How to Set Up an LLC: 7 Important Steps for Business Owners

Updated: Sept. 19, 2024

Creating a limited liability company (LLC) is the best way to launch your small business with comprehensive asset protection. An LLC is a legal business entity with its own Employer Identification Number (EIN) from the IRS, separating business debts and lawsuits from its owners and personal assets. It can be a single-member or a multi-member business.

While LLC formation may seem rather daunting, there’s a succinct process of steps to follow to ensure proper formation and compliance. Below, we show you how to start an LLC.

Table of Contents

• Step #1: Choose Where to Form Your LLC
• Step #2: Name Your LLC
  • Helpful Tips for Naming Your LLC
• Step #3: Hire a Registered Agent
  • Why Hire an Outside Registered Agent?
• Step #4: File Your Articles of Organization
• Step #5: Create an Operating Agreement
• Step #6: Obtain Federal & State Tax ID Numbers
• Step #7: Open a Business Bank Account
• The Different Types of LLCs to Consider
• Why Form an LLC?
• In Conclusion

Step #1: Choose Where to Form Your LLC

Establishing an LLC starts with choosing where to form it. This may seem like a simple first decision, but it’s the most important step to ensuring your business entity offers the protection you want.

Every state has different laws, formation documents, and levels of protection offered to businesses. It’s important to research the different guidelines and advantages of forming LLCs in various states while considering the needs of your business and future growth plans. Start thinking about the following:

• Asset and personal liability protection
• Taxes
• Privacy
• Filing fees
• Requirements for filing

Once you’ve chosen the best place for your business to incorporate, you’re ready to take the next step.

Step #2: Name Your LLC

The next step in LLC formation involves naming your business. Remember, your LLC’s name must be original and unique. Many states don’t allow businesses to share names, but you can trademark your company name to ensure others can’t use it.

Before opening your LLC, you should make a distinct name for it. Your business name represents more than just a name; it’s also the start of building your brand.

Your brand should appeal to your target audience and can tell any story that you like. Whether it’s a family name, a humorous play on words, or a completely made-up word, naming your LLC is your opportunity to create something that truly represents your vision.

Helpful Tips for Naming Your LLC

Since your business name must be unique, it’s smart to have backup options with variations or abbreviations in case your preferred name is taken. You can search for name availability via your state’s business portal. Active entity names cannot be reused.

We also recommend a litmus test. Consider factors like domain availability if you plan to create a website.

Additionally, check competitor names and ensure your business name isn’t similar. An online search or review of social media can reveal any negative press or feedback.

Once you’ve aligned these factors, you’re ready to file your business entity!

Step #3: Hire a Registered Agent

The best way to start your LLC filing process is with a registered agent.

LLC owners hire registered agents to receive and send documents such as legal notices, state filings, business licenses, and annual reports on their behalf. They must live in your home state or be a corporation authorized to transact business there. This means an LLC member can act as the company’s registered agent; however, the business may not act as its own registered agent.

Why Hire an Outside Registered Agent?

You may wonder why you need an outside designated registered agent service when you can simply be your own. Hiring an outside registered agent offers many benefits:

• As a business owner, you can work on your own schedule without being tied to the typical operating hours of 9 am to 5 pm. Your registered agent will be available during these hours to ensure that important legal documents, tax returns, and service of process are received.
• Having a registered agent allows you to form your LLC outside of your current state of residence.  For instance, if you live in California but want to utilize Nevada’s generous business laws, you can start an LLC in Nevada and then use a registered agent for all correspondence and tax purposes.
• If your business is operating without a physical location (such as an online business), using a registered agent will give you a business location while keeping your personal residence private.
• If your growth plan includes expansion to multiple states, a registered agent can give you a physical presence in each state.
• Registered agents can also help you keep copies of your corporate documents and remind you of state filing deadlines to ensure you stay in compliance.

Step #4: File Your Articles of Organization

Now, it’s time to file those state documents that establish your legal LLC. To form an LLC in your state, you’ll need to file articles of organization. This document provides basic information about your new business and defines how it operates.

An LLC’s articles of organization usually contain the following information:

• The LLC’s name and address
• The type of business the LLC plans to conduct
• The name and address of the LLC’s registered agent
• The managers and members of the LLC

Once your articles of organization are written and signed, they should be submitted to the appropriate governing office. The document is typically filed with the Secretary of State’s office; however, some states have other agencies that oversee business formation. Once approved, your LLC’s articles of organization will establish it as a business entity registered with the state.

