How to Start an LLC (7 Easy Steps to Business Formation)

Starting an LLC, which stands for a limited liability company, represents an empowering step for visionary entrepreneurs. An LLC constitutes a distinctive form of business entity that grants the flexibility akin to a sole proprietorship, all the while furnishing personal liability protection, akin to corporations.

This means that, in the event of business debts or lawsuits, your personal assets stay shielded.

Countless entrepreneurs have received guidance from our team of legal professionals in navigating the intricate process of establishing an LLC. We offer customized advice tailored to address individual business requirements and objectives.

Hence, comprehending the potentially intimidating nature of business startup paperwork and prerequisites, we have assembled this guide to simplify the procedure as much as possible. Let’s delve into it.

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

If you opt to establish an LLC, the initial step entails selecting a fitting business name. This name serves as the identity of your company and mirrors the essence of your business.

When you choose a name for your limited liability company (LLC), it becomes crucial to verify that it aligns seamlessly 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:

  1. Name search: Conduct a name search in your state’s business database to ensure that it is unique.
  2. 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.

Keep in mind that choosing a business name constitutes a significant milestone within the LLC formation process. Invest ample time in research and ensure the name you choose resonates with your customer base while aligning seamlessly with your brand’s identity.

Step 2: Select a Registered Agent

You must select a registered agent, a crucial element when delving into the process of starting an LLC. This registered agent can be either an individual or a business entity, and their primary responsibility is to receive and manage all legal documents on behalf of your limited liability company (LLC).

This encompasses vital LLC documentation such as service of process, correspondence from the state’s office, and various 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 crucial to understand that anyone has the potential to serve as a registered agent, whether it be an individual, a member of your LLC, a professional registered agent service, or even yourself.

However, in order for someone to qualify for this role, they must meet specific criteria. They need to be at least 18 years old, possess a physical address within the state where your business is based, and be accessible during standard business hours.

Our comprehensive examination of this topic reveals that collaborating with a professional but affordable registered agent service offers numerous advantages. These benefits include safeguarding privacy, diligent compliance monitoring, enhanced security, and added convenience.

This proves particularly beneficial for LLC owners who prefer not to disclose their addresses publicly or who lack a physical business location.

Should You Be Your Own Agent?

Opting to act as your own registered agent can be a cost-saving measure, but it also entails assuming additional responsibilities and potential risks. It’s quite common for LLC owners to initially take on this role during the early stages of forming their new business or entity, only to transition to professional services as their business expands.

If you choose to serve as your own registered agent instead of relying on registered agent services, be prepared to diligently and responsibly manage all legal and tax-related documents. Failing to fulfill these responsibilities can result in missed deadlines, penalties, or even the dissolution of your LLC.

Regardless of your choice, it’s essential to recognize that the role of a statutory agent involves serving as the primary point of contact between your LLC and the state. This role ensures that your business remains in compliance with the relevant government’s LLC laws and annual reporting 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:

  1. Accepting legal notifications regarding federal and state tax purposes or lawsuits
  2. Receiving and managing official government correspondence, including renewal notices for your LLC’s registration or business licenses.
  3. 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.
  4. Knowing the LLC laws and requirements to ensure your business remains compliant with them.
  5. 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) functions as the federal tax identification number for businesses operating in the United States. Consider it akin to a Social Security number designated for your LLC.

The Internal Revenue Service (IRS) assigns this distinctive nine-digit number to businesses, enabling them to fulfill tax filing and reporting obligations. In cases where your LLC comprises multiple members, obtaining an EIN from the IRS becomes a necessary step following the formation of your LLC.

Even in the scenario of a single-member LLC, an EIN becomes a requirement should you decide to hire employees or opt for taxation as a C or S corporation instead of maintaining sole proprietorship status.

How to Apply for an EIN

Obtaining an EIN for your LLC is straightforward. Here are the steps involved:

  1. Visit the IRS Website: Navigate to the IRS’s EIN application page on their official website.
  2. 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.
  3. 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.
  4. 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.
  5. 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

Securing the necessary licenses and permits can involve varying steps, depending on the state’s regulations.

