When the People’s Council of Latvia gathered in Riga on 18 November 1918 to proclaim Latvia’s independence, the Latvian Provisional Government did not yet have an army capable of defending it, and the entire territory claimed for the future Latvia was still under the control of German troops. In late 1918 and early 1919, the subsequent building up of the first army formations of the Republic of Latvia took place under extremely challenging circumstances. The government lacked financial resources, weapons, equipment and ammunition, while the Red Army advanced rapidly from the east. Initially, the armed forces were formed based on a compromise reached with Germany and according to the principle of ethnic division. After the loss of Rīga and the withdrawal to Liepāja in January 1919, a new line of division emerged: Latvian military units loyal to the Provisional Government were simultaneously formed in two distant regions, in the Liepāja area and in Estonia. The article aims to analyse the impact of both these factors on the development of the Latvian armed forces and the course of the Latvian War of Independence.