While you were probably misled to believe that forming an LLC was complicated, it’s actually very easy to do. Did you know that nearly half of all Americans own or work for a small business? And, if you’re one of the millions of people who own their own business, you have a lot of decisions to make.
What’s the best way to organize all of my receipts? How do I find good employees? The challenges of owning your own small business can be overwhelming at times.
One of the biggest challenges small business owners face is when and how to file for an LLC. Turning your small side project into a legal entity such as an LLC is a big step, but a necessary one, if your business is growing fast or you want to add a layer of legal protection.
In this article, we’ll discuss the eight steps to forming an LLC, so you can rest assured that you know how to handle the situation. Of course, there are other legal entities you could consider too, so check with a legal adviser if you’d prefer to form an S Corp, C Corp, or Non-Profit instead.
Now then, let’s get started!
Eight Steps to Forming an LLC
The eight steps to forming an LLC are:
- Determine where to file your LLC
- Choose an LLC name
- Declare a Registered Agent
- File Articles of Incorporation
- Define a Management Structure
- Choose the Ownership Percentages
- Pay Your Filing Fees
- File for an EIN
Let’s dive into each of these steps below, so that you can get your LLC formed with ease and simplicity.
1. Determine Where to File Your LLC
Before you start putting pen to paper, you have to determine where you need file for your LLC.
This is most often done with the Secretary of State in the state where you plan to do business.
It’s worth noting that you can not file an LLC with the federal government. So if you plan on doing business in multiple states, you may have to file for an LLC in each state individually, as well as pay a few different fees.
Research the laws and regulations for each state you plan to do business in to determine what you need to do before starting the process.
2. Choose an LLC Name
Next, it’s time to come up with an LLC name. This doesn’t have to be an exact copy of your business name itself. Instead, you can go with something else and then use a Doing Business As (DBA) name for your current business name.
It is a good idea to do a bit of trademark searching before deciding on an LLC name. Within the United States, you can do this online at the U.S. Patent and Trademark Office (USPTO).
Your State Corporation Commission website will usually have an “Entity Search” tool that you can use as well. As an example, here is the Entity Search for the state of Virginia.
It is also extremely helpful to do an online (Google) search for your proposed business name to see if it already exists. This will protect you legally, as well as let you determine if you can get the URL and social media handles that you want.
Failure to do so could lead to legal trouble down the line, which of course isn’t something you want to have to deal with.
Your best option for this step is to be creative, decisive and to proceed only after ensuring your choice is unique.
3. Declare a Registered Agent (It Can Be You!)
Before you sit down and start filling out paperwork, you need to determine who will be the registered agent for your LLC.
A registered agent is simply the person or people who are legally allowed to receive paperwork related to your LLC.
The registered agent needs to have a physical address where they will be present and able to receive physical mail related to the LLC.
For many early stage businesses, you’ll elect to serve as your own registered agent, but in the case of home-based businesses, the downside of this is that you’ll have to make your address public.
Other criteria you’ll have to meet in order to be your LLC’s registered agent is to:
- Live in the state where your LLC is registered
- Receive documents related to your LLC, such as lawsuit filings and legal notices, government documents, tax forms, and annual reports
- Keep Articles of Organization, LLC operating agreements, tax returns, and other necessary documents on file
If you don’t want to be your own registered agent, you can hire another company to do it for a small annual fee, usually a hundred or so dollars per year. Remember, only the agent can deal with and receive paperwork, so keep that information in mind.
While it’s not necessary, some people prefer to have two (or more) registered agents for an LLC. That way if one agent is gone for a specific amount of time, the other agent can still deal with business matters accordingly.
4. File the Articles of Organization
Now, it’s time to file your Articles of Organization. While the elements that need to be included can vary slightly by state, this paperwork isn’t difficult, so don’t be overwhelmed.
