Handbook / Business structure

How to form an LLC: the steps for a single-member business

Forming an LLC is mostly paperwork, done once, followed by a little paperwork every year. The process differs in detail from state to state, but the sequence is similar everywhere. This guide covers the steps for a one-person business, points out where state rules matter, and lists the follow-up tasks people forget. If you are still deciding whether an LLC suits you, start with LLC versus sole proprietorship.

Step 1: choose the state

Most solo owners form in the state where they live and work. The SBA explains that if an LLC does business in more than one state, it may need to file for foreign qualification in the other states, and that foreign qualified businesses typically pay taxes and annual report fees both where they formed and where they are qualified. Forming elsewhere to save a fee often costs more in the end.

Step 2: choose and check the name

States require an LLC's name to be distinguishable from others on their register and usually to include a designator such as "LLC" or "Limited Liability Company". Search your state's business database. Also check:

• that a matching domain and social handles are available
• that nobody is using a similar name for similar services, which could cause trademark problems

Some states let you reserve a name for a fee before filing.

Step 3: appoint a registered agent

The SBA says an LLC needs a registered agent in the state before filing. The registered agent receives official papers and legal documents for the company and must be located in the state where you register. You can act as your own agent if you have an address in the state and are available during business hours, or use a registered agent service. Many people use a service to keep their home address off public filings and to avoid missing legal papers.

Step 4: file the formation document

The SBA says most states require registration with the Secretary of State's office, a business bureau or business agency. The document is commonly called articles of organization, though names vary. It usually asks for:

• the LLC's name
• the registered agent and address
• the principal address
• whether the LLC is member-managed or manager-managed
• organizer details

Pay the state fee and file online if your state allows it. Use the official state site; private services charge extra for the same filing.

Step 5: write an operating agreement

An operating agreement sets out how the LLC is run: ownership, management, how money comes in and goes out, what happens if you add a member, and how the LLC is dissolved. Some states require one, and even where they do not, it helps show the LLC is a real, separate business. For a single member it can be short.

Step 6: get an EIN if you need one

The IRS says an LLC needs an EIN if it has any employees or must file certain excise tax forms, and that most new single-member LLCs classified as disregarded entities will need one. For income tax, a disregarded LLC owned by an individual reports on the owner's return, and a Form W-9 shows the owner's SSN or EIN rather than the LLC's. Banks commonly ask for an EIN when you open an account in the LLC's name. The working-alone guide on business structure and EIN covers the application.

Step 7: decide on tax classification

By default, the IRS treats a single-member LLC as disregarded. If you want it taxed as a corporation, you file Form 8832, and possibly a further election. The IRS says a Form 8832 election cannot take effect more than 75 days before or more than 12 months after it is filed. Most solo owners keep the default at first and revisit with a tax professional later.

Step 8: open a business bank account

Use the formation documents, EIN and operating agreement to open an account in the LLC's name. Run all business money through it. Keeping LLC funds separate from personal funds supports the liability protection and makes bookkeeping far easier.

Step 9: licenses, permits and state tax accounts

Forming an LLC does not license the business. You still need any local business license, professional licenses, home occupation permit or sales tax permit that applies. The guide on business licenses explains how to find them.

Step 10: ongoing obligations

Most states require an annual or periodic report with a fee, and some charge a franchise or similar tax. Missing these can lead to penalties or loss of good standing. Put the dates in your calendar every year. Keep the registered agent's details current.

On federal beneficial ownership reporting, FinCEN's page says a final rule exempts companies created in the United States, leaving the requirement on certain foreign companies. Check fincen.gov/boi before relying on that, since rules can change.

Common mistakes

• forming in another state without considering foreign qualification
• letting the registered agent lapse
• mixing personal and LLC money
• forgetting annual reports
• assuming the LLC replaces insurance or licenses

Name, agent, articles, agreement, EIN, bank account, licenses and a yearly reminder: that is the whole path for most single-member LLCs.