Starting an LLC, or a limited liability company, can be a really empowering step for visionary entrepreneurs. An LLC is a unique type of business entity that offers the flexibility of a sole proprietorship while providing personal liability protection, just like corporations do.
This means that your personal assets remain safeguarded in case of business debts or lawsuits.
Our team of legal professionals has guided countless entrepreneurs through the complex process of LLC establishment, providing tailored advice to meet unique business needs and goals.
Therefore, we understand how daunting the paperwork and requirements of starting a business can be, so we’ve compiled this guide to help make the process as simple as possible. Let’s take a look.
Brief Overview
- To start an LLC, you will need to draft pay filing fees, and file the Certificate of Formation with your state.
- You should also open a business bank account to keep your personal and business finances separate.
- An efficient way to form an LLC is by using online incorporation services, which simplify the entire process.
- Once you’ve formed your LLC, you’ll need to implement effective business strategies to ensure continued success.
Creating an LLC (Step-by-Step)
When starting an LLC, there are several important steps to follow. First, you need to choose a suitable business name. Next, you’ll need to appoint a registered agent. After that, you’ll have to file the Articles of Organization with your state and maintain compliance.
Let’s take a closer look at the steps:
Step 1: Choose and Register a Business Name
The first step if you decide to form an LLC involves choosing an appropriate business name. This is your company’s identity and a reflection of what your business is about.
When selecting a name for your limited liability company (LLC), it’s essential to ensure it aligns with your business structure and vision.
How to Choose a Name for Your LLC
A study published in the Journal of Advertising Research showed that companies with easier-to-pronounce names often perform better. A simple, memorable, and meaningful name can make a significant difference.
In addition, the name should meet the following criteria:
- Originality: When choosing a name for your business, ensure it is not the same as or too similar to an existing business name in your state. Avoid confusion and legal issues later.
- Compliance: Your chosen name must comply with your state’s LLC laws. These laws typically require the inclusion of “LLC” or “Limited Liability Company” in the name, identifying your business within the legal framework.
- Meaning: Your business name should reflect its nature and offerings. A descriptive and meaningful name can make a positive impression and attract the right audience.
Registering a Business Name
After choosing a perfect name, you need to register it. This process involves two steps:
- Name search: Conduct a name search in your state’s business database to ensure that it is unique.
- Registration: If the name is available, you can claim it by registering it with your state’s Secretary of State Office. This office handles business filing paperwork, including Articles of Organization, which you’ll need to form an LLC.
Most states will require a filing fee for this process.
More Tips to Consider When Naming Your LLC
Picking a successful and impactful name for your LLC goes beyond just sounding good. Consider these strategic tips when naming your venture for long-term success.
- Make it easy to spell: From our direct experience, this helps your potential clients find you more quickly when they search online.
- Be descriptive: The name should give an idea about your business, its values, or its location.
- Check domain availability: You’ll likely want a website, so make sure the domain name is available.
Remember, choosing a business name is a significant step in the LLC formation process. Take your time, do your research, and pick a name that will resonate with your customers and align well with your brand’s identity.
Step 2: Select a Registered Agent
When learning how to start an LLC, one of the most critical steps is selecting a registered agent. A registered agent is a person or business entity responsible for receiving and managing all legal documents on behalf of your limited liability company (LLC).
This includes essential LLC paperwork like service of process, correspondence from the state’s office, and other official government notifications.
According to recent statistics, about 36% to 53% of small business owners faced legal threats or actions in the past year. Therefore, having a statutory agent is crucial to avoid missing any important legal documents or deadlines.
Who Can Be a Registered Agent
It’s essential to know that anyone can be a registered agent – an individual, a member of your LLC, a professional registered agent service, or even you.
However, for “the person” to qualify, they must be at least 18 years old, have a physical address in the state where your business is located, and be available during regular business hours.
Our thorough investigation into the matter shows that working with a professional registered agent service has many benefits, like privacy protection, compliance monitoring, additional security, and convenience, especially for LLC owners who do not wish to list their addresses publicly or who might not have a physical location.
Should You Be Your Own Agent?
