How to form an LLC

Step 1: pick the state, and probably pick the obvious one

Form the LLC where the business actually operates. If you live in Ohio and your customers are in Ohio, form an Ohio LLC. This sounds too simple to be advice until you see how much of this industry is built on talking people out of it.

The pitch for Wyoming, Delaware or Nevada is real for some companies and irrelevant for almost everyone reading this. If you form in Wyoming but run the business from Ohio, Ohio still considers you to be doing business there, which means registering as a foreign LLC in Ohio anyway. You now have two states, two filing fees, two annual reports, and two registered agents, forever, in exchange for a benefit that mostly applies to companies raising outside investment or holding property across state lines.

There are genuine exceptions. Real estate holding companies, businesses with investors who expect Delaware, and companies with no physical presence anywhere are all cases where the answer changes. They are also all cases where you should be asking a CPA rather than a filing service.

Step 2: check the name before you fall in love with it

Every state keeps a register of business names and will reject a filing that collides with one already on it. Most states publish a free search on the filing agency's own site, and it takes about two minutes.

Two things trip people up. The first is that state registration is not trademark protection: nobody in another state is stopped from using your name, and a registered LLC name can still infringe someone else's federal trademark. The second is that the name on the filing does not have to be the name on the sign. If you want to trade under something different, that is a DBA, filed separately.

Step 3: name a registered agent

Every state requires an LLC to name someone who will accept legal papers on its behalf, at a street address in that state, during business hours. A PO box is not acceptable anywhere.

That person can be you, at no cost, if you have an address in the state and do not mind it being published. Commercial services exist for two reasons: forming in a state you do not live in, and keeping a home address off a public database. Both are legitimate. Neither is required, and any service that treats the agent as mandatory is describing its own pricing rather than the law.

Step 4: file the articles of organization

This is the filing that creates the company. The form is short — name, address, registered agent, sometimes the members, sometimes a purpose statement — and the state's fee is due with it. Some states call it a certificate of formation or a certificate of organization; it is the same document.

Nothing exists until the state accepts it. Rejections are usually a name collision, an agent address the state will not take, or a signature block filled in wrong. A rejected filing does not usually refund the fee, which is the main practical argument for having somebody who has done it before fill in the form.

Step 5: get an EIN

The EIN is the company's federal tax ID. Banks want it before they will open a business account, payroll cannot run without it, and most tax filings ask for it.

The IRS issues them free, in minutes, on its own site, to anyone with a social security number or ITIN. That is worth repeating because a lot of money is made obscuring it. If you do not have an SSN, the online route is closed to you and the application goes by fax, which takes days rather than minutes and is where a service earns its fee.

Step 6: write the operating agreement, then diary the report

An operating agreement sets out who owns what, who decides what, and what happens when somebody wants out. Most states do not require one. Every single-member owner who has been told it is optional and skipped it has been fine right up until a bank, a lender, or a co-founder asked for it.

Then find your state's annual report deadline and put it in a calendar you actually look at. Deadlines run from a fixed date in some states and from your formation anniversary in others, and a couple are biennial, which is precisely how a company misses one. Missing it costs a penalty first and administrative dissolution eventually.

What it costs, end to end

The state fee is unavoidable and it is the biggest number. Everything else is a choice. An EIN is free. A registered agent is free if you are it. An operating agreement is free if you use a template. Formation services charge for the labour of assembling and filing the paperwork, and the honest range for that is anywhere from nothing (with a subscription attached) to a few hundred dollars.

Our number is $100 flat in any state, with the state's fee itemised and passed through at cost. If you would rather do it yourself, the state's own site is the place, and it will cost you the filing fee and an afternoon.

Common questions