Starting an online business is challenging and comes with many decisions to make, including the type of business entity to form. Many entrepreneurs choose a limited liability company (LLC) because it offers personal liability protection for its owners, who are called members of the LLC.
LLCs also have what’s called pass-through taxation, meaning that instead of the LLC being taxed, profits are passed through to members to be taxed at their personal income tax rates.
If you’ve chosen to form an LLC, you’ll need to understand all the steps involved. In this guide, you’ll learn about those steps so that you can handle the process smoothly and get your online business off on the right foot.
Choose a Registered Agent
Your first step will be to choose a registered agent for your LLC, which is a person or company that will be authorized to accept official correspondence, such as legal and tax documents, on behalf of your business. You’re required to have a registered agent in nearly all states.
You or another member of the LLC can be the registered agent; however, being a registered agent requires being personally available to accept correspondence at your registered address during regular business hours. As the owner of an online business, you don’t necessarily want to be tied to your office. You may need to leave periodically to meet with potential partners or to ship your products.
That’s why many entrepreneurs choose to hire a registered agent service to handle their correspondence. A registered agent service will be available during business hours to accept your business correspondence, notify you when it’s received, and make your documents available to you online.
Many registered agent services also offer LLC formation services. As you learn more about how to create an LLC, you may decide to turn to one of these services to help you through the LLC formation process and to be your registered agent. The LLC formation process is time-consuming and involves several steps, and a business formation service can ensure that the process is handled correctly.
Decide on Your Management Structure
Some states require that you specify your management structure on your LLC formation documents. Yourtwo management structure choices are:
- Member-managed – In a member-managed LLC, all members are involved in the daily management of your online business, and no non-member managers are the official managers of your LLC.
- Manager-managed – In a manager-managed LLC, some members may be silent partners while other members are appointed as managers. A non-member can also be appointed as one of the managers.
Most small businesses are member-managed unless one of the members is simply an investor and will have no management role.
File State Documents
You’ll officially form your LLC by filing a document with the state and paying a fee. The document is usually called the articles of organization, but in some states, it’s called a certificate of formation or a certificate of organization.
The form will require basic information about your business and your registered agent information and can usually be filed online with the Secretary of State. Fees range from $40 to $500 depending on the state of formation.
Create an Operating Agreement
The most complex step in forming an LLC is creating an operating agreement. An operating agreement, while not required in most states (5 states require one), is a critical document that defines the ownership percentages of members. It also specifies how profits are allocated and distributed, how ownership can be transferred, the voting rights of members, and what happens to the LLC if a member leaves the business, becomes disabled, or dies.
It’s very important not to skip this step. Without an operating agreement, situations may occur that have to be settled in court.
Most business formation services offer an operating agreement template that you can customize for your business, or you can enlist the help of an attorney to draft your operating agreement. If your business has multiple members, an attorney is often the best choice.
Get Business Licenses and Permits
An online business may be required to obtain business licenses and permits, even if you’re operating your business from home. These licenses and permits may be required at the state and local levels, so you’ll need to check with your local governments for requirements.
If your online business sells taxable goods, you’ll be required to get a sales tax permit. Depending on your business model, you may need one in more than one state.
Some business formation services can assist you with this process.
Apply for an EIN
An employer identification number (EIN) is like a social security number, in that it allows the IRS to identify your business for tax purposes. If you are a single member LLC with no employees, you are not required to get an EIN and can instead use your Social Security number. But if your LLC has multiple members or you plan to hire employees, you’re required to obtain an EIN.
You can apply for an EIN for free on the IRS website.
Open a Business Bank Account
You’ll need to open a business bank account so that you can keep your business and personal finances separate. This will simplify your accounting processes and make things easier for you at tax time. Most banks offer business bank accounts and may require that you have an EIN, so even if you’re not required by law to have an EIN, you may need one for banking purposes.
Get Business Insurance
You’ll want to protect your investment in your online business, so you should get general liability insurance for your business. Other types of business insurance may also apply, so speak with your insurance agent.
As you can see, starting an LLC for your online business involves much more than filing a document with the state. Be sure not to skip any of the steps to ensure that you don’t run into any issues down the road that could affect the success of your business. If you need assistance, you can turn to a business formation service or an attorney to help you.