The Ultimate Guide to LLC Formation

One of the most significant choices that a business owner can make is choosing the right way to set up their business from the start — and one of those decisions is the business entity type. You have several options: sole proprietorship, partnerships, corporations, and, of course, the LLC (Limited Liability Company).

With all the options before you, why start an LLC?

LLC formation can offer business owners several advantages: protection from personal liability, tax benefits, and flexibility in management. Perhaps most importantly, it allows you to legally separate yourself from your business. It’s no wonder there were over 435,000 applications, for LLC formations in March 2024 alone.

We’ve created this ultimate guide to LLC formation so that you can learn what an LLC is and how they function, how to set your LLC up, financial strategies to help make your business successful, your tax obligations, how to stay legally compliant, and how to expand your LLC to other states and internationally.

What is an LLC?

An LLC is just one of many ways to legally structure a business. In the United States, an LLC provides business owners with liability protection in a less complex (and less expensive) manner than a corporation.

The basic structure of an LLC can be broken down into the following components:

• Members: Individuals, corporations, other LLCs, foreign entities, and trusts that own the business, and can take an active or passive role in day-to-day operations.
• LLC Operating Agreement: A document that outlines the ownership and management structure, as well as the rights, responsibilities, and obligations of members. Importantly, it outlines how profits and losses are distributed among members.
• Registered Agent: A designated party who is responsible for receiving legal documents on behalf of the LLC (such as lawsuits), and must have a physical address in the state where the business is registered.
• Management Structure: In a Member-managed LLC, all members make decisions and control the company (common in small LLCs with active members). A Manager-Managed LLC delegates authority to one or more managers, who may or may not be members (common in larger LLCs or when members desire a passive role).
• Articles of Organization: Filed with the state's Secretary of State or similar agency, articles typically include basic information about the LLC, like name, address, registered agent, and member information.

Why Form an LLC?

LLCs offer many benefits that other business structures don’t:

Liability Protection

Members are not liable for the actions of the LLC or its other members, and personal assets are not vulnerable if the business accrues debt. (This protection can be lost in certain circumstances, such as if members comingle business and personal assets.)

While forming an LLC provides significant protection from personal liability, it's important to understand the conditions under which this protection could be compromised. The liability shield of an LLC ensures that members are typically not personally responsible for business debts and lawsuits. However, this protection is not absolute. Members might lose this shield in certain circumstances, including:

• Failing to Maintain Corporate Formalities: Members must treat the LLC as a separate entity, which includes proper record-keeping, holding regular meetings, and avoiding the commingling of personal and business funds.
• Personal Guarantees: If a member guarantees a loan or a business debt, they can be held personally liable.
• Illegal or Fraudulent Activities: If members engage in illegal acts or fraudulent business practices, personal liability protection does not apply.

Understanding these limitations is crucial for maintaining the integrity of the liability protection offered by an LLC structure.

Tax Advantages

LLCs have several tax advantages. Although most LLCs default to ‘pass-through taxation’, they can elect to be taxed as a corporation if that’s more beneficial to members. There are also tax incentives and retirement savings options.

Operational Flexibility

LLCs can be owned by individuals, corporations, partnerships, and trusts — there is no limit to the number of members. They can be member- or manager-managed based on the needs and wants of the business and members.

Privacy and Professionalism

Forming an LLC can help protect personal information from public disclosure, enhancing privacy. Additionally, operating as an LLC rather than a sole proprietorship can elevate the perception of your business, portraying a more established and professional entity.

If you’re starting a side hustle, an LLC can shield your personal assets from business liabilities, providing peace of mind as you pursue your entrepreneurial journey. Plus, an LLC's pass-through taxation means simpler tax reporting, allowing you to focus on growing without the complexities of corporate taxation.

LLC vs. Other Business Entities

An exciting part of starting a business is the many possibilities for structuring it, such as sole proprietorships, partnerships, LLCs, and corporations.