Choosing to be your own registered agent can save money, but it also comes with additional responsibilities and potential risks. It’s not uncommon for LLC owners to take on the role early on when forming their new business or entity but later switch to professional service as their business grows.
If you decide to serve as your own registered agent instead of resorting to registered agent services, be prepared to handle all legal and tax documents promptly and responsibly. Failing to do so can lead to missed deadlines, penalties, or even the dissolution of your LLC.
Whatever your choice may be, remember that the role of a statutory agent is to be the point of contact between your LLC and the state, ensuring you stay compliant with your government’s LLC laws and annual report requirements.
Responsibilities of an LLC’s Registered Agent
Registered agents receive important documents and ensure they reach the appropriate person in your LLC. Their responsibilities generally include:
- Accepting legal notifications regarding federal and state tax purposes or lawsuits
- Receiving and managing official government correspondence, including renewal notices for your LLC’s registration or business licenses.
- Keeping your LLC compliant with state requirements, such as filing an annual report and other LLC paperwork necessary for your business entity to remain in good standing.
- Knowing the LLC laws and requirements to ensure your business remains compliant with them.
- Providing mailing address services or a physical location for legal notifications, if necessary.
Step 3: Prepare an LLC Operating Agreement
Operating agreements are legal documents that outline the ownership and member duties of a limited liability company. This agreement allows you to set out the financial and working relations among small business owners (“members”) and between members and managers.
This document, in essence, is a contract among the LLC’s members that clearly spells out how the business should be run. It provides details on the company’s financial and functional decision-making in a structured manner.
According to a Congressional Research Service report, 78% of small businesses are structured as a partnership or singular proprietorship; for these businesses, an LLC agreement can provide important liability protection that’s not available under these other forms.
Essential Elements in an Operating Agreement
An effective Operating Agreement template includes, but is not confined to, the following elements:
- Details of each member’s percentage of ownership
- Members’ rights and responsibilities
- Allocation of profits and losses
- Management structure (e.g., manager-managed vs. member-managed)
- Meeting schedules
- Buyout and buy-sell rules (what happens when a member leaves, passes away, or files for bankruptcy).
Why Draft an Operating Agreement
Although not obligatory, from our experience, you shouldn’t skip drafting an LLC Operating Agreement, and here is why:
Firstly, it lends credibility to your LLC, making it clear that your company is a separate legal entity.
Additionally, it helps safeguard your limited liability status, particularly for single-member LLCs. It does this by demonstrating that your LLC is indeed a separate entity and that you’re not operating as a sole proprietorship, which doesn’t have the same liability protections.
Lastly, it helps avoid potential disputes and misunderstandings by laying out clear expectations about member roles and responsibilities.
Step 4: File LLC Articles of Organization
The Articles of Organization or Certificate of Formation is a mandatory document for everyone who wants to form an LLC. It officially establishes a new limited liability partnership within the state.
This document contains essential information about the business and acts as the charter of the LLC, stipulating its purpose, membership, management, and duration of the company existence.
Essential Information for the Certificate of Formation
The Certificate of Formation must contain the following information:
- The name of the LLC
- The duration of the LLC (if not perpetual)
- The purpose of the LLC
- The name and address of the registered agent
- The physical address of the LLC’s principal place of business
- Whether the LLC will be managed by its members or by appointed managers.
How to File Articles of Organization
To file the Articles of Organization online, you must submit the document to the appropriate state agency, typically the Secretary of State, along with the required LLC formation fee. Filing fees vary widely from state to state, ranging from $35 to $520.
For instance, in the state of Massachusetts, the fee is $520, while in Montana, it is only $35. You can either submit the document in person, by mail, or in many states, online.
Some states also require an additional publication requirement, where the formation of the LLC must be published in a local newspaper for a set number of weeks, which can extend the period of time to get your LLC approved.
Should You Use an LLC Formation Service to Start Your Business?
CPA Practice Advisor mentions that small businesses spend an average of 120 working days per year on administrative tasks, which include business filings such as filing the formation documents.
To save time and ensure accuracy, many entrepreneurs opt to use a professional LLC formation service like Northwest Registered Agent or ZenBusiness.