This is usually a short document that describes:
- The name and address of your LLC
- The name and address of your registered agent (if you’re the registered agent, it will be the same info as above)
- Effective date of your LLC formation
- Type of management structure, such as a member-managed or manager-managed LLC
This is also where you add other member’s information to the LLC so that they’re on record as being involved with the company. You may be asked to provide a statement of purpose, but feel free to keep it short and simple.
Best of all, it’s likely that your state government provides a ready-to-go document you can use.
For example, in my current state of Virginia, you can use this Public Form to create your Articles of Incorporation: http://www.scc.virginia.gov/publicforms/322/llc1011.pdf
Alternatively, you can create this document using a website like Legal Zoom that will do it for you at a low cost.
Finally, you could Google the term [“Articles of Incorporation” + “Your State”] to find a template. But, if you use this approach, please have a lawyer in your state review your work to ensure your LLC is valid.
This paperwork will get filed with your Secretary of State by mailing it or delivering it to them by courier.
As an example, in my state of Virginia, you simply mail this document to the address listed on this form: State Corporation Commission, Clerk’s Office, PO Box 1197, Richmond, VA 23218-1197
5. Define a Management Structure
Step five is to choose a management structure, which is a very easy step because there are only two choices for LLCs!
These choices are:
- Member-managed LLCs, which are the most common:
As you’ve probably already guessed, member-managed LLCs are LLCs that are managed by the members of the LLC party themselves.
- Manager-managed LLCs, which are less common:
These are LLCs that are managed by appointed managers that have nothing to do with the LLC party or registered agents.
If you’re a small company, you’ll likely decide to be a member-managed LLC, so that you can control the entity.
6. Choose the Ownership Percentages
If you’re forming an LLC for yourself, this step is simple: You get 100% ownership!
However, if more people will be involved, then you’ll have to decide your respective ownership percentages. This is important for legal reasons, especially when it comes to making major decisions, because the majority owner will have the final say.
In the state where I live, Virginia, you are not allowed to be 50/50 owners of an LLC, so it’s not uncommon to see LLC’s with a 51/49 percentage ownership structure. Thus, it can be a major decision to decide in a partnership which person gets the 51%.
Also, if you ever sell your LLC, the money (profits) will be split according to the ownership percentages.
7. Pay Your Filing Fees
The last and final step to forming an LLC is to pay your LLC filing fees to make everything official.
Again, this is usually done with the Secretary of State in the state in which you are forming your LLC.
In the State of Virginia where I live, the filing fee is only $100 and there is an annual renewal cost of $50.
However, LLC filing costs vary from state-to-state, ranging from a low of $50 to a high of $500. This site lists LLC filing fees by state so that you can check what you’ll owe.
8. File for an Employer Identification Number (EIN)
Finally, you’ll want to file for an Employer Identification Number (EIN), so that your newly formed LLC can pay its taxes to the the United States Internal Revenue Service (IRS).
Don’t let anyone tell you this is complicated, because it is not.
You simply go here and apply online for your EIN.
After completing that paperwork, the IRS will issue you an EIN immediately. You can then download, save, and print your EIN confirmation notice.
The Basic Steps to Forming an LLC
Well, there you have it! Those are the eight basic steps to forming an LLC for your business.
The paperwork itself isn’t complicated and shouldn’t take long to complete. Determine where you need to file, what name you want to file under, who your registered agents will be, and above all else, make sure you have your ownership percentages figured out.
If you’ve learned nothing else from this article, please find the Secretary of State website for the state in which you want to form your LLC and look through their LLC formation paperwork. It is often simple to complete and return by mail.
If you found anything in this article overwhelming and simply want low-cost professional help with setting up an LLC, I’d recommend that you use LegalZoom for your LLC formation.
LegalZoom is an “online legal tech company” that helps people create legal documents without necessarily having to hire a lawyer. I have no financial relationship with them, but I do like and use their services.
Do you own a small business? Work from home? Check out our article on how to claim a home office deduction!