Last Updated: February 16, 2024, 1:55 pm by TRUiC Team


Forming an LLC: A Comprehensive Step-by-Step Guide

Ch2. 05

Chapter 2.05 guides you through the specific steps required to form an LLC, an essential legal structure for many small businesses. You'll learn about choosing your state, finalizing your business name, designating a registered agent, filing formation documents, drafting an operating agreement, and obtaining an Employer Identification Number (EIN).

This video is part of the free Small Business Startup Course designed to help walk you through the entire process of business formation from idea to launch. 

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Key Steps in Forming an LLC

In this section of Chapter 2.05, we break down the six key steps to forming an LLC. You'll learn about the importance of each step, from choosing your state and finalizing a business name to obtaining your EIN, ensuring you're fully equipped to navigate this process.

Forming an LLC: A Comprehensive Step-by-Step Guide – Transcript

So you're looking to take your business legit. You've met with your accountant and anyone you're starting your business with, and you've decided that forming an LLC is the best option for you. But what are the actual steps that you have to take in order to make it official? Not to worry. We'll be covering that in this video. 

Hey everybody, Will Scheren from Small Business Startup Guide by TRUiC. This video is part of a larger course dedicated to helping small business owners cut through the noise and get to the essentials of starting and operating their business. That sounds like it would be really useful to you, be sure to like and subscribe. 

So how do you form an LLC? The LLC, or limited liability company, is one of the most popular ways to form a business in America. A great option for small businesses and single owners, LLCs are a flexible and simple alternative to corporations. LLCs allow business owners to protect their assets, gain credibility, minimize taxes, and streamline their administrative responsibilities. Best of all, they are easy and inexpensive to start. 

There are two ways to start an LLC: you can either do it yourself or hire a service to do it for you. In this video, we'll take a look at both options and help you decide how to go about forming your own limited liability company. 

LLCs are a formal business structure recognized at that both the state and federal level. Let's start by looking at how to form an LLC on your own. This method will save you some money and doesn't require lots of complicated paperwork, but every state does have different laws and filing processes, so you want to move through the process of starting an LLC by completing the right steps in the right order. 

Generally speaking, there are six steps that you'll need to take in order to start an LLC. You can move through these steps specific to your state at howtostartanllc.com. 

Step 1: choose your state. For most new business owners, the best state to form your LLC in is the one where you conduct business and the one where you live. When an LLC is first formed in its home state, it's known as a domestic LLC in that state. If your business then expands to other states, your domestic LLC will need to be registered as a foreign LLC in each of the states where you have a physical presence or employees. 

There are sometimes benefits to forming your LLC in a state that has business-friendly laws, such as Delaware or Nevada. However, this is rarely worth the extra fees and headache of having to register your LLC in multiple states, so be sure to consult with your accountant concerning which states they think you should register your LLC in. 

Below this video, we've provided a link to our website, where we provide detailed information and tutorial videos for completing the registration for your LLC in any state in the United States. 

Step 2: finalize the name for your business. Earlier in the course, we covered the best practices for naming your business, but every state has its own rules about what names are allowed for LLCs. In general, you'll need to observe these naming guidelines: 

Your name will need to include the phrase “limited liability company” or an abbreviation like “LLC” or “LLC” with a period after each of the letters. 

Restricted words such as “bank,” “attorney,” or “law office” may require additional paperwork and may also require a license professional working with that LLC. 

Your name can not include words that would confuse your LLC with a government agency like “FBI,” “Treasury,” “State Department,” or anything else like that. You also can't use a name that's already been registered. 

To see if your name is available in your state, you'll need to do a name search. This free search is available on your state's Secretary of State website. 

Step 3: you need to nominate a registered agent for your LLC. Depending on your state, a registered agent is sometimes referred to as a registered agent, a statutory agent, or an agent for service of process. 

A registered agent is a person or place of business that acts as a point of contact for your business. They'll send and receive legal paperwork on your behalf. These documents include official correspondence like legal summons and document filings, which your registered agent will receive and forward to you. 

Your registered agent must be a resident in the state that you're doing business in or a company authorized to conduct business in that state. If you nominate an individual, they can be a member of your LLC, including yourself. 

Step 4: to officially become an LLC, you'll need to file formation documents with your Secretary of State. The most common name for this formation document is the Articles of Organization. It's also known in some states as the Certificate of Formation or the Certificate of Organization. Your LLC formation document outlines the organizational structure of your business. 

