Are you an entrepreneur ready to form your own LLC but overwhelmed by the complexities of the process?
Starting a limited liability company (LLC) can offer your business many advantages, but the steps to make it go live can be overwhelming without the right guide.
Fear not! We’ll break down the process so you can confidently create your LLC. With just seven simple steps, you'll be well on your way to making your goals a reality.
How To Start An LLC Step #1: Determine If an LLC Is Right for Your Business
The initial step in launching your LLC is to evaluate if it aligns with your new business aspirations and legal structure needs.
LLCs are a compromise between the formality of a corporation and the simplicity of a sole proprietorship or partnership. They are very well-suited for small- to medium-sized businesses that need operational and management flexibility and personal asset protection from business liability.
The Pros of Forming an LLC
- An LLC is treated as a legally separate entity from its members, meaning personal assets are generally protected in the event of lawsuits or business debts (with some exceptions), offering much-needed peace of mind and financial security for business owners.
- LLCs also offer tax benefits, specifically pass-through taxation, where profits and losses are directly reported on members' personal tax returns, potentially lowering the overall tax burden. This contrasts with corporations, which face double taxation—both at the corporate and shareholder levels.
- LLCs offer operational flexibility and can be owned by an unlimited number of individuals, corporations, partnerships, or trusts. It can be a single-member LLC or have multiple members, including individuals, corporations, or trusts, and can be managed directly by its members or by appointed managers. This flexibility extends to profit-sharing and decision-making, tailored to suit the business's specific needs.
The Cons of Forming an LLC
- LLCs may have difficulty attracting outside investment compared to corporations, as they can’t issue stock to investors. (There are ways around this — think outside the box and seek out angel investors, private equity investors, or investors who want a more customized, less formal arrangement.)
The workaround: If you want to attract more investors in the future, you can convert your LLC to a corporation. - LLC members may incur higher self-employment taxes than corporations, which is contingent on income levels, business structure, and location. This doesn’t typically happen, but it’s possible if you’re not careful.
The workaround: You have the option to have your LLC taxed like a corporation. - Despite their less stringent structure than corporations, LLCs must adhere to certain legal and administrative mandates, such as submitting annual reports and maintaining precise financial records, which are essential for professional services and compliance.
The workaround: Keep consistent, accurate records so that fulfilling your obligations is easier and less time-consuming. You can also get LLC Attorney to do this for you!
Whether you choose to form an LLC or a different business structure, thorough research and careful planning are key to building a strong foundation for your business and confidently setting it up.
How To Start An LLC Step #2: Choose Your LLC Name
Now that you know you want to set up your business as an LLC, it’s time to pick a name. You will first need to understand your state’s name requirements and ensure the name you've chosen is available for use.
Every state has its own set of rules and regulations regarding LLC names. Your state may:
- Restrict specific words
- Require the use of LLC or other variations of the term in the name
Most states don’t generally allow words that could mislead the public or imply a different type of business entity, such as "corporation" or "incorporated."
Your business name must also be unique to avoid confusion among the public or the potential to mislead.
Conduct a complete search for name availability before proceeding to the next steps in this list. Do your due diligence by searching your state’s business entity database to determine if the name you want is already taken.
Fortunately, conducting a name search is typically straightforward. You can search for availability using criteria such as exact match, similar-sounding names, or keywords. If the name you want is already in use or too similar to an existing business, you'll need to choose a different name to avoid potential conflicts.
Pro tip: Sometimes, a business name has a special meaning to you, or you just know it would be perfect for other reasons. To prevent disappointment, brainstorm a few ideas beforehand and go into your search mentally prepared to settle for a totally different name or variation on your original vision.
If you're not ready to file your Articles of Organization but want to hold your chosen name, you may be able to do so. Many states allow you to reserve a business name for a specific time, typically 30-120 days, by filing an application and paying a small fee. This can be particularly useful if you need to finalize other aspects of your business plan or wait for additional funding before officially forming your LLC.
