I would be a rich woman if I requested a dollar from everyone that asked me if it was time to become an LLC. (Here’s the post that explains my secret to knowing when it’s time.)
In making this decision, you should do research and answer these 13 questions. But there comes a point when you just need to pull the trigger. And when you get to that point, you need to know how to create an LLC.
The process of creating an LLC isn’t hard. You have to:
- pick your LLC name
- mail forms to your state
- appoint an agent of service of process
- publish your LLC name (in some states)
- create an operating agreement
- pay your franchise privilege tax (in some states)
- comply with any other tax or regulatory requirements
But doing each of these seven steps correctly is the difference between having an LLC and having an expensive piece of paper.
What do I mean?
When you are a sole proprietorship or a partnership if anything goes wrong in your business, your personal assets are affected.
But once you start to accumulate personal assets you don’t want to risk those if something goes wrong in your business. And so by creating an LLC, those assets become off-limits. LLCs effectively put a fence between your personal life and your business life. (Watch this 7-minute video if you want to know more.)
But if you don’t do these steps right (or fail to keep your LLC legit after it’s created), then you weaken your fence. And make it easy for lawyers to knock it down when anything goes wrong. Which means, you might have an LLC on paper, but it carries no legal weight. And when that happens, your personal assets are back on the table.
This post guides you through the seven steps that you’ll need to complete to form your LLC. (Plus a bonus eighth step, because you might need to prepare and submit documents within the first few months. And I couldn’t leave you hanging.)
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Step 1: Choose a name
The rules on this vary slightly state to state, but typically the name:
- cannot be the same as another LLC on file in that state
- must end with an LLC designator, e.g. LLC, L.L.C., or Limited Liability Company
- cannot include prohibited words, e.g. bank, insurance, corporation, or city (these vary state to state)
To find the rules in your state, you’ll want to check the website of the LLC division. This is usually part of the Department of Corporations or Secretary of State.
Once you’ve chosen a name that meets the rules, you have to make sure that it hasn’t already been taken in your state. To do this, many states will let you search their online database for free. If not, they’ll have a process where you can search your desired name for a small fee.
If you need time to file your documents, and you are concerned that someone will take your name, most states have a solution. And will allow you to reserve the name for a period of time for a small fee, while you prepare your filing documents.
While the requirements of your state might be fairly simple to comply with, you must also make sure that your name won’t infringe on another company’s trademark.
For example, I could probably form Etsy, LLC with my state officials. But this won’t stop Etsy’s lawyers from sending me a cease and desist letter when I open a store featuring local handmade goods. And that’s because the name that I picked, could confuse consumers and infringe on Etsy’s trademark.
To check the availability of a trademark, you need to perform a detailed trademark search. You can find out my step-by-step process here.
Step 2: File articles of organization
The first document you need to file with your state officials is often called “articles of organization.” Some states call this document a “certificate of formation” or “certificate of organization.” Regardless of the name, this document is what legally creates your LLC in your state.
This document is usually simple. It requires you to enter your LLC’s name, its address, and in some states the names of the owners. (The business owners go by the legalese name of members). If the LLC has more than one member, some states require all the owners to sign this initial filing document.
When you submit this initial filing document, you’ll also have to pay a filing fee. This amount varies, some states like California are $70, but Massachusetts is $500. This filing fee is often listed on your articles of organization or can be found on your state’s website.
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Step 3: Appoint a registered agent
On either your initial filing document or on a later document, you will be required to appoint a “registered agent” or “agent of service of process.” This person will be listed on your LLC’s public record. A registered agent is a person/business that will receive legal paperwork for the LLC. This might be because the LLC is being sued, or a lawsuit is threatened.
Many states will allow one of the members to function as the registered agent. However, not all states do; so check the restrictions in your state before appointing a member as the registered agent.
In many states this address must be a physical address, it can’t be a P.O. Box or a Private Mailbox. If you are in one of these states, and you work from home, an option is a registered agent service. They will allow you to use their address and forward any documents they receive.
Step 4: Publish your LLC name
In a few states to finish creating your LLC, you must publish a legal notice. This is done for several consecutive weeks in a newspaper. Once you’ve done this, the newspaper will give you an “affidavit of publication” to submit.
Step 5: Prepare operating agreement
Even though only a few states require operating agreements, all LLCs should have one.
An operating agreement outlines the rules, boundaries, and expectations between the business owners. It also pre-determines outcomes if specific situations arise. (If it sounds a lot like a contract, that’s because it is!) For example, your operating agreement should spell out:
- what percentage of the business each of you owns
- each owner’s contribution to the business (financial, property, or hard work)
- how profits (and losses) will be shared
- the roles and responsibilities of each of the members
- how owners will vote on business decisions
- who will manage the LLC on a day-to-day basis and what they have to consult with the owners about
- when meetings must be held and what can be voted on at those meetings
- what happens if one of the members dies, becomes disabled, or wants to leave the business
- how an owner can be forced to sell his/her interest in the business
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Enter your email to download your free copy of a checklist that will help you form your LLC on the up and up. You'll also get added to my friends-only email list where I share my favorite tips and tricks.
Step 6: Pay franchise/privilege tax
Once again, if you need to pay this and how much you’ll have to pay varies widely from state to state. In some states, it doesn’t exist, but in California, it’s a minimum of $800. (Even if your LLC loses money!) This isn’t something that should be skipped because not paying can result in fines, penalties, or even cancellation of your LLC.
Step 7: Comply with other tax + regulatory requirements
The last step is to comply with all the permits, taxes, and other regulatory requirements that most businesses need to operate. These might include:
- obtaining a business license
- obtaining a federal employer identification number
- obtaining a seller’s permit
- obtaining a zoning permit
- filing for s-corporation status, if your accountant recommends it
S-corporations
Even though s-corporation includes “corporation”, you don’t have to be a corporation to elect it. s-corporation status (often shortened to s-corp) is a tax designation, not a legal one. And corporations, LLC, and even partnerships can opt to be taxed this way.
There are pros and cons of electing this status, which you need to discuss with your accountant. She will advise you if this election will save you in taxes due each year. Factors that go into this decision might include:
- how much revenue your business generates
- your salary
- your spouse/domestic partner’s income
- what state you live in
If she advises electing this status, you’ll file form 2553 with the IRS. However, you can only file this form for within two windows:
- if you want the election to start this year: up to 2 months and 15 days after the start of each tax year
- if you want the election to start next year: anytime prior to the tax year beginning
For example, if you formed your LLC on August 25, 2016, to elect s-corp status for:
- 2016 the form must be filed no later than November 9, 2016
- 2017 the form can be filed any time prior to March 15, 2017
- 2018 the form can be filed any time prior to March 15, 2018
(Step 8: Follow renewal requirements)
This step isn’t required to create your LLC, but it’s required to keep your LLC. In some states, you must file follow-up forms shortly after your LLC is created. For example, in California, you must file a form within 90 days. In Nevada the next month after creating your LLC, you must file a form. Once again these requirements will be on your state website.
Ready to create an LLC?
Enter your email to download your free copy of a checklist that will help you form your LLC on the up and up. You'll also get added to my friends-only email list where I share my favorite tips and tricks.
Whew! That covers it. Now you have an action plan for how to form your LLC.
