How to incorporate a small business as an LLC

Choosing how to incorporate your small business is very different from incorporating a large business.

With a large, multi-million dollar business, it really doesn't matter if your incorporation's legal costs are $500 or $20,000--the percentage of total revenue is low.

Similarly, with a multi-million dollar business, if your corporate form requires a lot of ongoing paperwork and compliance, again, those costs can be borne by your large organization.

On the other hand, if you have a small business making five or low six figures annually, then startup legal expenses are important. Minimizing ongoing redtape corporate compliance is important as well.

When it comes to keeping your incorporation startup costs low, forming a limited liability company using an online company is good choice.

By using an online incorporation company instead of an attorney, you can have your LLC formed and ready for business for less than $500 (depending on your particular state's filing fees--some are higher, unfortunately).

Here is a bird's eye view of the steps needed to incorporate your small business by forming a limited liability company.

• File Articles of Organization
• Select your Registered Agent
• Create an Operating Agreement to govern the operation of your LLC
• Obtain a Federal Employer Identification Number (EIN / FEIN)
• Corporate resolutions authorizing opening of a business bank account
• Open a business checking account

Each state has its own Articles of Organization form for creating an LLC.

Some states even permit you to complete and fill out Articles of Organization directly on its website, paying the filing fee via credit card.

However, you are not done forming your limited liability company simply by filing Articles.

You are still responsible for selecting a registered agent, drafting an Operating Agreement, obtaining an FEIN/EIN, and so on.

After filing your Articles of Organization, you're going to need to draft an Operating Agreement.

This is not a simple form like your Articles, but is instead a legal contract governing the operation of your LLC. In complex LLCs, I've seen Operating Agreements of more than 100 pages.

Now, with a small business, you're probably not going to need such a lengthy Operating Agreement, so don't get scared off.

The point is, you're going to need to have your Operating Agreement professionally prepared. This normally means spending thousands of dollars on an attorney.

Fortunately, there are online LLC formation companies, such as Legalzoom which not only file your Articles of Organization, but more importantly, provide you with a customized Operating Agreement.

These Operating Agreements prepared by Legalzoom are customized based on questions you answer on Legalzoom's site, and are further customized by the state you're forming the LLC in. There is really no better value for obtaining an Operating Agreement for your LLC than to use an online incorporation service.

To open a bank account, apply for an affiliate program, be paid by large customers, and many other normal business functions, you're going to need an Employer Identification Number (also known as a Federal Employer Identification Number, EIN, or FEIN).

The EIN is similar to a social security number, in that it is 9 digits long and is unique to your LLC.

The IRS is responsible for assigning an EIN to your business. Your business applies for an EIN using IRS form SS-4.

Legalzoom has formation packages (Express Gold, $359 + state filing fees) that include the preparation of your business' EIN, along with a customized operating agreement, filing your articles of organization, a corporate resolution to open a bank account, and more.

After you have formed your limited liability company, your paperwork isn't necessarily complete.

Some states require you to file an Annual Report. Fortunately, this is usually a fairly simple document, stating the name of the LLC, current place of business, current registered agent, and similar information.

It is not the complex "annual report" that public companies must file with the SEC, and all the attendant in-depth financial disclosures (e.g. a 10-K).

Other states require you to pay an annual franchise tax (notoriously, California, with its $800 franchise tax).

When you form your LLC with a company like Legalzoom, they will remind you about ongoing paperwork obligations based on your state.

Forming your small business LLC is a relatively straightforward process....if you've done it before.

If it's your first attempt, even intelligent people can make mistakes, as you're dealing with unfamiliar concepts and government bureaucracy.

Tens of thousands of limited liability companies are started each year. Some are formed by attorneys, some by individual do-it-yourself business owners, and many by online incorporation services like Legalzoom.

In my opinion, online incorporation services are the best mix of low expense and low hassle, particularly if this is your first LLC formation. Even if you've done it before, you are probably better off spending a couple hundred dollars to have Legalzoom do it right and spend your time marketing, raising capital, or otherwise directly improving your business.

Good luck with your new business!

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