How To Start An LLC Step #3: Appoint a Registered Agent
A registered agent plays an essential role in LLC formation. And we mean that literally —every LLC is required to have registered agent in the state it’s formed in.
Their primary function is to serve as the official point of contact for the LLC. They receive and forward legal documents and official correspondence on behalf of the business, including notices from the state (annual report reminders and federal tax notices), and in the event of a lawsuit.
A registered agent must:
- be 18 or older
- be reachable at a physical address in the state during business hours
Choose someone reliable to ensure your formation documents are promptly received and that the LLC can respond within the required timeframes.
When choosing a registered agent, you can appoint yourself or a trusted employee of the LLC, or hire a professional registered agent service. (We recommend hiring out this role!)
Appointing Yourself Or An Employee As Your LLC’s Registered Agent
Pros: This can be a cost-effective choice, especially for small businesses with limited resources.
Cons: Consider that a registered agent's address becomes part of the public record. If you prefer to maintain privacy, or anticipate frequent address changes, this may not be ideal. A registered agent will also need to have some understanding of the legal documents the LLC may receive — or the desire to learn. If you choose an employee, you will likely need to change your LLC’s registered agent if they seek employment elsewhere.
Hiring a Professional Registered Agent Service As Your LLC’s Registered Agent
Pros: These services offer a range of services like a dedicated physical address, mail forwarding, and compliance monitoring. They offer peace of mind knowing that experienced professionals handle your LLC's legal documents and that you'll never miss an important deadline.
Not every registered agent service offers mail forwarding and a physical address, but LLC Attorney does!
Cons: They are an additional business cost, and the LLC relies on their outside expertise, which may remove some control from the members.
Ultimately, make your decision based on your business needs and preferences. If privacy and convenience are top priorities, a professional registered agent service may be the best option. If cost savings and maintaining control over the process are more important, appointing yourself or an employee may be the preferred choice.
Whatever you decide, selecting a reliable registered agent is essential for the smooth operation of your business and for completing the next steps.
How To Start An LLC Step #4: File Your LLC’s Articles of Organization
Articles of Organization serve as the foundational paperwork for a limited liability company and outline essential details about the business and its structure. You’ll submit this information to your Secretary of State to transform your business from an idea into a fully-fledged LLC!
This process is exciting — it’s finally real — so understanding what information to include and how to file it with your state is essential to getting it done right the first time and with minimal stress.
Preparing your LLC’s Articles of Organization involves gathering key information about your LLC and readying these details for submission. This generally includes:
- Name and business address
- An indication that the business is member- or manager-managed
- Registered agent’s name and address
- Signature of members
- The reason the LLC was created, and how long it will be active
Note: Not all states will ask for member signatures, if your LLC is managed by members or managers, or why it was created.
Once you have compiled all the needed information, file the Articles of Organization with the appropriate state agency. Most states allow you to file online with your Secretary of State's website, which makes the paperwork much more convenient and easy to submit.
Alternatively, you may choose to file by mail, although your request will naturally take longer to process.
When you file your Articles of Organization, you will be required to pay a state filing fee, which varies depending on the state where you formed your LLC. This fee can range from around $50 to a few hundred dollars. It is non-refundable and must be paid at the time of filing.
Whether filing online or by mail, be sure to carefully follow the state's instructions and pay the required filing fee.
After you submit your Articles of Organization and pay the filing fee, the state will process your request and review the document to ensure compliance with state laws and regulations.
Once approved, your LLC will become official, and you will receive a Certificate of Organization or similar document from the state as proof that your LLC is officially on the record.
How To Start An LLC Step #5: Create an Operating Agreement
Does My LLC Need an Operating Agreement?
What's the name of your company?
An LLC operating agreement provides the framework for your LLC’s internal operations and business management. While not mandatory in all states, there are many reasons to create a solid operating agreement.
