previous submission.
Most of the time your annual reports won’t be covering any structural changes, but it is still mandatory to submit one since you need to inform the state of the company’s financial status. The document itself is fairly straightforward, containing information about the LLC and its members, including:
- Entity’s physical address
- Personal information of at least one owner/member
- Ownership status (domestic/foreign)
- Registered agent info
- Financial statements
- Performance report
- Future objectives etc
The final submission date for these reports varies depending on the state, plus some local authorities require biennial reporting instead of annual while select others allow you to skip this step. All information regarding annual reporting can be found on your state’s website.
Certificates of Good Standing
As the name suggests, a Certificate of Good Standing is designed to determine the standing of the company. To put it simply, it’s an indication of how well your company has adhered to the filing requirements of the state, be it reports or mandatory fees.
There are quite a few instances in which you may need this certificate issued by the state, mostly financial in nature. Some of them are:
- Seeking to undertake loans on behalf of your company;
- Obtaining or renewing licenses and/or permits;
- Providing evidence of good standing for potential partners or investors;
- Transferring or receiving large sums and similar banking operations
- Expanding the company to other states;
- Selling stocks in the company;
- Selling the company.
Given the nature of this certificate, there is no way to predict when you might need one in order to complete potential deals. And since you can’t plan too far ahead, it’s just another incentive for you to keep your business in order at all times.
Forming your own LLC is not as terrifying a task as it may seem at first. While it involves plenty of paperwork, and you will definitely need to put in a fair number of hours into the process, it’s not so convoluted when you break it down into simple steps.
If you still mean to proceed on your own or with your business partner, be sure to seek additional information provided by state websites and legal experts online. Alternatively, you can use this article as an introductory guide to understanding what goes into this process before you can hire professional services.
Those interested in seeking professional assistance can check out the list of good LLC services through our website where we examine the best 7 options currently available.
At the end of the day, creating a company without outside help is more financially-appealing and suits people who prefer to be more involved, but it’s no less respectable to hire professional services who can take a significant part of the work upon themselves.