In this guide, we will walk you through every step of forming an LLC so you can do this yourself without hiring an expensive lawyer, CPA, or spending more money than you have to. We will also show you some expensive mistakes people commonly make that can cost thousands in extra taxes, create legal issues, and even reveal your personal address to the entire internet without you realizing it.
**Step 1: Choose the Best State to Create Your LLC**
90% of the time, it is best to form your LLC in the state where your business operates. Most states require businesses to register where they conduct business anyway. It is even better if that happens to be the state you live in because that simplifies your taxes and annual filing requirements.
Most LLCs are taxed as pass-through entities, meaning 100% of your LLC business income is not taxed at the entity level. Instead, it passes through to the owners, who report their share on their personal tax return.
For example, if you live in California but someone told you to create an LLC in Wyoming because they have no state income tax, it would not matter if you are taxed as a pass-through entity. All that income will be taxed to you personally based on the state where you live.
There are legitimate reasons for forming an LLC in other states, such as privacy protections. States like Wyoming, Delaware, and Nevada do not require disclosure of LLC owners, whereas most states make that information publicly available. But generally, it is best to form your LLC in the state where you conduct business.
**Step 2: Choose a Name for Your LLC**
The name you choose must be unique and cannot already be in use in your state. Check your Secretary of State website and search the business name you have in mind.
Beyond choosing a unique name, select a marketable business name that reflects the nature of your business. Your state may also require certain designations like "LLC" or "Limited Liability Company" in the name, so check those requirements.
**Step 3: Appoint a Registered Agent**
Most states require you to appoint a registered agent when forming your LLC. A registered agent is a person or entity authorized to accept legal documents on behalf of your LLC. To qualify, your agent must have a physical address in the state where you are forming the LLC.
You can personally serve as your own registered agent, but be warned: your information will become public record, meaning your personal name and physical address will be publicly available. If that is your home address, be very careful.
For more privacy protection, you can appoint a third-party service to keep your personal information private.
**Step 4: File Articles of Organization**
This legal document officially registers your business as an LLC in your state. Most states provide a standard form requiring basic information like your LLC name, primary address, business purpose, how it is managed, and the organizer.
Here is an important privacy consideration: the person who registers your LLC will be listed as the organizer. If that is you, your name becomes public record and its association with this LLC means someone could search your name and see all the LLCs you own.
If you do not want that visibility, have a third party register your LLC for you. Many registered agent services also provide this.
**Step 5: Create an Operating Agreement**
This private document outlines how your business is structured and operates. Some states require it, some do not, but this document is usually not public record and should be kept internally as a binding legal agreement.
The operating agreement typically outlines ownership structure, who manages the LLC, and how profits and losses are distributed.
If you are a single-member LLC, this may be straightforward. However, if you have partners, carefully consider the terms you include. For example, clauses around what happens when disputes arise, what happens if a partner wants to quit while another continues working, or what happens if someone dies.
Forming a partnership is like going into a marriage. Having agreements in place prevents issues that may arise in the future. Seek legal advice from a professional if needed.
**Step 6: Submit Your LLC Registration**
At this point, you should have enough information to submit your LLC filing directly through your Secretary of State website or through a third-party vendor.
Most states charge a filing fee, which could be as little as $50 or as high as $500 depending on the state. Creating an LLC is not technically free, but you can avoid many other costs if you do not need additional services.
**Step 7: Obtain Your EIN**
An EIN (Employer Identification Number) is like a Social Security number for your LLC. It is a unique number specific to your LLC that you will need for opening a business bank account and filing taxes.
Good news: you can apply for this number for free on the IRS website. Apply once you have official confirmation that your LLC has been registered with your state.
**Step 8: Make Your LLC Tax Election with the IRS**
One of the largest tax benefits of having an LLC is choosing how you want it to be taxed. You have 75 days from the date your LLC was formed to elect your tax classification.
Options include disregarded entity, S corporation, partnership, or C corporation. By default, your LLC will be taxed as a disregarded entity, which is usually best if your business is not earning much income.
If you expect to earn more than about $50,000 in profits, you should consider making an election. Switching your tax classification could save you thousands of dollars in taxes. Contact a tax professional for guidance on your specific situation.
**Step 9: Open a Business Bank Account**
This is extremely important for both legal and tax reasons.
From a legal standpoint, you can lose your liability protection if you mix personal assets with business assets. Creating a business bank account avoids commingling.
From a tax perspective, you want clean business records. Showing the IRS that personal expenses are mixed with business records is problematic. If the IRS finds you are commingling funds, they may disallow business deductions, leaving you with a higher tax bill plus interest and penalties.
Open a business bank account with whichever bank you are comfortable with. Most major banks offer business accounts and can extend additional resources like financing if needed.
**Step 10: Maintain LLC Compliance**
Once your LLC is formed, keep it in good standing. From a legal standpoint, most LLCs must file annual reports with their state to renew registration. If you miss these filings, your LLC could expire and be dissolved, resulting in loss of legal protection.
From a tax perspective, you are generally required to file a tax return if your LLC earns income. Filing requirements vary based on income type and how your LLC is taxed:
- Single-member LLCs report business income on Schedule C, due by April 15th
- Multi-member LLCs file Form 1065 by March 15th
- S corporations file Form 1120-S by March 15th
- C corporations file Form 1120, typically due April 15th
Missing any of these requirements can result in massive penalties, interest, and other issues that could jeopardize your LLC.
**Ready to Get Started?**
Following these steps will help you enjoy the legal protection and tax benefits that LLCs provide. If you need guidance on tax elections, business structure, or estate planning to protect your new business, contact JKJ Enterprises today for a free consultation.