The primary reason is to establish clear guidelines for how the LLC will be managed and operated.
Without this document in place, your LLC will be governed by the default rules and regulations outlined by your state’s laws, which may not benefit LLC members or align with their preferences. Your operating agreement can customize the management structure to suit your specific needs and preferences, providing clarity and certainty regarding the operation of the business.
Additionally, an operating agreement helps protect the limited liability status of the LLC and its members. By clearly outlining the roles and responsibilities of each member, as well as procedures for decision-making and dispute resolution, an operating agreement can help prevent misunderstandings and conflicts that could potentially jeopardize the LLC's limited liability protection.
A well-drafted operating agreement can assure members and stakeholders that the business is run transparently and professionally.
When you create your operating agreement, there are several key elements to include so you can document your LLC's internal operations accurately. These may include:
- Clearly defining each member's roles and responsibilities within the LLC, including managerial duties, voting rights, and decision-making authority.
- Specifying the structure of your LLC, if it’s member-managed or manager-managed, and outline the procedures for electing managers and conducting meetings.
- Establishing rules for voting on significant business decisions, such as entering into contracts, making investments, or amending the operating agreement.
- Outlining how profits and losses are distributed among LLC members, including any special arrangements or profit-sharing agreements.
- What percentage of the LLC each member owns (to help prevent legal disputes).
- How the LLC can be dissolved or terminated, and procedures for adding and removing members.
- Provisions that protect the company and its assets if a member experiences personal financial problems, including judgment creditors of a member obtaining a charging order.
By including these key elements, you can ensure that the business operates smoothly, keep your business compliant with state regulations, and minimize the risk of conflicts or disputes.
How To Start An LLC Step #6: Obtain an EIN and Open a Business Bank Account
Obtaining an Employer Identification Number (EIN) and opening a dedicated business bank account helps to formalize the business, establish its identity, and ensure proper financial management.
How To Obtain an EIN: This unique 9-digit identifier functions as a business identification number, like a Social Security Number.
You are required to obtain an EIN, whether you’re a solopreneur, a multi-member LLC, or if you plan to hire employees.
To get your EIN, you will need to apply for one with the Internal Revenue Service (IRS) through their website or submit Form SS-4 by mail or fax. The application requires information about the LLC, such as its legal name, business address, and the name and address of a responsible party.
Upon approval, the IRS will issue your EIN, which is necessary for various business activities, including tax reporting, hiring employees, and opening a business bank account.
How to Set Up Your Business Bank Account: Always establish a business bank account to maintain a separation between personal and business finances. This will ensure that you adhere to tax regulations and protect your personal assets.
Register for a sales tax identification number with the tax department in each state your LLC operates in if your LLC conducts business across multiple states. Typically, this applies to goods, not services. For example, a SaaS business likely won’t need to collect sales tax.
To open a business bank account, you'll need to visit the financial institution of your choice and provide the information they request, like your articles of organization, operating agreement, and EIN. You may be required to present identification for the LLC's members or managers.
When choosing a bank, consider the bank's reputation, fees and charges, account features, and convenience of access. Many banks offer specialized business banking services tailored to the needs of LLCs and other small businesses, including online banking, merchant services, and business credit cards. Shop around and compare options.
Once your business bank account is established, be sure to use it exclusively for business-related transactions and expenses. Avoid commingling personal and business funds, as this can complicate accounting and tax reporting and potentially undermine the limited liability protection afforded by the LLC structure.
How To Start An LLC Step #7: Comply with Tax and Regulatory Requirements
Complying with tax and regulatory requirements will help you ensure your business is above board and will help you avoid any legal issues.
Two areas to consider for LLCs are state tax registrations and obtaining the necessary licenses and permits to operate legally.
To register for state tax, you must visit the Department of Revenue for each state your LLC operates in, and follow their registration process. Depending on your LLC's activities and its location, your obligations may include sales tax, income tax, or franchise tax.
