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.
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:
LLCs offer many benefits that other business structures don’t:
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:
Understanding these limitations is crucial for maintaining the integrity of the liability protection offered by an LLC structure.
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.
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.
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.
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:
As you can see, an LLC offers many advantages to these business types, which makes it an attractive option for many entrepreneurs.
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).
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.
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.
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.
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.
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:
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.
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.
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.
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:
Suitable for businesses operated by two or more individuals, this structure facilitates collaborative entrepreneurship with features like:
Designed specifically for licensed professionals such as doctors, lawyers, and accountants, PLLCs offer:
A sophisticated structure that's ideal for businesses that own multiple properties or operate various divisions, each with distinct liability profiles. Benefits include:
Crafted for ventures that primarily aim for social impact over profit, L3Cs facilitate:
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:
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.
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.
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.
Understanding the complicated LLC tax responsibilities is critical to ensuring your business’s long-term success. Here’s how to effectively manage these obligations:
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:
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.
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:
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:
To legally operate your LLC, adherence to state regulations is critical. Each state has specific requirements, but generally, you will need to:
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.
Membership changes can occur for various reasons and need to be managed carefully:
Restructuring your LLC may be necessary to meet new business goals or regulatory requirements:
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.
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:
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.
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.
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:
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.
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.
The high-level steps to form your LLC are: choose your LLC name, secure your digital presence, select a registered agent, prepare and file your articles of organization, and craft an effective operating agreement.
Yes, in every state an LLC needs a registered agent to represent the business and receive legal documents on its behalf. They must be 18 or over, have a physical address in the registered state, and be available during business hours. You can elect to choose yourself or another member of the LLC as the registered agent, or you can hire a professional to take on this role.
Every state has different filing fees, typically ranging from $35-500. You may also need to pay other licensing fees depending on your industry.
Your annual report covers financial information and business activity. Every state has specific rules, but in general, you’ll need to include your business name and address, registered agent’s name and address, member names and addresses, identification numbers such as EIN and state entity, and business purpose.
Depending on your state (and if you file online or by mail), receiving your LLC certification can range from instantaneous to several weeks.
It is possible to create an LLC on your own, but getting professional advice will help ensure that you’ve set it up in the most beneficial way for you and your business.
To set up an LLC, you’ll need your Articles of Organization (which include business name, purpose, duration, primary address, member names and addresses, and registered agent name and address), and an operating agreement. In some states (Alaska, California, Nevada, and Washington), you may need to provide initial reports. Many states require registration with the Department of Revenue for tax purposes.
LLC formation in the USA is simply choosing to set up a business located in the USA as an LLC. LLCs offer pass-through taxation and limited liability protection. Like a corporation, an LLC is legally separate from its owners. In many cases, LLC owners are not personally liable for their debts and obligations.
Forming an LLC provides several advantages, such as liability protection where members are generally not liable for the actions of the LLC, tax flexibility through pass-through taxation or the option to be taxed as a corporation, and operational flexibility, accommodating different management structures and unlimited member possibilities. Whether you're starting a side hustle or a full-scale business, these benefits make LLCs an attractive choice for entrepreneurs seeking legal separation between their personal assets and business obligations.
LLC formation can be a great option for your side hustle. It 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.
You need an EIN for your LLC if the business has employees or multiple members.
Jonathan is admitted to practice law in Colorado and Wyoming. In this position, he helps business owners at nearly every level and in nearly every industry with asset protection, estate planning, and business formation. Beyond business owners, Jonathan also helps activists of all political persuasions to legally protect themselves.