When owning a business or working as a freelancer, one must decide how to go about “doing business.” This article highlights two ways of structuring a business, and the steps needed to become an LLC or self-incorporated.

LLC stands for limited liability company. This is a business structure offering pass-through taxation and liability protection. Passthrough tax treatment means that a business’s taxes are literally “passed through” to the tax returns of the individuals who own the business. Legally, the LLC exists as a separate entity from its owners. The owner of the business is not personally responsible for business debts and liabilities. When forming an LLC, there are important steps to follow:

  1. Choose a State for Your LLC
  • Cost, taxation, and LLC laws vary from state to state, so be aware.
  • Most individuals form an LLC in the state where they live or do the most business in.
  1. Pick a Name for Your LLC
  • The name must not already be on the Secretary of State’s records as being the name of another domestic or qualified LLC or other business.
  • Make sure to do a trademark search to avoid intellectual property infringement.
  1. Choose a Registered Agent
  • The registered agent is the one who receives legal notices and tax documents on behalf of the LLC.
  • Some LLCs use the owner of the company as a registered agent.
  1. Prepare an LLC Operating Agreement
  • An operating agreement is an agreement among the members, and between the LLC and the member/members, regarding how the LLC will be operated.
  • Many states do this orally, but it is encouraged to have a written agreement as well.
  1. File the LLC with Your State
  • LLC formation documents (Certificate of Organization, Certificate of Formation, or Articles of Organization) must be filed with the Secretary of State’s office.
  • Each state requires different information for the LLC formation document, so make sure to check the requirements for your state.
  1. Obtain an EIN
  • Now that the business has been established, you must apply to the IRS for an EIN (Employer Identification Number).
  • This number will be used on the LLCs bank accounts, income, and employment tax filings.

Self-Incorporation is when a self-employed business owner sets their business up as a corporation for tax purposes. This makes the owner not personally responsible for business liabilities. While similar to an LLC, self-incorporation allows for shareholders and a board of directors. Here are the steps to follow to self-incorporate your business:

  1. Pick a Name for Your Corporation (just like LLC)
  2. Create Governing Documents
  • Corporate bylaws are used internally as formal guidelines for how your corporation will handle all matters.
  1. File Paperwork
  • The articles of incorporation can be found on most Secretary of State’s website with step-by-step instructions.
  • Each state requires different information for the articles of incorporation, so make sure to check your state’s requirements.
  • Once the filing is accepted, you will receive a certificate or receipt that confirms your business’s legal existence.
  1. Obtain an EIN (same as an LLC)

While the steps and some benefits may be similar, there are differences between an LLC and self-incorporation. An LLC can have unlimited owners or “members,” while a self-incorporated company can only have 100 shareholders. Self-incorporated companies are only taxed once, and only the shareholders pay on the profits received, while with an LLC, you can choose whether to be taxed once or twice. A board of directors is required for self-incorporation, while it is not required for an LLC.