You must also obtain the necessary licenses and permits for your LLC to operate legally at the local, state, and federal levels. These licenses and permits vary depending on your business and its location, but common examples include business and professional licenses, and zoning and health permits.
Before you start operating, research the specific requirements applicable to your business and ensure that all necessary licenses and permits are obtained.
Consider seeking out guidance from a tax professional and attorney. Additionally, stay informed about changes to tax laws and regulations so you can address issues and minimize risks to your business (costly penalties and legal issues).
Complying with tax and regulatory requirements is a critical responsibility for LLC owners and running a successful business. By proactively approaching compliance, you can protect your business and set yourself up for long-term success.
How To Start An LLC Bonus: How To Maintain Your LLC
You’ve crossed the how to start your LLC bridge, but your journey doesn’t stop there! Beyond the day-to-day operations of your business, there are a few steps you need to take from a compliance standpoint to maintain your business.
Here's a closer look at your obligations:
- Annual Reports: Many states require annual reports to provide updated information about the business, such as the names and addresses of members, the registered agent, and any changes to the business structure.
These reports serve to keep the state's records accurate and up-to-date. Some states require paying a renewal fee. If you don’t pay the required fee and submit reports as needed, you could incur penalties or late fees, and your LLC will be dissolved. Some states will dissolve your LLC immediately if you don’t pay the required fee, while others have a grace period (which varies by state). If your LLC is dissolved, there may be a waiting period to reinstate it (Wyoming is two years). - Hosting Meetings and Documentation. Hold a meeting and create a signed document whenever a material change is made to the business– such as changing your business name/address or filing for a DBA. We also recommend hosting an annual meeting and treating it the same way.
- Business-Specific Obligations: You may need to renew your business licenses or permits and adhere to any regulations governing your LLC’s industry.
Sometimes your LLC might go through changes, like adding and removing members or changing the business address or registered agent:
- Managing Membership Changes: Update your LLC’s documentation, amend the operating agreement, and file changes with the Secretary of State as needed.
- Changing Business Address Or Registered Agent: Update information with the state and any other relevant parties. You may need to file a change of address or registered agent form with the state and update business licenses, permits, and other official records accordingly.
Get Your Limited Liability Company Started Today
Creating an LLC on your own can be complex, involving numerous choices, documentation, and expenses — and it’s possible to miss an important step (or several) for your specific business.
A reliable service like LLC Attorney can simplify the business formation process and support you in launching your LLC, so reach out if you’re ready to take the next steps with professionals in your corner.
FAQS
LLCs can sometimes be unattractive to investors because they cannot issue shares. Members may face higher self-employment taxes than a corporation, and LLCs must comply with certain legal and administrative requirements, such as filing annual reports and maintaining accurate financial records.
An LLC has many advantages for side hustles, such as protecting your personal assets from business liability. Plus, an LLC's pass-through taxation means simpler tax reporting, allowing you to focus on growing without the complexities of corporate taxation. If this sounds like a great fit for your side hustle, then the answer may be yes!
An LLC’s advantages include personal liability protection, increased privacy, tax advantages, and operational flexibility — and they’re inexpensive and easy to form. They also make a business appear more professional.
Apply for your EIN with the Internal Revenue Service (IRS) through their website or submit Form SS-4 by mail or fax. The application requires information about the LLC, such as its legal name, business address, and the name and address of a responsible party.
The answer here is it depends on your state and how you file. If you file online with your Secretary of State, some states can approve your LLC request on the same day you file your Articles of Organization. Some states can take several weeks (like Nevada or Delaware) to process your application. If you submit by mail, it can take a few weeks to start an LLC (to account for processing and time in the mail system). If you want faster processing, some states offer a paid expedited service.
If your business is registered as an LLC, you don’t need a DBA (Doing Business As) to use your official name on your LLC filing documents. However, if you want to use any different versions of the official name, you'll need to file for a DBA.
