Starting a Limited Liability Company (LLC) is a popular choice for business owners as it offers the best of both worlds: the personal liability protection of a corporation and the tax benefits and operational flexibility of a sole proprietorship.
However, it’s crucial to understand the associated costs. These include state filing fees, ongoing expenses like the annual report costs, and possibly franchise taxes. Your business may also require a registered agent service, adding to the overall cost.
While fees vary by state, certain costs like business name registration and opening a bank account are generally consistent.
Now, you might be wondering, how much does an LLC cost?
To provide you with a comprehensive overview of the typical costs associated with forming an LLC, our team of experienced financial advisors has created this guide. Let’s dive in!
- LLC formation involves filing costs and recurring expenses, including report costs and potential franchise taxes.
- Other costs include registered agent services, business name registration, and bank account opening.
- Understanding these costs is key to managing an LLC’s financial obligations effectively.
How Much Does It Cost to Form an LLC?
The cost to form an LLC varies in each state and depends on the business structure or purpose. Generally, LLC formation fees range between $35 and $520. However, depending on the specifics of your business, you may need to pay other fees that can increase the overall LLC cost up to $1,000.
Let’s take a look at the expenses you’ll need to consider when starting an LLC for a restaurant, Airbnb, or other types of small businesses.
LLC Name Reservation Fees
You may need to secure the business name of your LLC by registering it with the Secretary of State. This requirement varies by state, so make sure to check if your government mandates it. Certain states, such as Alabama, California, Delaware, and Texas, have made this process obligatory.
The main cost associated with this process is the state LLC filing fee for submitting the LLC Articles of Organization (also known as Certificates of Organization or Certificates of Formation).
Each local government has a different fee structure, and the price tends to vary based on the nature of your LLC. For example, in California, the state filing fee is $70 while in New York, it’s $200.
Also, if you prefer having your LLC getting approved faster, then you need to pay extra for expedited filling.
Registered Agent Fees
All 50 states require LLCs to designate a registered agent responsible for receiving legal documents. You can act as your own registered agent or use a professional service. If you decide to hire, expect costs to vary, with $100 to $300 annually being the norm.
Operating Agreement Costs
While not filed with the state, the LLC operating agreement outlines the regulations and capital contributions of owners and should be kept in your company’s records.
If you create the agreement yourself, it can be virtually free. Just ensure you cover all necessary details accurately. Online resources provide templates as a starting point.
Alternatively, hiring an attorney to draft the agreement may cost between $200 to $1000, depending on your business structure’s complexity and the attorney’s rates.
Our expert analysis indicates that investing in a professionally drafted operating agreement is the wisest decision, as it helps to prevent possible disputes and confusion in the future.
Employee Identification Number (EIN) Fees
The Employer Identification Number is a unique nine-digit number assigned to your business that is essentially used as a social security number for the LLC. Applying for this is free of charge and you can complete it online via the Internal Revenue Service (IRS) website.
On the other hand, if you decide to apply for an EIN through a professional service, expect to pay a fee, which can vary from one service provider to another. For example, Northwest Registered Agent charges $50 for this service while ZenBusiness’ fee is $99.
The requirement of publishing the formation of an LLC is not universal and is mandated by only a few states. These include Arizona, Nebraska, New York, and Pennsylvania.
The cost of this process can vary greatly, ranging from $50 to several hundred dollars, depending on the publication and the size of the advertisement. This fee is intended to inform the public about the new business entity and its members.
Opening a Bank Account
LLCs should open a bank account to differentiate their business transactions from personal funds. This requires valid identification and paperwork proving the business exists. Most banks waive these fees, but more specialized accounts can carry an initial cost of up to $50.
Ongoing LLC Fees
It’s important to understand that the costs associated with limited liability companies don’t end when it is formed. You’ll also need to pay ongoing fees such as LLC annual report fees and franchise taxes.
In the US, 48 states require annual reports or biennial reports from LLCs, accompanied by a fee. These annual fees vary significantly, with Idaho on the lower end at $0 and Alaska requiring a hefty $100 annual fee.
In certain states, you’ll also need to pay an annual franchise tax. This is essentially a fee you have to pay for the privilege of doing business in that state and is based on the LLC’s total income.
The ongoing LLC costs of this can range from $300 to several thousand dollars each year, depending on the specifics of your business.
State Business License Renewal Fees
You may also need to renew your license or permit every year. The cost of this process will vary depending on the type of business you are running and the specific state regulations. In New Jersey, for example, you might have to pay up to $75 for a license renewal.
Hidden Costs of Forming an LLC
While the LLC startup costs and ongoing expenses of maintaining a small business are generally well-known, there are three less obvious expenses that prospective small business owners should be aware of.
Legal and Professional Commissions
Whether you hire a lawyer or use a formation service, expert help is a significant but necessary expense. They can advise on the best business structure, help write an LLC operating agreement, and ensure the correct filing of all formation papers.
Tax Preparation Expenses
While LLCs don’t pay corporate income tax like a C corp or S corp, members need to report their LLC’s profits or losses on their personal tax returns.
However, the complexities of the income tax may be challenging to navigate. Hence, many small business or LLC owners opt for tax preparation services.
The National Society of Accountants reported that, in 2020, the average state fee to prepare a Schedule C (profit or loss from business) tax form was $457.
State-Specific Filing Fees for Starting an LLC (2023)
Considering the wide range of costs associated with forming an LLC, it is very important to understand the fees for your particular state. Below, we have included a breakdown of formation fees in all 50 US states so that you can budget accordingly.
Ways to Save on LLC Formation Costs
Let’s discuss some key strategies you can employ to reduce LLC costs. Being alert and proactive can help you control your expenses effectively, ensuring that you get your new venture off the ground without unnecessary financial stress.
Undeniably, one effective strategy to reduce the additional LLC costs associated with the filing process is opting for a do-it-yourself (DIY) approach. By taking charge of the process, you can eliminate the need for lawyer commission and other service charges.
Even tho, this is the cheapest way to start an LLC, our careful evaluation of the topic reveals that the DIY route is not always the most suitable as it requires a thorough understanding of the state rules and the process involved.
Online LLC Formation Services
An online LLC formation service offers an appealing middle ground between hiring a business attorney and the DIY approach. Companies like ZenBusiness and IncFile provide services starting from 0$ to guide you through the process, including preparing and filing your paperwork.
In conclusion, starting a business comes with both initial and ongoing costs. These include filing the Articles of Organization, annual fees, and state taxes.
Maintaining a sole proprietorship business also involves paying annual LLC fees, which vary depending on your state and industry.
Based on our experience, there are ways to reduce formation costs.
Consider options such as DIY formation or hiring online LLC filing services. These services often include the LLC’s registered agent service with their formation packages.
Just remember to explore all available options to find the best fit for your unique business needs.
Yes, it is possible to start an LLC for free. However, you will still need to pay for the cost of filing the paperwork with your state government and any additional fees associated with the process. Additionally, depending on where you live, there may also be ongoing costs associated with operating an LLC such as federal taxes and annual registration fees.
No, you do not need to hire a lawyer to form an LLC. However, many business owners opt for professional advice since the process can be complex and require detailed knowledge of state regulations. Additionally, if your LLC will have multiple members or undertake complex operations, it is especially important that you consult a lawyer for guidance regarding pass-through taxation.
The state with the lowest LLC filing fee is Montana, which charges just $35. Kentucky and Arkansas also have relatively low state fees of $40 and $45 respectively.