To form an LLC, you file articles of organization (or similar document) with the state business filing office—typically, the Secretary of State.
After you’ve filed your articles of organization, your LLC will begin its legal life. But there are still other actions that you need to take in order to make your LLC fully operational. Just when you thought the work was over, you realize that it isn’t.
Below is an outline of some of the steps that you need to take. Some of them are legally required. Others aren’t mandatory, but they’re highly recommended by experts anyway.
Step 1: Draft and Sign an LLC Operating Agreement
First up, let’s discuss the need to draft and sign an LLC operating agreement.
What’s an operating agreement? It’s basically a legal document that will establish how your LLC will be run. So, for example, it will include how decisions will be made, how money will be distributed, and how disputes will be resolved. Lots of detail here, so take your time as you draft it, and really think about what you’re putting into your operating agreement.
All of the members of your LLC will need to sign the agreement and agree to follow the rules that it contains. Obviously, if you’re the only member of your LLC, you’ll be the only one who needs to sign it and follow it.
An operating agreement isn’t mandatory, but it’s a great idea to have one in place, even if your LLC only has one member and you’ll be in charge of making all of the decisions. That’s because having this written operating agreement lends credibility to your LLC.
It also helps show that your LLC is a legitimate business entity that’s separate from you, not just some sham that’s been created to avoid liability—really important for single member LLCs (SMLLCs) because, without the formality of an agreement, an SMLLC can appear like a sole proprietorship, which doesn’t provide limited liability.
Plus, lenders might ask to see an operating agreement before they’ll agree to issue you a loan in your LLC’s name, so if you’re planning on taking out loans to build your business, this simple document will definitely be helpful.
The good news is that your operating agreement doesn’t need to be complex or long, especially if you’re an SMLLC. While you don’t need to file the agreement with the Secretary of State—or anywhere else, for that matter—you should keep this document with all of your other important LLC files.
To learn more about operating agreements, read our article, Freelancer’s Guide to LLC Operating Agreements.
Step 2: Get a Federal Tax ID (EIN)
Next up is the Federal Tax ID (or Employer Identification Number / EIN).
You should obtain an EIN from the IRS. This nine-digit number will be used by the IRS to identify your LLC, so you’ll need to include it in all of your tax forms and communications with the IRS and your state tax agency.
If your SMLLC doesn’t have any employees, a separate EIN is, generally, not required by the IRS. Instead, you can use your personal Social Security number. But it’s still recommended that you get an EIN.
Why is an EIN an important part of doing business?
- It helps prove that your LLC is a legal entity that’s separate from you personally, just like the operating agreement discussed above.
- Using your EIN rather than your Social Security number can be a smart step in avoiding identity theft, which is frighteningly common today.
- Many banks will actually require an EIN when you’re ready to open up a business bank account in your LLC’s name.
Thankfully, it’s easy to get an EIN, and it’s free as well. While you can complete an online application at the IRS website, you can also use a service like Collective, which will do all of the work for you.
For additional information, see our article, Freelancer’s Guide to EIN (Federal Tax ID).
Step 3: Get a Business License
Whether or not you’ll need to get a business license for your LLC will depend upon where your business is located. A few states require all business to get a state-wide business license. But, in most states, business licenses are handled by your city or county government.
As is the case with an operating agreement and EIN, obtaining your business license helps prove that your LLC is legitimate. It also helps preserve your limited liability.
And, more importantly, if your local government were to find out that you failed to get a required license to run your company, it could impose penalties and fines that cost a lot more than it would’ve cost you to just get the license in the first place.
Don’t fret, as obtaining a local business license is usually simple and straightforward. The specific details for your particular license will be available from your local government, so some research is required. Once you know what you need, you’ll have to fill out an application and pay a fee.
Just keep in mind that, in addition to a local business license, you might also need to get a professional or occupational license or permit from your state government, or even from the federal government. This will depend on the work that you do. For example, real estate brokers and salespeople must be licensed by the state.
Pro tip: when you join Collective, we help you obtain the appropriate business license(s), so it’s one less thing that you need to worry about.
Step 4: Open a Business Bank Account
It’s highly recommended that you open a bank account in your LLC’s name, rather than use your personal bank account for business purposes.
Once again, it boils down to ensuring that your LLC is recognized as a separate, legal entity that’s a legitimate business. Combining your personal funds with your LLC’s funds in a single account, therefore, is a bad idea.
If you use your personal bank account for business purposes, you might even end up losing the limited liability that you obtained by creating your LLC. You definitely don’t want that!
Setting up a business bank account might seem daunting at first, but you can read through our article, Freelancer’s Guide to Banking, to learn more. You can also join Collective and we’ll help you set up a business bank account that you can use for profits and expenses.
Step 5 (Optional): File a Fictitious Name Statement
Did you know that you aren’t required to operate your LLC under the legal name that’s listed in your articles of organization? It’s true; you can use a different name.
This name is referred to as an assumed name, fictitious name, or dba, which stands for “doing business as.”
- In order to operate under a different name than your LLC’s legal name, you have to file a fictitious business name or “dba” application. In some states, you can file the application with the Secretary of State or similar official and it applies state-wide. In other states, fictitious business name applications are filed at the local level—in the county or city where you have a business location.
- You may have to file more than one application if you do business in more than one county. To find out what you need to do, check your state Secretary of State’s website and the website of the county where your office is located.
- Before you file your fictitious business name application, you should also check fictitious name records to be absolutely sure that the name you wish to use isn’t already taken by another business. In states with a state-wide dba application, you can check the registry maintained by the Secretary of State. In states with local filing, you’ll have to check your county’s records. For additional information, check your county’s website for details.
Maintaining Your LLC Doesn’t Have to Be Complicated
Wow, those are a lot of rules! But try to relax, and just take things one step at a time so that you don’t become overwhelmed. Also, know that Collective is here for you to help you through all of the important steps above.
With the right strategy and the right support, you can rest assured that your LLC will have everything that it needs to operate legally and be recognized as the legitimate business that it is.
Stephen has dedicated his career as an attorney and author to writing useful, authoritative and recognized guides on taxes and business law for small businesses, entrepreneurs, independent contractors, and freelancers. He is the author of over 20 books and hundreds of articles and has been quoted in The New York Times, Wall Street Journal, Chicago Tribune, and many other publications. Among his books are Deduct It! Lower Your Small Business Taxes, Working with Independent Contractors, and Working for Yourself: Law and Taxes for Independent Contractors, Freelancers & Consultants.