Now that you understand what an LLC is, let’s compare it to the other types of business entities:

• Sole Proprietorship: Owned and operated by one person. The owner has unlimited liability, meaning they are personally responsible for all debts and obligations of the business. There is no legal separation between the business and the owner.
• Partnership: Owned and operated by two or more individuals or entities. Like sole proprietorships, partnerships offer no limited liability protection, exposing the partners' personal assets to business liabilities.
• Corporation: A separate legal entity owned by shareholders. Corporations offer limited liability protection to shareholders, meaning their personal assets are typically protected from the debts and liabilities of the corporation. However, corporations are subject to double taxation, where the corporation itself is taxed on its profits, and shareholders are taxed again on any dividends they receive.

As you can see, an LLC offers many advantages to these business types, which makes it an attractive option for many entrepreneurs.

• Small businesses, such as consulting firms, freelancers, and retail stores, opt for LLC status due to its simplicity and flexibility.
• LLCs are commonly used for owning and managing real estate properties due to their liability protection.
• Professionals such as doctors, lawyers, and architects use LLCs for operational flexibility, but it’s important to note that LLCs and PCs do not protect personal assets from malpractice lawsuits. Professionals must rely on malpractice insurance, and in cases of insufficient coverage, a Domestic Asset Protection Trust (DAPT) can offer additional security. Note that personal assets exceeding any liabilities, like student loan debt, remain vulnerable.
• Startups may choose LLC status initially for its simplicity and ease of setup. As the business grows, it may later convert to a corporation if needed for fundraising or expansion plans.

How to Form an LLC

Now that you’ve decided that an LLC is the best option for your business, follow this guide to setting it up for success. Every state has different requirements and fees, so please seek out state-specific information with your Secretary of State (or seek out professional assistance).

Choose Your LLC Name

Creating the name of your LLC is one of the first steps on your journey to setting up your business. Although each state's laws can differ, the name you choose must meet two requirements.

1. It must be compliant. Your business name must indicate its LLC status, and you can meet this requirement by simply adding “limited liability company,” “LCC,” “L.L.C.”, or another variations at the end of the name you choose.
2. It must be unique. Your business name can not be deceptively similar as other business entities registered in your state. To search for other registered business names, review your state’s business filings website.

Giving your business a name can be a challenging task, but you want to get it right. After all, the name you choose is one of the first things people will learn about your business, and it’s an opportunity to leave a lasting first impression on your future clientele. You could go the simple route and choose a name based on what your business does (or perhaps your name). Or, if you’d like to get more creative, you could draw inspiration from other languages, your business origin story, and mission - or even play with spelling a common word differently.

If you need extra time to complete all of your Articles of Organization, you can often hold an LLC name for 30-90 days by filing with the Secretary of State's office.

Secure Your Digital Presence

Once you’ve decided on your business name, you’ll need to choose and register your domain name. The name you choose should be easy to remember and find.

Ideally, your domain name should contain keywords related to your offers or products. You’ll also need to consider the Top-Level Domain (TLD) you wish to use - the most common are .com, .net, .org, and .biz - so be sure to choose one that matches what your industry typically uses and meets your goals.

Recommended tools to check domain name availability: Godaddy and Namecheap

If the domain name you want is taken, you may need to settle on an alternative or change your business name slightly.

After you’ve decided on your domain name, register it! Choose a domain registrar (such as Godaddy or Bluehost register for an account, search for the name you want to claim, and then go through the steps to provide your payment details and contact information.

For privacy protection, information, and data security, we can’t overstate the importance of investing in domain privacy protection (also known as WHOIS privacy). Domain registrars offer this service to prevent personal information from being publicly accessible. It also protects website visitors and your business from malicious activity (such as phishing) and is a valuable tool to protect your business reputation.

To get more advanced, consider securing multiple TLDs to prevent competitors or fraudsters from creating similar domains to divert your clientele. You can also use multiple TLDs to boost your market reach. One example is using different country codes (.us and .ca, for example) to attract clients in these countries.

Select a Registered Agent

All LLCs must appoint a registered agent to handle important legal and official documents. This agent is responsible for receiving and promptly delivering these documents to the LLC to facilitate necessary actions. The registered agent must be at least 18 years old and available at a physical address within the state during business hours.

You can serve as your own registered agent for your LLC, appoint another individual, or hire a professional service. Opting for a professional registered agent provides several benefits, including enhanced privacy, as their address is listed publicly instead of your own. This also reduces the risk of being served legal documents in front of employees, family, or friends.

