In May 1982 Marr decided that he wanted to establish a new band, and subsequently turned up on the doorstep of Morrissey's house – 384 Kings Road, Stretford– accompanied by mutual friend Steve Pomfret, to ask Morrissey if he was interested in founding a band with himself and Pomfret. Morrissey and Marr bonded with their love of poetry and literature. A fan of the New York Dolls, Marr had been impressed that Morrissey had authored a book on the band, and was inspired to turn up on his doorstep following the example of Jerry Leiber, who had formed his working partnership with Mike Stoller after turning up at the latter's door. According to Morrissey: "We got on absolutely famously. We were very similar in drive." Conversing, the two found that they were fans of many of the same bands. The next day, Morrissey phoned Marr to confirm that he would be interested in forming a band with him.
After remaining with the band for several rehearsals, Pomfret departed acrimoniously. He was replaced by the bass player Dale Hibbert, who worked at Manchester's Decibel Studios, where Marr had met him while recording Freak Party's demo. It was through Hibbert that the Smiths were able to record their first demo at Decibel, doing so one night in August 1982. Aided by drummer Simon Wolstencroft, whom Marr had worked with in Freak Party, the band recorded both "The Hand That Rocks the Cradle" and "Suffer Little Children". Wolstencroft was not interested in joining the band, so auditions were held to find a permanent drummer, which resulted in Mike Joyce joining them; he later revealed that he was under the influence of magic mushrooms during his audition performance. Meanwhile, Morrissey took the demo recording to Factory Records, but Factory's Tony Wilson wasn't interested.
In October 1982 the Smiths gave their first public performance as a support act for Blue Rondo à la Turk during a student music and fashion show, "An Evening of Pure Pleasure", at Manchester's The Ritz venue. During the performance, they played both their own compositions and "I Want a Boy for My Birthday". Morrissey had organised the gig's aesthetic; the band came onstage to Klaus Nomi's version of Henry Purcell's "The Cold Song" playing through the venue's sound system before his friend James Maker stepped onstage to introduce the band. Maker remained onstage during the performance, relating that "I was given a pair of maracas – an optional extra – and carte blanche. There were no instructions – I think it was generally accepted I would improvise... I was there to drink red wine, make extraneous hand gestures and keep well within the tight, chalked circle that Morrissey had drawn around me." Hibbert however was unhappy with what he perceived as the band's gay aesthetic; in turn, Morrissey and Marr were unhappy with his bass playing, so he was removed from the band and replaced by Marr's old school friend Andy Rourke. Hibbert however denies that he had any issue with the band being perceived as a 'gay' band, and was unsure as to the reasons why he was asked to leave the band.
In December 1982 the band recorded their second demo, this time at the Drone Studios in Chorlton-cum-Hardy; the tracks recorded were "What Difference Does It Make?", "Handsome Devil", and "Miserable Lie". This was used as their audition tape for the record company EMI, who turned the band down. During the rest of that month, the band continued to practice, this time at the upstairs of the Portland Street Crazy Face Clothing company, a space secured for them by their new manager Joe Moss. By Christmas they had created four new songs: "These Things Take Time", "What Do You See in Him?", "Jeane", and "A Matter of Opinion", the last of which they would soon scrap. Their next gig was Manchester's Manhattan in late January 1983, and although Maker would again appear as a go-go dancer, this was the last time that he did so. In early February they performed their third gig, at the city's Haçienda club.