How to Create a Limited Liability Company (LLC) in 7 Simple Steps
There are many advantages to forming an LLC (Limited Liability Company). For the sole proprietor, this takes your business to the next level by easing your tax burdens and separating your personal finances from your professional finances. Larger businesses with multiple partners will find that an LLC offers these same benefits, but comes with more flexibility than an S Corporation.
Don’t let the legal jargon throw you off—even though many people are intimidated by the idea of forming an LLC, it’s actually a very easy process.
Here’s how to create a Limited Liability Company in seven simple steps:
1. Choose a Business Name
You might think that choosing your business’ name is the easiest part of the entire process, but depending on availability in your state, it can be as difficult as choosing a unique username for an email account. The first step is to come up with a name that accurately reflects your business and that no one in your state has used. Fortunately, most states have online name availability searches.
The next part of the process is to choose a name that doesn’t include words that are restricted by your state—and these can be somewhat surprising. In the state of New York, for instance, you’re free to use obscure or potentially offensive terms, but you can’t use words like “bank,” “insurance,” “lawyer” or “loan.” So make sure to look over your state’s restricted word list before choosing your name.
The final step to choosing a name is to ensuring that the name indicates your company’s status as an LLC. This means that you can’t simply name your consulting business “ABC Consulting.” Instead, you’ll need to choose something like “ABC Consulting Limited” or “ABC Consulting LLC.”
2. File the Articles of Organization
The next step to registering your business as an LLC is to file your articles of organization. This is also sometimes referred to as a “certificate of organization” or a “certificate of formation,” depending on your state. The articles of organization are basic forms that list things like your address, the name of your business, and the names and addresses of your associates, if you have any.
You’ll file this form with the LLC office in your state, which is usually the Secretary of State (Google “Secretary of State [your state]” to find the appropriate website, which is where you can get the necessary forms, too). With the articles of organization, you’ll also need to pay a filing fee—normally around $100, but it can vary from state to state.
3. Create an Operating Agreement
Operating agreements aren’t usually required by the state, but they’re a good idea nonetheless, especially if you’re going into business with partners. These documents should be tailor-made to protect you and the business in case of disputes and other events that can threaten the business’ wellbeing. Here are some of the things your operating agreement should include:
- A clear definition of the business’ financial and management structure
- Each member’s share of the company as well as their rights, duties and voting powers
- Provisions that outline what should happen during a buyout or buy-sell event
- A distribution plan for profits and losses
4. Apply For Your EIN
Whether you had an employer identification number (EIN) or not as a sole proprietor, you’ll need to file for a new EIN when your LLC is formed, even if you don’t plan on hiring employees. If you do hire employees or contractors, you’ll need to furnish your EIN on their W2s or 1099s. If you’re in business alone, you’ll still need the EIN number to apply for certain licenses and permits, and to sign up for business bank accounts and lines of credit. Apply for your employer identification number here.
5. Publish a Notice of Your New LLC
Once your business is formally registered as an LLC, there are several smaller tasks that may need your attention. A few states (Arizona, Georgia, Nebraska, New York and Pennsylvania) require you to announce your business to the public by publishing a notice in a local newspaper and then filing an “affidavit of publication” with your state’s LLC filing office. Each state has different requirements (like Nevada requires only foreign businesses to announce themselves in this way), so make sure to read up about yours in the link above. Check with your state’s
business filing office to learn more about the specifics of announcing your new LLC.
6. Open a New Business Bank Account
You’ll also need to use your EIN number to open a new bank account for your business. This is an extremely important step because by separating your business finances from your personal finances, you’ll be protecting your personal assets against any financial liabilities that may be incurred by the business.
7. Get Your License and Permits
The last thing that you’ll need to do is apply for any applicable business licenses or permits. This varies by industry. Here are some of the things that may be required by your state depending on your business:
- Professional licenses (typically for service industries like electricians or auto mechanics)
- A vendor’s license or reseller’s permit
- Health department permits
- Zoning permits
Keep in mind that that these permits may be required by a variety of different agencies at different levels. For instance, your municipality may not require you to hold professional licenses, but your state might. Be sure to check with local, state and federal agencies before you officially open up for business.
Remember that LLC status isn’t something you can forget about once you’ve finished the initial paperwork. LLCs need to be renewed, which means that each year, you’ll need to file a report (and pay a small fee) to the governing agency in your state in order to maintain your status. With these seven steps completed, your company will be formally recognized as an LLC and you can start hiring employees and building your business.