Additionally, a professional agent can offer expertise, especially if you lack a physical address in the state of your LLC's registration. Before choosing a registered agent, you may want to consult with a business attorney to explore your options thoroughly. With LLC Attorney, you can access both services in one place.

Prepare and File the Articles of Organization

Once you have selected your LLC's name and registered agent, the next step is to formalize your business by filing the Articles of Organization. These documents are crucial for officially establishing your LLC and may be filed online for a fee, which varies by state. When preparing these documents, you will need to provide:

• Your LLC's name and primary business address
• Whether your LLC will be managed by its members or a manager
• The registered agent's name and address
• The signatures of all forming members
• The purpose of your LLC and its planned duration

To file, identify the appropriate state agency — often the Secretary of State — and follow their specific submission guidelines on their website. After paying the required fee and submitting your documents, you will receive a certificate of formation. Depending on the state, processing times can vary from immediate to several weeks.

Craft an Effective Operating Agreement

An operating agreement is essential for defining the internal operations of your LLC and is mandatory in almost all states. This document details the operational guidelines and agreements among all members and the LLC itself, preventing disputes, protecting personal assets, ensuring personal liability protection, and facilitating smooth business operations.

Even if you are the sole member of your LLC, an operating agreement is crucial to establish the business's legitimacy and protect your assets. It acts as a formal declaration of the company's structure and intentions, which is especially important in legal disputes or financial evaluations.

For LLCs with multiple members, the operating agreement becomes even more critical. It should clearly outline the division of authority, decision-making processes, allocation of labor, and distribution of profits. It should also specify procedures for changing membership and assigning voting rights. To ensure its effectiveness and legality, having this document reviewed by an attorney is advisable.

Benefits of an Effective Operating Agreement

• Prevents Internal Disputes: Clearly defines member roles, responsibilities, and procedures for resolving conflicts, helping prevent misunderstandings and disputes among members.
• Protects Personal Assets: Establishes the separation between members' personal assets and business liabilities, enhancing legal protections.
• Ensures Operational Clarity: Outlines operational processes and management structure, ensuring that all members understand the operational dynamics and decision-making processes.
• Facilitates Smooth Transitions: Details the procedures for adding or removing members, handling the transfer of membership interests, and other changes, facilitating smooth transitions within the LLC.
• Enhances Legal Compliance: Helps ensure compliance with state laws by documenting the agreed-upon terms for running the LLC, beyond what is dictated by default state laws.
• Customizes Management Structure: Allows members to establish a management structure tailored to their specific needs, which can be crucial for unique business models or industries.

Types of LLC Structures

Choosing the appropriate LLC structure is crucial as it significantly impacts your business's operational efficiency, legal protections, and tax obligations. Here's a detailed overview of the various types of LLCs and their unique benefits, helping you make an informed decision tailored to your business needs.

Single-member LLC

A single-member LLC is ideal for solo entrepreneurs who seek the simplicity of a sole proprietorship with the added benefits of a corporate structure. However, it's important to note that not all states offer the same level of asset protection for single-member LLCs. For example, Wyoming does recognize its asset protection, but this isn't universal. It offers:

• Limited Liability Protection (LLP): Shields your personal assets from business debts and liabilities.
• Simplified Tax Filing: Profits are taxed on your personal income tax return, not at the corporate level.
• Operational Flexibility: Easier management with fewer formalities than more complex structures.
• Enhanced Privacy and Credibility: Operates under a distinct business name, increasing professional perception.
• Estate Planning Benefits: Simplifies the transfer of business assets to heirs.
• L3Cs: Low-Profit Limited Liability Companies are designed to offer socially-conscious businesses flexibility in operations to allow them to reach their goals within a business framework, legal recognition and credibility, and access to capital and Program-Related Investments (PRIs).

Multi-member LLC

Suitable for businesses operated by two or more individuals, this structure facilitates collaborative entrepreneurship with features like:

• Joint Liability Protection: Each member’s personal assets are protected against the business’s liabilities.
• Shared Responsibilities: Members divide management duties and business decisions.
• Pooled Resources: Combines skills, knowledge, and financial resources from multiple members.
• Tax Flexibility: Members can opt for pass-through taxation or choose to be taxed as a corporation.
• Risk Sharing: Spreads business risks across all members, reducing individual exposure.

