Starting a business is exciting, but it involves many tasks, including forming a business entity. A limited liability company (LLC) is a smart business entity choice because of the benefits that it offers, including personal liability protection and pass-through taxation.
But before you officially form your LLC, there are a few other things to do. Here we’ll discuss what you need to do before you form an LLC and the steps involved in the LLC formation process.
Create a Business Plan
Your number one priority should be creating a business plan, even if you’re not seeking financing for your business. Writing a business plan involves much research and building strategies for every aspect of your business. It’s a learning process and will help you to make informed decisions about your strategies, but it will also help you to determine if your business idea is viable.
That’s why you need to handle this step first. You don’t want to put time and money into setting up your business and then find out that your business idea and model are not likely to be successful.
A business plan has several sections.
- Executive summary – This is an overview of your entire plan that covers the highlights of your plan. You’ll write this section last, but it’s the introduction to your plan. If you are seeking financing, this is what the lender or investor will read first, and if it doesn’t interest them, they are unlikely to read further. It should be compelling and designed to essentially “sell” your idea in no more than one to two pages.
- Company overview – This should cover the goals of your company, your mission and vision, and short-term milestones you seek to achieve.
- Products or services – Explain the problem that your offering solves and how, and describe your products or services in detail. Also explain how you’ll source your products or deliver your services.
- Market analysis – This is where much of your research will be done. You’ll want to analyze the overall market for your product or service, as well as the local market, if applicable. You’ll also want to do some direct research to test the viability of your idea. This should involve actually talking to potential customers to find out if they will buy what you’re offering, why they would buy it, how they will buy it, and what they would be willing to pay. You can do this by conducting surveys or holding focus groups. By doing this research, you should learn not only the viability of your idea, but who your target market will be and where best to market to that group of people.
- Competitor analysis – Research your main competitors to identify their strengths, weaknesses, and target markets. By doing so, you should be able to determine how you can gain a competitive advantage over them by capitalizing on their weaknesses, or targeting a market that they currently don’t serve.
- Sales and marketing strategy – You’ll need to create a full strategy for reaching your target market and getting them to buy your product or service. This strategy should be based on what you learned from your market analysis.
- Operations plan – Operations are the logistics of your business, meaning what activities need to be done on a daily basis to produce, sell, and deliver your product or service.
- Management and personnel – Operations and marketing are the “how,” but now you need to determine who will manage the business and perform all the activities required to run your business on a daily basis.
- Financial plan – This will include an analysis of your startup costs, your sales projections, and your ongoing costs. Doing this analysis will help you to assess the financial viability of your business. Obviously, you’ll need to be able to generate enough sales to cover your costs of doing business, so be sure to analyze your numbers realistically.
Once you go through the planning process and determine that your business idea is viable enough to proceed, you can take the preliminary steps necessary to form your LLC.
Choose an LLC Name and Check Availability
You may already have a business name in mind, but if not, you’ll want to come up with one that’s unique and easy to spell and remember. It should also, obviously, be related to what your business offers. Once you have a name, you’ll need to ensure that it complies with your state’s LLC naming regulations.
Each state has its only rules, sometimes restricting words like bank or university. Your LLC name will also have to contain the words “limited liability company” or an abbreviation like LLC. Check with your state for specific requirements.
Then you’ll need to check to make sure the name is available in your state, which you can usually do on your Secretary of State’s website. You’ll also need to make sure the name is not nationally trademarked by visiting the United States Patent and Trademark Office’s website.
Select a Registered Agent
Nearly all states require you to appoint a registered agent for your LLC, which is a person or company that will accept your LLC’s correspondence and official documents. States have differing rules regarding who can be your registered agent, but generally, it requires that it’s an individual who is at least 18 and has a physical address in the state, or a business that’s authorized to operate in the state.
You can elect to be your own registered agent, but that comes with a requirement to be personally available at your registered office address during normal business hours. Instead, you can choose to use a registered agent service that will notify you of correspondence and make your documents available online. The cost of such a service can range from $100 to $300 annually.
Determine Your Management Structure
You’ll need to determine if your LLC will be member-managed or manager-managed. In a member-managed LLC, all owners, called members, are involved in the management of the business. In a manager-managed LLC, only some members or non-members are appointed as managers, while some members are silent partners.
In some states, you have to disclose your management structure, as well as the names and addresses of managers, when you file your LLC formation documents.
Forming an LLC
Now you’re ready to officially form your LLC and get your business up and running.
File Documents with the State
You’ll simply need to file a document, usually called the articles of organization, with your state to officially form your LLC. You can usually do so online on the Secretary of State’s website.
Visit site for more detailed information including state specific guides.
Create an Operating Agreement
While most states do not require that your LLC have an operating agreement, it’s a crucial document to have in place. It defines the ownership and profit distribution structure of your LLC, as well as many other provisions regarding the management of the LLC. It’s best to have an attorney draw up the agreement for you, although you can find many templates online for a fee.
Apply for an EIN
You’re required to obtain an employer identification number (EIN), which is a tax identification number, if your LLC has multiple members or if you’re hiring employees. You can apply for free on the IRS website.
Last Steps
You just have few steps left to take that include:
- Obtaining any required business licenses and permits at the federal, state, and local levels
- Getting business insurance
- Opening a business bank account
In Closing
As you can see, you have many steps to take both before and after officially forming your LLC. If it seems like an overwhelming process, there are many business formation services that can help you with some or even all of the steps. They usually charge a fee of a few hundred dollars, but it can save you the time and hassle of doing it yourself and ensure that everything goes smoothly. Then you can focus on making your new business a success!