Step #5: Create an Operating Agreement

The next key step for an LLC owner is creating an operating agreement that defines member roles, daily responsibilities, and funding expectations. It’s your business, so you decide how it will operate.

The agreement should also cover accounting tasks, naming who manages finances, bank accounts, credit cards, payroll, and profit distribution. It can outline management structure, check signers, and fiscal year setup.

Additionally, it’s a good place to address member withdrawal and dissolution, detailing procedures and payment of shares. If dissolution is needed, you can outline the process and profit distribution in the agreement.

If your LLC needs to be dissolved, you can outline the process, responsibilities, and distribution of profits in its operating agreement.

Step #6: Obtain Federal & State Tax ID Numbers

Typically, LLCs are required to pay taxes at the federal and state level.

If your business will manage employees, it must apply for an EIN. This number can be obtained from the IRS website for free. Alternatively, LLC formation service providers can apply for an EIN on your LLC’s behalf.

Newly formed LLCs can also get tax ID numbers from their states, but some areas may direct these businesses to state tax agencies to obtain one.

Step #7: Open a Business Bank Account

Forming an LLC allows you to separate your business and personal assets, including your finances.

Establishing separation between your finances increases personal asset protection. Setting up a business bank account is a good way to do so, with your LLC’s income and expenses remitted to it. Furthermore, it can help with tax preparation, building business credit, and obtaining funds through loans or government grants.

Banks will ask you to provide specific business information when opening a business bank account. Generally, they’ll need your EIN, your LLC’s formation documents (articles of organization, certificate of formation, or similar), and other necessary information and paperwork.

The Different Types of LLCs to Consider

LLCs are divided into multiple types, with some recognized by all 50 states and others recognized by certain states. The most common types of LLCs created by business owners include:

• Domestic LLCs: These LLCs are formed and run in only one state. They’re the most popular choice for aspiring entrepreneurs and are expected to follow specific state laws and regulations.

• Foreign LLCs: Foreign LLCs are established in one state and operate in one or more states outside of its main location.

• Professional LLCs: These LLCs are formed by licensed professionals such as doctors, lawyers, and accountants. Professional LLCs and domestic LLCs share the same conditions for formation, although the former has additional requirements and restrictions associated with it.

• Nonprofit LLCs: Nonprofit LLCs are corporations established for charity work or public benefit activities.

• Low-Profit LLCs (L3Cs): L3Cs have the significant characteristics of traditional and nonprofit LLCs. They can only be formed in 15 states and reduce one’s liability, but when established, L3Cs must pursue a social mission.

• Series LLCs: These LLCs are comprised of a parent or “umbrella” LLC and the single or multiple LLCs under it. It increases liability protection as each sub-LLC runs separately from the parent entity.

• Anonymous LLCs: Anonymous LLCs combine the benefits of traditional LLCs with stronger privacy protection. They’re ideal for owners of high-risk assets who want to stay anonymous.

• Restricted LLCs: These Nevada-based LLCs are exempt from taxes and profit distribution for 10 years after formation. Restricted LLCs let owners transfer assets to a third party with no taxes paid and limited liability for the transferred assets.

Why Form an LLC?

Starting an LLC offers several advantages.

At its core, an LLC is a separate legal entity that has specific rights, responsibilities, and liabilities. It also prevents creditors from seizing an LLC member’s assets to settle the company’s debts and fulfill its obligations unless they obtain a charging order.

Beyond the aforementioned benefits, LLC formation offers flexibility. State law acknowledges that LLC members can run the business however they desire. But, in some cases, an LLC’s operating agreement, articles of organization, or both documents may permit managers to oversee business operations. Members or non-members can handle an LLC’s daily operations.

In Conclusion

Using this step-by-step guide will help you successfully establish a limited liability company, ensuring compliance and protection for you and your family.

Incorporating is the most powerful thing you can do to legitimize your startup. And at IncAuthority.com, our setup LLC services are 100% free. Always. So, don’t wait. Form your new LLC today and enjoy the protection due to you and your business under the law.

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• What is an LLC (Limited Liability Company) and How Does it Work?
• How to Start a Corporation