Professional LLC (PLLC)

Designed specifically for licensed professionals such as doctors, lawyers, and accountants, PLLCs offer:

• Statutory Compliance: Meets specific state legal requirements for licensed professions.
• Professional Credibility: Enhances trust and credibility within the professional community.
• Limited Liability Protection: Protects personal assets while allowing professional practice.
• Tax Flexibility and Benefits: Offers the same tax options as other LLCs, tailored for professional earnings.
• Independent Practice: Enables professionals to own and manage their practice directly.

Series LLC

A sophisticated structure that's ideal for businesses that own multiple properties or operate various divisions, each with distinct liability profiles. Benefits include:

• Asset Protection: Each series can own assets and operate independently, shielding each from the liabilities of others.
• Cost Efficiency: Reduces the need for multiple LLC formations, saving on setup and operational costs.
• Operational Flexibility: Each series can have different members and managers, and operate under different names.
• Tax Efficiency: Allows for consolidated or separate tax filings, depending on business needs.

Low-Profit LLC (L3C):

Crafted for ventures that primarily aim for social impact over profit, L3Cs facilitate:

• Access to Capital: Attracts private investments and philanthropic funding through Program-Related Investments (PRIs).
• Legal Recognition and Credibility: Operates under a recognized legal structure that assures investors of its charitable or educational mission.
• Operational Flexibility: Combines the benefits of a non-profit with the profitability aspects of a commercial entity.
• Tax Benefits: While not exempt from taxes, it can offer advantages in certain tax situations.

Choosing the Right LLC Structure

Selecting the right LLC structure is a critical decision that can influence your business's legal protections, tax obligations, management style, and overall success. To ensure you choose the most suitable structure for your specific needs, consider the following steps and factors:

1. Assess Your Business Needs: Start by defining what you expect from your LLC in terms of liability protection, tax preferences, and management flexibility. Each type of LLC offers different benefits and is designed to cater to varying business models and objectives.
2. Consider the Number of Owners: Both types of LLCs operate under the same legal framework but are differentiated by the number of owners and the specifics of management and liability, as outlined in the LLC's operating agreement.
   1. Single-member LLC: Ideal for solo entrepreneurs, this setup maintains simplicity and grants foll control to the single owner.
   2. Multi-member LLC: Suitable for businesses with two or more owners, this structure facilitates shared responsibility and resources, enhancing collaboration among partners.
3. Evaluate Professional Requirements:
   1. Professional LLC (PLLC): If your business involves professional services requiring licenses, such as legal, medical, or accounting services, a PLLC ensures compliance with state regulations that pertain to these professions.
4. Analyze Liability and Asset Protection Needs:
   1. Series LLC: If your business owns multiple properties or operates different divisions, a Series LLC can protect each segment’s assets and liabilities independently from others within the same parent LLC.
5. Identify Your Social Impact Goals:
   1. Low-Profit LLC (L3C): If your primary goal is to achieve a social mission rather than maximize profit, an L3C provides a suitable structure that facilitates access to both private and philanthropic capital.
6. Project Your Tax Implications: Understand how different LLC structures can impact your tax filings. Most LLCs benefit from pass-through taxation, but options like being taxed as an S corporation or C corporation could be more beneficial depending on your financial goals and revenue size.
7. Understand State-Specific Rules: Some states have unique rules and benefits for different types of LLCs. Research your state’s specific regulations or consult with a local business attorney to ensure that your chosen LLC type is optimized for your location.
8. Plan for Future Growth and Scalability: Consider how each LLC type can accommodate future growth. For example, a multi-member LLC or a Series LLC may offer more scalability for adding new partners or expanding operations than a single-member LLC.
9. Consult with Professionals:Before finalizing your decision, it’s wise to consult with a business attorney or a tax advisor who can provide personalized advice based on your business specifics. They can help clarify complex points and ensure that your chosen structure aligns with both current needs and long-term objectives. You can contact LLC Attorney to discuss your questions and narrow down your options.
10. Make an Informed Decision: With all the information gathered, weigh the pros and cons of each structure against your business needs and future aspirations. The right choice should meet your current requirements, support your business's growth, and adapt to evolving challenges.

