How to Form an LLC

1. Choose Your LLC Management Structure

When forming an LLC, you must choose between two LLC management structures: member-managed or manager-managed. These two styles dictate who in your company may make managerial decisions and enter your LLC into legal contracts. This selection determines whether all owners (members) of an LLC may make management decisions or whether only certain owners or hired managers may make these decisions.

• Member-managed LLCs: Under this management structure all members/owners have authority to make management decisions and enter the LLC into legal contracts. This is the most common structure and is the default in most states. Member-managed LLCs are best for business’s whose members are active participants in the business.
• Manager-managed LLCs: Under this management style one or more designated managers, who may be members or outside individuals, are appointed to handle day-to-day operations. Manager-managed LLCs are often good for company’s whose members are passive investors.

Because some states (like Wyoming) require that you list the names of either your members or your managers, but not both, manager-managed structures are sometimes used to maintain the privacy of the LLC owner.

2. Designate a Registered Agent

A registered agent is simply a person or business that maintains a physical street address in the state your business was formed and agrees to be available during business hours to receive legal notices for your company, like service of process. All states require an LLC to appoint and maintain a registered agent, but in some states like New York, the Secretary of State by default acts as your registered agent.

Some states have a different name for registered agents. For example, they are called a statutory agent in Arizona and Ohio, resident agent in Kansas, Maryland, Massachusetts, Michigan, and Rhode Island, and agent for service of process in California, Louisiana, New York, and West Virginia.

Three benefits of hiring a commercial registered agent:

A commercial registered agent is a company like Northwest Registered Agent that serves different clients instead of being a registered agent for just one company.

• Privacy. When you hire a commercial registered agent, much of your own information can be left out of those public documents, adding one more layer of privacy to your LLC.
• Freedom. If you don’t have a staffed office, than committing to being available at your place of business during all business hours can be a real burden.
• Compliance. Good registered agents offer annual report reminders and other compliance services that can really be a life saver.

A commercial registered agent can be your biggest ally in the battle for your right to privacy.

Find everything you need to know about Registered Agent Service for your LLC.

3. Name Your LLC

The fun part! You get to name your LLC. Now, you’ve probably spent hours coming up with the perfect name, but there are three technicalities you’ll need to be aware of before you finalize it with the state:

• The name can’t be taken. Check with your state authorities for name availability.
• The name must include the acronym LLC, L.L.C., or the words Limited Liability Company.
• The name can’t indicate the company does something it doesn’t, nor illegal.

Consider choosing a name that is easy to spell, pronounce, and remember. Before settling on a name, you’ll also want to check for any federal trademarks that may lay claim to your name.

4. Determine Your Business Address

When forming your LLC you’ll encounter reference to a couple of different addresses on your formation documents. They may sound interchangeable, but there’s an important difference.

• Principal address A business’s principle address refers to the physical location of your LLC operations. It must be a street address, not a P.O. Box. To protect your privacy, some registered agents allow you to use their address here (Northwest does).
• Mailing address Your business’s mailing address refers to the address where your company receives its mail. It can be the same as your principal address, a separate P.O. Box, registered agent service, or virtual office mailing address.

If you’re forming your LLC in a state you don’t live, you may want to look at mail forwarding or virtual office options that give you access to an address in the state where you are forming without you having to high fees for leasing. There are also many other options for how you can get a business address, whether you’re in-state or out of state.

Note: Some forms may ask for a business address, which is the same as a principal address.

1. Apply for an EIN

After starting an LLC, you’ll likely need to obtain an Employer Identification Number (EIN) from the IRS. The EIN is like a Social Security number for your LLC. Every LLC that will pay taxes or hire employees needs an EIN. In some cases it is not required, but it is a good idea because using an EIN for your business helps establish a clearer separation between your business and your personal finances.

Apply for an EIN at no cost with the IRS by filing Form SS-4. Applying online on the IRS website typically takes just a few minutes.

2. Choose Your Tax Classification

By default, the IRS will treat your LLC as a sole proprietorship/partnership for tax purposes. Sole proprietorship and partnerships are pass-through entities. This means any income you receive from your LLC will simply be claimed on your personal income taxes.

An LLC also has the option of being taxed as an S-corp. Owners of an LLC taxed as an S-corp agree to draw a minimum salary from the LLC. That minimum income is subject to federal payroll taxes (Social Security and medicare). However, any income above that specified salary will not be subject to payroll taxes and will instead be taxed as a distribution.

The higher your LLC’s revenue, the more likely you’ll benefit by electing to be taxed as an S-corp. Individual situations vary widely, of course, but most people will pay less taxes as an s-corp if their LLC earns over $80,000-$100,000. To elect S-corp treatment, complete Form 2553 with the IRS within 75 days after your LLC is formed.

1. Business License

In most cities and counties, you will need a general business license before you can legally operate. This license may also be called a business tax certificate or an occupational license.

The name of the specific office that issues business licenses varies from city to city and county to county, but are often The City Clerk’s Office, County Clerk’s Office, Department of Finance, or Business License Division.

For most small businesses a license will cost $30-$100 and typically must be renewed annually.

2. Zoning and Land Use Permits

Before you open your doors, it is important to confirm that your chosen location is zoned for the type of business you plan to run. Zoning and land use permits are handled by the local planning or zoning department. Businesses that plan to operate out of a local store front, require construction or renovating an area, or some home based businesses require a zoning permit. To check if your LLC needs a permit, contact your local zoning department.

3. Sales Tax Permit

If your LLC sells goods, and in some states certain services, you will need a sales tax permit. This permit allows you to collect sales tax from customers and is usually issued by your state’s Department of Revenue. In Texas, for example, businesses apply for a Sales and Use Tax Permit through the Texas Comptroller’s Office.

4. Health, Safety, and Fire Permits

Many businesses must also meet local health and safety standards. Restaurants, salons, food trucks, and gyms often require permits from the health department, while most physical business locations need to pass a fire department inspection. In New York City, for instance, restaurants must undergo inspections by the Department of Health and Mental Hygiene before they can operate.

5. Resale Certificate

Sales tax is only applied to products consumed by the customer. Goods and materials purchased by businesses for resale are exempt from paying sales tax on those items. Resale certificates are how business owners get exempt from these taxes.

It some states, like Wyoming and Arkansas, you’ll need to first get your sales tax permit. In other states  you’ll be able to apply for a resale certificate by itself. Present this certificate when making qualified purchases.

Note: Stuff you buy to use for your business is not exempt, like office supplies.

6. Professional License

Certain occupations are regulated by the state and require a license to legally operate. These are professions that require a specific educational credentials and training. Operating a business in one of these professions without a license is a serious offense and can result in criminal charges.

Fields that require a professional license include:

• Medical (doctors, nurses, psychologists)
• Legal (lawyers, judges)
• Education (teachers)
• Finance and real estate (CPAs, insurance sales)
• Engineering
• Trades (plumbers, electricians)

There are others too like massage therapists and security guards. Check with your state to verify whether your field requires a professional license to legally operate.