How to Set Up an LLC

We really like the limited liability company (LLC) as a business format for small businesses. But how do you set up an LLC and then maintain it afterwards? What are the mechanics of it?

This is what we’ll focus on, in this article. We’ll take you step-by-step through the process, from filing the paperwork to opening a bank account. We’ll also explain some LLC-specific vocabulary too.

So, let’s start from the beginning, with the paperwork.

How Do I Set Up an LLC?

Starting an LLC is a little more formal than starting a sole proprietorship or a partnership. You’ll have to file some paperwork with your state and pay a higher filing fee than what you’d pay for sole proprietorships or general partnerships.

File the Paperwork with Your State

Technically, you can set up an LLC yourself, but this is not recommended. There are services that can help you file the paperwork for $50 or less, so it’s easier to just use them. If you want to form a multi-member LLC, then you should probably hire a lawyer.

Most people file their LLC in the state they live in, but you don’t have to. This sort of forum shopping is more common with forming corporations. They do it to take advantage of the favorable tax laws in some states.

You’ll need to decide on a few things before you file:

The Name for Your LLC

You have to have decided on the name of your business.

You can’t use the name of an LLC already registered in your state, but sometimes, “different” can mean adding a comma between the name and LLC. The state does not check for trademark issues.

If someone has taken the name you like and you don’t want to use another name, you still have options. You can set up an LLC under a second-choice name and then file an assumed name certificate for your preferred business name.

If you pick this solution, be sure to check for trademark issues. Otherwise, you might be forced to change the name later, after you’ve spent marketing money on it. It’s safest to use a trademark lawyer to clear the name for you.

Organizer

This is the person filing the LLC paperwork for you. It can be you, your lawyer, or someone from the LLC formation service.

If it’s not you, then, once the state approves your paperwork, the Organizer will formally resign (more paperwork), so you get full control of your LLC.

Agent for Service of Process

This is the person/agency to be formally contacted for important notices such as official notices from your state or notices about lawsuits filed against you.

You can be your own agent, but you’ll have to provide a physical address that can be looked-up by the public. If you used a lawyer to set up your LLC, your lawyer might agree to be the agent. You can also hire a company whose business is to be the agent for service of process for companies.

Agent for service of process companies make sense if you run a home or internet based business. Using them means you won’t have process servers notifying you of lawsuits going to your home.

The least expensive of these agent services cost around $100/year. If you use an LLC formation service to set up an LLC, this is often an additional service they offer. For convenience and privacy, we recommend you use one of these services.

Managing Member

You’ll have to settle on a managing member. Depending on your state, you may have to disclose the name of the managing member and their (work) address on the LLC formation document.

For the address of the managing member, if you run a home or internet-based business, you might want to keep your home address private. In some states such as Texas, you can use a PO Box address. Other states won’t allow it. Check the official filing instructions from your state to be sure.

There are also services that can provide you with a corporate address. These services usually cost more than the agent for service of process. But, if you need such a service, they are out there for you to hire.

When is the LLC Officially Formed?

Once you file the paperwork, it’ll take a few days for the paperwork to be approved. Once the paperwork is accepted by the state and you’re given a filing date, your LLC is officially formed.

The filing date is the official birthday of your LLC.

File an Assumed Name Certificate (If Necessary)

Sometimes, and for various reasons such as the LLC name is taken by someone else, you’ll want to file an assumed name certificate to do business under. This is an easy form to fill out, and the filing fee typically doesn’t cost much. For example, in Texas, as of this writing, costs $25 to file the certificate with the Texas Secretary of State.

For LLCs, you’ll probably file the certificate with your state’s secretary of state or equivalent (as opposed to filing with your county). Do an internet search with “assumed name certificate” and the name of your state to double check to be sure.

Get an EIN

Once your LLC paperwork comes down from your state, you’ll need to get an Employer Identification Number (EIN) from the IRS.

You can do this yourself for free by going to the IRS website and filling out the appropriate information. It takes just a few seconds to get the EIN. If you had an EIN before, for your sole proprietorship or for your partnership, you’ll need to apply for a different one for your LLC.

Some LLC formation services will try to upsell you by offering you a more expensive package where they obtain the EIN for you. Don’t be fooled. You can get this yourself for free, in just a few seconds.

Open a Bank Account

Once you have your LLC documents from your state, your EIN, and your assumed name certificate (if you filed one), you can open a bank account under your LLC’s name or the assumed name.

Banks associate EINs with each bank account number, so if you had bank accounts for your sole proprietorship or your partnership, they won’t just switch the name out for you. You’ll have to open new accounts.

Is there a way under the law to simply swap out EINs and keep the account numbers? Maybe. But your bank is a bureaucracy and will do what is most convenient for them. In this case, it is to force you to open a new account.

You Might Need Other Certificates or Licenses

Depending on your line of business, you might need other certificates (e.g., Certificate of Occupancy) or licenses (e.g., electrician’s license) before you can open for business.

But these documents are not related to the forming of an LLC. This is why we won’t cover them in this article.

Maintaining Your LLC

Once you’ve set up your LLC, you’ll typically have to file a simple document or two with the state every year or two. This is to them that you’re still an ongoing business. Sometimes, the document is in the form of taxes. Other times, it’s just a notice to show that your business is still alive.

Often, your state will remind you that it’s time to file the tax or notification. If not, and if you used a LLC filing service, some services will send you a reminder for free too.

In your everyday operations, you’ll have to treat the LLC as a separate entity. This can be as simple as keeping a bank account separate from your personal bank account. You should also keep good financial records to show where the LLC’s money comes from and goes to. Definitely do not use LLC funds for personal purchases.

If you have a multi-member LLC and the members meet from time to time to review the state of the business, having good meeting minutes for such meetings would be a nice touch too.

The LLC is a Great Business Format for a Small Business, so Don’t Be Afraid to Set One Up

If you’ve never owned a business before, setting up an LLC and then maintaining it might sound a little intimidating. Rest assured, though, that this is not the case.

If you use at least an LLC formation service to set up your LLC and then run the business following good accounting practices, you should have no problems setting up and maintaining an LLC. We’re not kidding when we say the LLC is one of the best business formats for a small business. Next, let’s look at how much it costs to set up an LLC. (Hint: It does cost a little, but not too much.)

Interested in starting and running a small business? Here’s the beginning of our step-by-step guide: What to do right after getting that great business idea.

DISCLAIMER: This article does not constitute legal advice. Instead, it contains general information. The information gives you the background you’ll need to hit the ground running when you do go get advice from a lawyer. Only lawyers properly licensed in your state/country are qualified to give you legal advice.