Establishing Your Financial Foundation

Setting up a strong financial foundation is crucial for the stability and growth of your LLC. Here are the foundational steps needed for effective financial management.

Applying for an EIN and Setting Up Bank Accounts

Congratulations on the official formation of your LLC! The next critical step is to obtain your Employee Identification Number (EIN) from the IRS. This 9-digit number serves as your business's federal identification for tax purposes, similar to a Social Security Number but for your business.

Acquiring an EIN is essential, particularly if your LLC has multiple members or hires employees. Even sole proprietors may need an EIN to open a business bank account, as many financial institutions require it. Always open a dedicated business bank account to keep your personal and business finances separate, thereby ensuring compliance with tax laws and protecting your personal assets.

Additionally, register for a sales tax identification number with your state’s tax department if your LLC operates in multiple states.

Understanding and Obtaining Necessary Licenses and Permits

Every business, based on its location and industry, must secure the appropriate licenses and permits. Common requirements may include sellers' permits for sales tax, city or county-specific permits, industry-specific permits, permits for operating in multiple states (foreign LLC permits), and doing business as (DBA) registrations if operating under a trade name.

To determine the specific licenses and permits your LLC requires, consult with industry associations and local or state government offices. These resources will provide tailored guidance to ensure your business operates legally and smoothly. You can also visit our state specific pages for more information.

Tax Obligations and Strategies

Understanding the complicated LLC tax responsibilities is critical to ensuring your business’s long-term success. Here’s how to effectively manage these obligations:

Navigating Your LLC's Tax Responsibilities

Choosing the right tax classification is crucial for your LLC as it affects your financial obligations and business operations. Here’s a detailed look at the options:

• Pass-Through Taxation: By default, LLCs are treated as pass-through entities, meaning the business itself is not taxed on its profits. Instead, profits and losses are reported on the personal tax returns of the members, and taxes are paid at the individual level. This avoids the double taxation commonly associated with corporations.
  • Pros: Simplifies the tax process and avoids double taxation.
  • Cons: Members pay self-employment taxes on their total net earnings.
• Corporate Tax Status: LLCs can elect to be taxed as C-corporations or S-corporations if it suits their business model better.
  • C-Corporation Taxation: Electing C-corporation status means the business is taxed separately from its owners at corporate tax rates, which could be advantageous for retaining earnings within the company.
    • Pros: Potentially lower tax rates on retained profits, and benefits from corporate tax perks.
    • Cons: Profits are taxed twice – once at the corporate level and again at the individual level when distributed as dividends.
  • S-Corporation Taxation: S-corporation status combines the benefits of pass-through taxation with some corporate characteristics. Profits and some losses pass directly to owners’ personal tax returns but avoid self-employment taxes on those profits.
    • Pros: Avoids self-employment taxes on distributed profits, and avoids corporate double taxation.
    • Cons: Requires adherence to strict IRS rules, including limitations on the number of members and types of members allowed.

Making Quarterly Payments

If your LLC expects to owe $1,000 or more in taxes for the fiscal year, the IRS requires you to make quarterly estimated tax payments.

To determine your installment payment amount, use the previous year’s income, deductions, and credits as a basis and account for any projected increases or decreases for the year. The IRS provides a form on its website to help you with this calculation.

It’s crucial to pay these installments on time and in full to avoid penalties. Missing payments or underpaying can lead to fines and complicate your financial management.

Seeking Professional Tax Advice

While forming an LLC is a step forward for your business, there are responsibilities and tax implications that you might not be aware of or anticipate. Doing it yourself, or DIY-ing, an LLC’s taxes can be time-consuming and costly without a tax specialist. To get a handle on it, get a professional tax advisor on your side from the very beginning.

A tax advisor can help you with compliance, strategic planning, record keeping, audit support, and of course, help you structure your taxes in the most beneficial way to the most out of your LLC.