These services handle all the paperwork, including filing the Articles of Organization, paying the filing fees, and obtaining the EIN on your behalf.
Moreover, many of them offer free commercial registered agent services in their packages, which can reduce the initial LLC costs considerably.
Note that while these services can provide valuable assistance, they’re not a substitute for legal and tax advice. Always consider consulting licensed professionals for more details on how to start an LLC.
Step 5: Obtain an Employer Identification Number (EIN) and Open a Bank Account
An employer identification number (EIN) serves as the federal tax identification number for businesses in the United States. Think of it as a Social Security number for your LLC.
This unique nine-digit number is assigned by the Internal Revenue Service (IRS) to businesses for tax filing and reporting purposes. If your LLC has more than one member, you’ll need to get an EIN from the IRS after forming your LLC.
Even for a single-member LLC, you will need an EIN if you hire employees or choose to have it taxed as a C or S corporation instead of a sole proprietorship.
How to Apply for an EIN
Obtaining an EIN for your LLC is straightforward. Here are the steps involved:
- Visit the IRS Website: Navigate to the IRS’s EIN application page on their official website.
- Choose the Type of Entity: Select the option for LLC. You’ll then need to provide the requested information about your LLC, such as the number of members and the state where your LLC was formed.
- Complete the EIN Application: Fill in the required information about your new LLC, including the name, social security number, and address of the responsible party, and the reason you’re applying for an EIN.
- Review and Submit: After filling in all the required information, review the form to ensure all the details are correct. Once you’re sure, click on the ‘submit’ button.
- Receive Your EIN: The IRS will generate your EIN instantly upon completion of the online application. You can then download, save, and print your EIN confirmation notice.
Why You Need a Separate Bank Account for Your Business
Opening a separate business bank account is crucial for maintaining your personal liability protection, which is one of the major advantages of starting an LLC.
Having a dedicated business account helps keep your personal assets separate from your business assets, which can prove invaluable if your LLC is ever sued.
Additionally, having separate accounts makes tax time much less complicated, as it’s easier to determine and track your business income and expenses.
Here’s a tip: Most banks require your EIN and formation documents to open a business account, so make sure you have those ready when you visit the bank.
Step 6: Obtain Business Licenses and Permits
Operating an LLC requires adhering to the regulations established by your state’s office and complying with state laws.
Depending on the nature of your business, you may need various types of licenses and permits, including:
- business licenses
- professional licenses
- health permits
- signage permits
- building and construction permits.
For instance, if you’re planning to start a restaurant, you’ll need health permits. If you’re starting a construction firm, building permits are essential.
How to Find Out Which Licenses and Permits You Need
Understanding the permits and licenses you’ll need is crucial. Contact your state’s LLC office or visit their website to understand the requirements. You may also enlist the services of business formation experts who can guide you through the process.
Certain resources like the U.S. Small Business Administration’s (SBA) License and Permit page can also serve as a guide.
How to Receive Your Licenses and Permits
The steps of obtaining licenses and permits vary from state to state.
Typically, you’ll need to complete an application, provide important documents related to your LLC, and pay a required fee.
Some states require additional paperwork or steps involved to be completed. For instance, in New York, all LLCs are required to draft an Operating Agreement, publish a formation notice in two newspapers, and file a Certificate of Publication.
Another example is California, which requires LLCs to file a Statement of Information within 90 days of filing the original Articles of Organization and every two years thereafter.
Step 7: File Any Necessary Tax Forms
After forming your LLC and acquiring the required licenses, the next crucial step is ensuring tax compliance. This entails understanding your LLC’s tax obligations and filing the necessary forms. Let’s explore the specifics of this important process.
Understanding Tax Classifications for LLCs
Limited Liability Companies (LLCs) have flexible tax classifications. They can be taxed as a sole proprietorship (a “disregarded entity”), a partnership, or a corporation (either S Corporation or C Corporation).
The classification you choose influences how both federal and state governments tax your business.
How to File Your Tax Forms: A Step-by-Step Guide
- Decide your LLC’s tax classification: Consider the nature of your business, the number of members, and anticipated profits and losses.