Articles of Organization require three key pieces of information: 

Your LLC’s unique and legal business name, the name and street address of your registered agent, and who will act as the manager of your LLC. There's two options for this. The first is member-managed, where all members of the LLC manage the business. This is good for small organizations where everyone's involved in day-to-day operations. The second option is manager-managed, where individuals are appointed to manage the LLC. This is appropriate for larger organizations where not everyone is involved in the day-to-day operations of the business. 

You'll also have to pay a fee to the Secretary of State. This fee varies state to state. If you click the link that we mentioned earlier, you can find a video and a web page that provides the exact details for your state, but the price ranges between $40 and $500 with an average price of about $125. 

Once you filed your Articles of Organization and paid the fees, the state will then process your application. Most states take to business days to process an application. If your application is approved, you will have successfully formed an LLC. If the application is not approved, the most common reason is that the LLC didn't follow the naming guidelines. 

Step 5: although not every state requires it, you should create an operating agreement for your business. This will establish ownership terms and membership roles for your LLC. This foundational document is the core of your LLC and will help you maintain your organization as well as further establish your LLC as a separate legal entity. 

There are six main sections of an operating agreement. 

“Organization” outlines when and where the company was created, as well as who the members are and how the ownership is structured. 

“Management and Voting” addresses how the company is managed as well as how the members vote. 

“Capital Contributions” covers which members financially support the LLC and how more funds will be raised in the future. 

“Distributions” covers how the company's profits and losses are shared amongst its members. 

“Membership Changes” describes the process for adding or removing members as well as if and when members can transfer their ownership shares. 

And “Dissolution” explains the circumstances in which the LLC could be dissolved. 

An operating agreement is an internal document, and it often doesn't need to be filed with the state. However, it should be updated every time there's a change in ownership or management at any company. It's there to protect the owners and document what they all agreed to when the company was formed, and it should be amended any time they agree to a change. 

You can download a free operating agreement using the link below this video. 

Step 6: lastly, you'll need to get an Employer Identification Number or EIN from the IRS. Also known as a Federal Tax Identification Number, Your EIN is like a Social Security number for your LLC. An EIN is how the IRS tracks your business for tax purposes, but it's also needed to get a business bank account and to legally hire employees. 

The good news is that EINs are free and can be obtained quickly. And we've provided a link below this video that will take you directly to the web page where you can get an EIN number for your business. 

To recap, these are the six steps for setting up an LLC on your own. One, choose your state. Two, choose your name. Three, nominate a registered agent. Four, file your Articles of Organization. Five, create an operating agreement. And six, get an EIN. 

After completing these steps, you'll have an official LLC recognized that the state and federal level. Congratulations! Now that you understand how to form an LLC, you may have realized that you don't want to do it all yourself. In that case, you may want to consider the second way of forming an LLC, which is hiring a professional service. 

The second way of forming an LLC is nearly identical, with the exception that you're paying someone to do it for you. There are many professional formation services for hire available, and we provide detailed reviews of top providers like Northwest and Legal Zoom on our website.

At TRUiC our mission is to offer all our resources and information for free - but we support our work by using affiliate links, meaning we earn a commission on many of the amazing deals we’ve negotiated for you. Full transparency, Northwest & LegalZoom are such affiliate partners. Links in description below.

With paid services, packages can involve many aspects of business formation, so you'll have to choose based off of your needs and your budget. 

Primarily what a professional service offers, in addition to filing your Articles of Organization, is acting as your registered agent. Registered agent services typically have a fee ranging between $50 and $150 annually. In most situations, however, this is a small price to pay for the convenience and benefits of a professional service. 

A hired registered agent helps you keep your business organized by keeping your business mail separate, and it's available during all normal business hours to accept legal documents and official paperwork on your LLC’s behalf. 

A final and additional benefit to using a professional service is privacy. A professional service will withhold your name and address from your LLCs contact information. 

Now that you've seen the different ways to form your LLC, take some time and consider your options. Every state has different laws, and there are many professional services that are available to help you on your way. Click the links below this video to research further and get more information about how to form an LLC. 

In the next video in the course, we'll be showing you how to complete the formation process if you chose a corporation for how you'd like to legally file your business. 

This video is part of a step-by-step course that gives business owners all of the essential information for starting and operating their business. We've provided a link below this video to give you access to all of the free and discounted business tools that we mentioned in this course. 

Be sure to like and subscribe to get more of this content. We'll see you in the next video, and if you have any questions, let us know.