If you’re forming a limited liability company (LLC), you’ll need to file articles of organization, sometimes called a certificate of organization or certificate of formation, with your state. In some states, your LLC will be formed immediately if you file online; in others, it can take a few weeks.
You should receive a notice of your LLC’s approval either by mail or email. But if you don’t, or you think you might have missed it, you can quickly check the status of LLC formation by doing a business name search on the state website.
If your business name appears, your LLC is formed and ready to go. But you should know that forming your LLC with the state is just one of several key steps in the LLC formation process.
You’ll have several other things to do before you open for business.
1. Determine Your Tax Status
LLCs are pass-through entities, which means income passes through to the member or members. If the LLC has only one member, it’s taxed as a sole proprietorship. If the LLC has more than one member, it’s taxed as a partnership.
However, LLCs are unique because they can elect to be taxed as a corporation if the members decide it makes financial sense. This is done by filing an election form with the IRS. In addition, you can choose to be taxed as a C-Corp or an S-Corp.
C-Corp status means income is taxed at the current rate for corporations (21% as of late 2022), which is lower than the usual individual taxpayer rate. But keep in mind that C-Corp shareholders – who are members in the case of an LLC – must also pay taxes on their distributions. This is called double taxation.
However, members are subject to self-employment tax in an LLC that is taxed by default as a sole proprietorship or partnership. Once such LLC switches to being taxed as a corporation, self-employment taxes no longer apply.
Similarly, self-employment taxes do not apply to members with S-Corp status, which is the main advantage of electing S-Corp status.
With S-Corp status, members are generally paid as company employees, which means more accounting and payroll expenses. Therefore, S-Corp status is only beneficial when the self-employment tax savings exceed those additional expenses.
2. Draft an Operating Agreement
Most states do not require an operating agreement, but it’s a very important document. It defines the ownership percentages of members and how profits and losses are distributed. Those are the most critical elements of the operating agreement, but it should also include the following:
- Each member’s rights and responsibilities
- Management structure and roles
- Voting rights of each member
- Rules for meetings and voting
- What happens when a member sells their interest, becomes disabled, or dies
You can find operating agreement templates online, but it’s best to have them drawn up or reviewed by an attorney. The language of an operating agreement is crucial and can often help determine how member disputes will be resolved.
3. Get Your Employer Identification Number (EIN)
The IRS uses an EIN to identify your company. It’s used for tax filing purposes. An EIN is required if your LLC has more than one member or hiring employees. Obtaining an EIN requires applying on the IRS website.
The IRS rules for obtaining an EIN are as follows:
All EIN applications (mail, fax, electronic) must disclose the name and Taxpayer Identification Number (SSN, ITIN, or EIN) of the true principal officer, general partner, grantor, owner or trustor. This individual or entity, which the IRS will call the ‘responsible party,’ controls, manages, or directs the applicant entity and the disposition of its funds and assets. Unless the applicant is a government entity, the responsible party must be an individual (i.e., a natural person), not an entity.
4. Obtain Business Licenses and Permits
Depending on the nature of your business, you may need to apply for various licenses and permits at the federal, state, and local levels.
At the federal level, licenses and permits are generally industry-specific and may include health licenses and permits from the Occupational Safety and Health Administration (OSHA).
You may need a general business license to operate at the state level. If you sell tangible goods or services subject to sales tax, you’ll need a sales tax license, also known as a seller’s permit.
Check the SBA guide for specific licenses required for your business.
Here are some common licenses and permits you may need:
- Industry-specific licenses for certain professions and industries, such as construction, plumbing, electrical, childcare, food handling, liquor, architecture, and finance
- Building and zoning permits
- Doing business as (DBA) permits using a name other than your LLC.
- Health licenses and permits at federal, state, and local levels
- Fire permits
- Sign permits
This is a crucial step in the LLC formation process, so make sure that you check with your state and local government offices to find out all the licenses and permits you need. You could face steep fines and penalties if you operate without the proper licenses and permits.
If you need help, it’s a good idea to consult a business attorney to ensure you’re in full compliance. You can also use a service like MyCorporation to do the research and provide you with all the forms you need to license your business.
5. Open Your Business Bank Account
When you have an LLC, keeping your business and personal finances separate for accounting and tax purposes is essential. Co-mingling your business and personal funds can threaten your liability protection since the line between business and personal assets will need to be clarified.
Most banks offer business bank accounts, so check with your local bank. You’ll need your EIN and a copy of your articles of organization to open an account. Your bank may require other documents as well.
6. Get Business Insurance
Insurance is the right choice to protect the investment you’ve made in your business. There are several different types of insurance you may need.
- General liability: A comprehensive type of insurance covering many business elements. It includes coverage against bodily injury and property damage.
- Professional liability: Protects against claims from a customer who suffered a loss due to an error or omission in your work. It’s also known as errors and omissions (E&O) insurance.
- Workers’ compensation: Provides compensation to employees injured on the job.
- Property: Covers your physical business space.
- Business Property: Covers equipment and supplies.
- Equipment Breakdown Insurance: Covers the repair or replacement of broken equipment due to mechanical issues.
- Commercial auto: Covers your company-owned vehicles.
- Business owner’s policy (BOP): This option combines the above insurance types.
7. Annual Reporting
Most states require that you file an annual or biennial report to verify you’re still doing business. These can generally be filed online. A small fee usually applies and varies by state.
Checking the status of your LLC is quite simple, and approval is usually relatively fast. Just remember, you have more to do to get your business started. Be sure not to skip any steps, or you could face fines and penalties that will hurt your business.
Doing everything right when forming your LLC will put you and your business on the road to success.