When meeting with a tax advisor, be sure to discuss:

1. Their fees and scope of support
2. The available deduction types
3. State tax credits and incentives
4. Planning for the future - not just next year, but succession and retirement as well
5. Income, asset purchasing, and tax estimates
6. How to make tax season happen as smoothly as possible

Maintaining Legal Compliance

Maintaining legal compliance is essential for the legitimacy and smooth operation of your LLC. Staying compliant not only keeps your business in good standing with various regulatory bodies but also shields your personal assets from potential legal issues. Here’s how you can ensure compliance:

Annual Requirements and Good Standing

To legally operate your LLC, adherence to state regulations is critical. Each state has specific requirements, but generally, you will need to:

• File annual reports: These documents update the state on your LLC’s status and activities.
• Pay required fees and taxes: This includes any applicable state franchise taxes or annual fees.
• Maintain separate accounts: Separating personal and business finances is crucial for protecting both your business and personal assets and ensuring clear financial records.

Managing Changes in Your LLC

Businesses evolve, and sometimes, changes are necessary for growth or legal compliance. Whether you're adding members, changing your business structure, or even dissolving the LLC, each action requires careful planning and adherence to legal procedures.

How To Handle Membership Changes

Membership changes can occur for various reasons and need to be managed carefully:

• Onboarding new members: Ensure new members are officially added to the LLC’s documentation, amend the operating agreement, and file any changes with your Secretary of State.
• Offboarding members: Members wishing to leave should provide a written notice, after which you should update your operating agreement and official records.

How To Restructure An LLC

Restructuring your LLC may be necessary to meet new business goals or regulatory requirements:

• Changing LLC type: For example, transitioning from a single-member to a multi-member LLC.
• Mergers: Combining multiple LLCs into one entity.
• Entity conversion: Such as converting from an LLC to a corporation.
• Updating Articles of Organization: Including changes like business name updates or changing the registered agent.

Each restructuring step involves legal considerations, including tax implications and filing necessary documents with your state. Consulting with a legal expert can ensure these transitions are smooth and compliant.

How To Dissolve An LLC

At some point, you may need to dissolve your LLC. This can be necessary for any number of reasons (such as some business entity type changes, or the business is no longer viable). The exact steps you need to take may vary depending on your state and specific business, but the general steps to dissolve an LLC are:

• Member consent: All members must agree to dissolve
• State filings: File the necessary articles of dissolution with your state
• Debt settlements: Pay off all business debts
• License cancellations: Cancel any business licenses and permits
• Tax notifications: Inform tax authorities and settle any outstanding taxes
• Asset distribution: Distribute any remaining assets among members according to the operating agreement
• Account closures: Close all business accounts and finalize any outstanding financial obligations

Expanding Beyond Borders

Expanding your LLC beyond its initial borders offers exciting opportunities for growth and increased market presence. Whether you're considering other states within the U.S. or exploring international markets, understanding the legal and logistical requirements is crucial for a successful expansion.

Registering in Other States

If your LLC operates in multiple states, you must register or "foreign qualify" in each state. This involves applying through each state’s Secretary of State and meeting their specific requirements. Legal advice is crucial here to avoid fines and ensure compliance.

International Considerations

With LLC formation, there may come a point where expanding your business internationally can be a strategic move that can expand both your client base and your profits.

Still, there are several points to consider when conducting business abroad, and here are just a few:

• Understand local laws: Each country has its own legal and tax systems. Understand these fully to ensure compliance.
• Hire local representation: Employ local professionals who can navigate the legal landscape of the country.
• Manage tax obligations: International operations bring varied tax responsibilities like VAT, customs duties, and transfer pricing.

Although international regulations and compliance requirements can be a minefield, an LLC can expand its business operations abroad while minimizing legal risks and maximizing opportunities for growth and success in global markets — if the change is managed correctly. Consider consulting with a legal professional with experience in your industry to help with this transition.

Form Your LLC Today

Setting up an LLC can seem like a huge undertaking since so many decisions are involved and legal steps to take. Still, given all the benefits (liability protection, tax advantages, legal separation between you and the business, and operation flexibility), it might just be the right move for you. And with5.5 million new business applications filed in 2023 alone, you’ll be in good company.

Our guide can set you on the path to setting up your LLC on your own, but if you don’t want to take the DIY approach, we can help. Reach out to LLC Attorney to get a formation service on your side and get down to business in no time.