An LLC or Limited Liability Company (LLC) is a business structure offering the benefit of limited liability protection along with flexible tax options. Here are the simple steps on how to start an LLC.
How to Form an LLC
Setting up an LLC is relatively straightforward. You can save a significant amount with the steps here.
STEP 1: Select Your State
Ideally, your LLC is better located in the state where you live or where you plan to do business. However, if your business will operate in different states, you will have to register a foreign LLC in the other states where you plan to do business.
STEP 2: Name Your LLC
You first need to choose a name for your LLC. To do this, check out the name availability. You can typically do this at the secretary of state website. Meanwhile, here are the naming requirements:
- The company name should include “limited liability company” or abbreviations like LLC or L.L.C.
- The company name should not include words that might confuse your company name with any government agency (i.e., FBI, State Department, Treasury, etc.).
- Words like Bank, Attorney, University, and some others are restricted and may require additional paperwork on top of a licensed individual like a doctor or lawyer as part of the company
Check out other details about choosing a name on the How to Name a Business guide.
STEP 3: Choose a Registered Agent
A registered agent is someone who or an organization that processes legal documents on your company’s behalf. The documents would include official correspondences like state filing notices and legal summons.
All states generally require businesses to nominate a registered agent when forming an LLC. Remember that your registered agent should be a resident of the state where you are operating your business or a corporation authorized to do business in your selected state.
Learn more about Registered Agents so that you’ll know what to look for when choosing your agent, and check out the LLC services that provide you professional registered agent service.
STEP 4: File LLC Articles of Organization
Formation documents are vital to creating an official LLC. There are different names to this document, depending on the state: Certificate of Formation, Articles of Organization, or Certificate of Organization. You file this at the Secretary of State. You can file either online or by mail, and the filing fee, on average, would be about $100.
STEP 5: Create an LLC Operating Agreement
The LLC operating agreement is not mandatory, but it is encouraged. This legal document outlines the organizational structure and roles of members of your LLC. Take note that you should have already decided if your LLC is member-managed or manager-managed.
Here are the six main sections of an operating agreement:
- Capital Contributions
- Management and Voting
- Membership Changes
Learn more about LLC Operating Agreement to file it properly.
STEP 6: Get an EIN
EIN stands for Employer Identification Number. Some would call it Federal Employer Identification Number (FEIN) or Federal Tax Identification Number (FTIN). It’s like a Social Security number (SSN) for your LLC. The EIN Is vital when you plan to hire employees or open a business bank account.
There is no fee associated with getting an EIN, and you can do it via the IRS website, via fax, or by mail. You can learn more about EIN from our articles on what an EIN is and why you need EIN.
Essential Steps After Starting an LLC
There is more to forming an LLC. You’ll have to deal with your assets and taxes. Here are other important things to address when starting an LLC.
Separate Personal Assets From Business
Your LLC offers limited liability protection. It is vital to use dedicated business banking and credit accounts to avoid mixing them with your personal accounts. Otherwise, your personal assets (your home, car, and other valuables) would be at risk if your LLC gets sued.
Register Your LLC for State Taxes
There are several taxes that you might need depending on the nature and location of your business.
- If you are selling a physical product, you’ll register your company for sales & use tax.
- If you have employees, then you need unemployment insurance tax and employee withholding tax.
- You may also be required to file an annual report or biennial report.
You can find out more from our tax guide article.
Understand Your LLC’s Federal Tax Options
LLCs get taxed as pass-through entities. It means all of the business’s profit goes through the LLC member’s tax returns. It is then the member who pays self-employment taxes and income tax on their share of business income after tax.
Meanwhile, LLCs can also be taxed as S corporations (S corps) or C corporations (C corps). The former allows LLC members to be taxed as employees. It reduces the tax burden in certain circumstances.
Set Up Business Accounting
It is vital to have a business accountant who will help you take advantage of tax benefits. It will save you and your business tons of money in taxes annually.
Get Licenses and Permits
You need to check if your business will require licenses or permits so that you can stay compliant. Licensing requirements would vary per state and county or city laws.
Get Business Insurance
Generally, businesses with employees must get workers’ compensation insurance. Meanwhile, general liability insurance is not a legal requirement, but it is highly recommended to protect your business assets from lawsuits.
Much unlike a sole proprietorship, an LLC is a separate entity from its owner. Sole proprietors generally benefit from converting their business to an LLC, which offers liability protection, not to mention inexpensive to start and maintain. Meanwhile, only businesses with zero liability must operate as sole proprietorships since there is no legal separation between a sole proprietor and the business.
An LLC or limited liability company protects your personal assets and increases your business’s credibility. These are the most straightforward and most affordable legal business entities in terms of formation and maintenance. However, LLCs aren’t ideal when attracting investors.
Definitely, you can start an LLC by yourself by following our LLC formation guides.
Depending on the state where you plan to operate your business, the cost of creating an LLC would vary. It could range from $50 and $500 to form an LLC, and some $100 annually to maintain.