Generally, the process entails submitting an application, furnishing essential documents related to your LLC, and satisfying the prescribed fee requirements.

In certain states, additional paperwork or specific procedures might be mandatory. For instance, in New York, every LLC must create an Operating Agreement, publish a formation notice in two newspapers, and submit a Certificate of Publication.

Similarly, in California, LLCs are obligated to file a Statement of Information within 90 days of their initial Articles of Organization submission and then repeat this process 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

  1. Decide your LLC’s tax classification: Consider the nature of your business, the number of members, and anticipated profits and losses.
  2. Find the appropriate forms: These can be obtained online from the IRS website or your state’s tax department.
  3. 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).
  4. 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

Should you make the decision to initiate an LLC, you’ll gain access to a plethora of crucial advantages, encompassing legal perks and tax-related flexibility. In this section, we’ll explore the five fundamental benefits that come with establishing an LLC and why it stands as the favored business structure for countless entrepreneurs.

Taxation Flexibility

One of the numerous merits associated with launching an LLC is the flexibility it provides in terms of taxation. When you opt for an LLC, you have the liberty to dictate your preferred federal tax treatment.

For instance, you possess the option to elect taxation as a sole proprietorship, partnership, or even as a corporation (S or C Corp). This remarkable adaptability has the potential to yield substantial tax benefits.

Limited Liability Protection

Another pivotal advantage linked to an LLC pertains to the asset protection it furnishes. This signifies that the members of the LLC bear no personal responsibility for the company’s debts and obligations. Consequently, in cases of financial adversity, creditors lack the ability to pursue the personal assets of the members.

This differs markedly from sole proprietorships and general partnerships, where owners endure unlimited personal liability for business indebtedness.

Ease of Formation and Management

The process of initiating an LLC is relatively uncomplicated, involving less bureaucratic paperwork compared to corporations. It encompasses tasks such as selecting a distinctive LLC name, filing the requisite LLC formation documents, and remitting the mandatory filing fee to the state.

Moreover, the flexibility in managing an LLC serves as another significant advantage. Unlike corporations, which necessitate a board of directors and annual meetings, LLCs do not impose such formalities.

For instance, in a manager-managed LLC, only the managers, who may also be members, bear the responsibility for day-to-day operations and decision-making.

Access to Business Credit and Funding

The establishment of an LLC can also simplify the process of obtaining funding for your business. Financial institutions, including banks, are more inclined to extend financing to well-structured business entities like LLCs.

Following the formation of your LLC, you can proceed to apply for a business credit card. This not only facilitates the separation of personal and business expenses but also contributes to building your business’s creditworthiness.

Enhanced Credibility

The formation of an LLC can lend a considerable degree of professional credibility to your enterprise, particularly if it operates as a foreign LLC. Customers, suppliers, and business partners often favor dealing with organized business entities.

An LLC can underscore your industry expertise, making potential customers more inclined to place trust in your business.

Related Article: How to Buy an LLC

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

How LLC Members Are Taxed?

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.

What Are the Four Types of LLCs?

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.

How Much Does It Cost to Form an LLC?

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:

  1. https://www.journalofadvertisingresearch.com/content/48/1/148.short
  2. https://www.thezebra.com/resources/research/small-business-statistics/
  3. https://sgp.fas.org/crs/misc/R44086.pdf
  4. https://www.cpapracticeadvisor.com/2017/09/13/smbs-spend-120-working-days-per-year-on-admin-tasks-and-bookkeeping/27084/
  5. https://www.sba.gov/business-guide/launch-your-business/apply-licenses-permits
  6. https://worldpopulationreview.com/state-rankings/llc-cost-by-state
  7. https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-number-ein-online
Carla Baker

Carla Baker

With an MBA from the University of Pennsylvania and a proven track record, our Co-Founder brings expert guidance to new small businesses and LLCs. Her portfolio showcases a history of successfully launching and managing diverse ventures, while her passion lies in empowering others to navigate the world of business.