- Find the appropriate forms: These can be obtained online from the IRS website or your state’s tax department.
- Fill out the forms meticulously: Ensure to include all the necessary information, including your LLC’s name, the fiscal year, and your employer identification number (EIN).
- Submit the forms: You can submit your tax forms to the IRS through mail or e-file them online. Some states also have their own filing requirements.
See this article for more information on how to start an LLC for cheap.
Related: How to Start an LLC for Airbnb
Benefits of Starting an LLC
If you decide to start an LLC, you will enjoy important advantages, ranging from legal advantages to taxation flexibility. In this section, we’ll delve into the five key benefits of forming an LLC and why it’s a favored business structure for many entrepreneurs.
Flexibility in Taxation
One of the many benefits of starting an LLC is the flexibility in taxation. With an LLC, you can choose how you want to be taxed for federal tax purposes.
For instance, you can opt to be taxed as a sole proprietorship, a partnership, or a corporation (S or C Corp). This unique flexibility can potentially offer significant tax advantages.
Limited Liability Protection
Another key benefit of an LLC is the asset protection it offers. This means that the LLC’s members are not personally liable for the company’s debts and liabilities. So, if the company runs into financial trouble, creditors can’t go after the members’ personal assets.
This is different from sole proprietorships and general partnerships, where owners have unlimited personal liability for business debts.
Ease of Formation and Management
Starting an LLC is relatively straightforward, with less paperwork than corporations. The process includes choosing a unique LLC name, filing the LLC formation paperwork, and paying the state’s required filing fee.
Management flexibility is another significant advantage of LLCs. Unlike corporations that require a board of directors and annual meetings, LLCs don’t need these formalities.
In a manager-managed LLC, for example, only the managers (who may be members) handle the daily operations and decision-making.
Access to Business Credit and Funding
Establishing an LLC can also make it easier for your business to get funding. Banks and other financial institutions are more likely to provide funding to formal business structures like LLCs.
After creating your LLC, you can apply for a business credit card, which not only enables you to separate your personal and business expenses but also helps your business build credit.
Enhanced Credibility
Forming an LLC can add professional credibility to your business, especially if it is a foreign LLC. Customers, suppliers, and partners often prefer to deal with an organized business entity.
An LLC can reinforce your industry expertise and make potential customers more likely to trust you.
Should I Seek Assistance When Creating an LLC?
Starting your own LLC may seem intimidating, but with careful planning and the right guidance, it is entirely within your reach. Remember, you’re not alone in this journey.
Professional help is available to assist you in navigating the process, from filing your formation paperwork to understanding your tax obligations.
If you need help filing the paperwork for your LLC, make sure to check our recommendations for the cheapest LLC formation services in the US, which can save you time and money.
Also, remember to seek advice tailored to your specific circumstances, and don’t let complexity discourage you.
FAQs
LLC members are taxed either as a pass-through entity or as a corporation. Pass-through taxation, which is the default option, means that members report business income and losses on their personal tax returns.
Alternatively, an LLC can choose to be taxed as a C Corp, meaning it pays taxes at the corporate level, and then shareholders pay taxes on any dividends received.
The four types of LLCs include a single-member LLC, multi-member LLC, a manager-managed LLC, and a series LLC. Each type serves different purposes and offers varying levels of control, liability, and management flexibility.
The cost to open an LLC varies by state, ranging from $50 to $800, with an average cost of around $127, according to a survey by World Population Review. This includes the state’s filing fee but not ongoing costs like filing annual reports or franchise tax.
References:
- https://www.journalofadvertisingresearch.com/content/48/1/148.short
- https://www.thezebra.com/resources/research/small-business-statistics/
- https://sgp.fas.org/crs/misc/R44086.pdf
- https://www.cpapracticeadvisor.com/2017/09/13/smbs-spend-120-working-days-per-year-on-admin-tasks-and-bookkeeping/27084/
- https://www.sba.gov/business-guide/launch-your-business/apply-licenses-permits
- https://worldpopulationreview.com/state-rankings/llc-cost-by-state
- https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-number-ein-online
