LLC: How to Start Your Own Company in 7 Easy Steps
If you're tired of your daily commute to your nine-to-five job and have ever considered exploring your own path in the world of business ownership, the Limited Liability Company (LLC) structure could be the next exciting chapter in your entrepreneurial journey.
With its flexible format and personal liability protection, establishing an LLC is a relatively fast and simple process — just seven steps to make the switch from simple employee to cutting-edge entrepreneur.
From choosing a creative name for your up-and-coming business to filing the right paperwork with the appropriate state agency, here’s a step-by-step guide designed to help you create your new company: your very own LLC. Ready to start an LLC?
- Starting an LLC is a great way to dive into entrepreneurship with limited liability protection.
- When choosing a business name, consider both its marketing appeal and ensure it complies with state laws, including restrictions on certain words.
- A registered agent is necessary to either appoint or hire so that the LLC can receive official and legal documents on its behalf.
- Understanding tax implications is crucial for ensuring proper tax classification and compliance with IRS requirements, whether you're operating as a single-member or multi-member entity.
What Is a Limited Liability Company (LLC)?
A Limited Liability Company, otherwise known as an LLC, is a business structure that combines the advantages inherent in both corporations and partnerships.
This unique organization shields its owners, who are more formally recognized as members, from being held financially responsible for their company’s debts or any legal problems it faces.
In essence, members of an LLC follow a “limited liability” formula, which ensures their individual personal assets cannot be seized if their company borrows money, files for bankruptcy, or is sued.
LLCs are also more straightforward when it comes to ownership structure and make it easy to manage and maintain members compared to corporations.
For instance, if two buddies opened up a small graphic designing endeavor together, they may opt to incorporate their partnership by forming a liability company limited in order to receive liability protection.
Moreover, sole proprietorship and LLC are often confused. But, the greatest difference that will affect your business is whether or not you have limited liability for the business debts and obligations as you do with an LLC or whether the business debts and obligations come right out of your pocket if the business is sued or debt is collected through legal processes.
Why Do You Need to Start an LLC?
LLCs have gained substantial popularity in recent years, especially among young professionals, freelancers, and creatives. Here are a few reasons why you might want to consider starting an LLC.
Limited Liability Protection
One of the primary reasons for starting an LLC is to gain limited liability protection. This means your personal assets are separate from your business’ liabilities.
If your LLC is sued for damages, for example, someone generally can’t go after your personal bank account or property.
More Management Flexibility
An LLC can be Member-Managed or Manager-Managed, and you will govern your company as set up in your LLC Operating Agreement.
An LLC is typically easier to manage than a corporation, which often requires more formality in terms of shareholder meetings and certain record-keeping protocols.
There are generally fewer rules regarding the management and operation of an LLC, resulting in greater flexibility of internal governance regarding the division of interests, profits, losses, business assets, etc., among members.
Setting up an LLC may offer certain tax benefits. By default, income generated by this business entity “passes through” to the members of the LLC, which means that it is reported on their personal tax returns and is only taxed once.
This, in turn, avoids a potential problem of “double taxation,” where the corporation itself is taxed for its profits, and then shareholders are also taxed on their personal returns when they receive dividends from the corporation.
Thus, by default, LLC owners are not subject to separate tax liability.
Types of LLCs to Consider
Different LLC types are chosen when starting an LLC based on specific needs and objectives. The following list of basic LLC types should help you decide which is best for you.
- Single-Member LLC: The simplest form of an LLC, owned and operated by one member. Provides protection of personal assets but is not required to file separate tax returns.
- Multi-Member LLC: Similar to a single-member LLC, but this form of LLC includes more than one business owners or members. The rights and responsibilities are all listed in a member’s agreement.
- Series LLC: A Series LLC is a set of LLCs with one “parent” LLC, and each other reciprocal LLC is connected via membership interest in that parent LLC.
- Professional LLC (PLLC): Many states require professionals, such as lawyers or doctors, to form a PLLC instead of a general LLP. Like a general LLC, a PLLC is a combination of a corporation and a partnership.
- Low-Profit Limited Liability Company (L3C): L3Cs are hybrids of nonprofits and LLCs. Their focus is primarily a social mission rather than a return on investment.
How to Set Up an LLC?
Do you want to form your LLC? Follow these seven steps to establish your LLC today. Keep in mind that laws and processes can vary by state. Check out your state LLC formation guides to see how to form an LLC in your state.
1. Choose a Name for Your Business
One of the exciting milestones of starting your LLC is naming your business. While choosing flashy, unrelated names for your LLC can be tempting, it's essential to consider both marketing and legal aspects.
First and foremost, you will want to choose a name that will appeal to your target audience, and that will represent your brand. You want to pick a name that is different from other businesses, easy to remember, and closely connected to your industry.
A unique name can help you build brand recognition and attract customers. However, please keep in mind the legal requirements you will also have to meet with your name.
Because of this, you will want to make sure you are within your state’s legal parameters. A comprehensive search should be conducted to ensure no other businesses have protected the name you want to use.
Most states have a resource where entrepreneurs can check name availability for free. Keep in mind that there are certain words that are restricted in some states if they imply some professions or industries that are not related to your business.
In addition, it’s probable that you will have to put “LLC” or “limited liability company” at the end of your business’s name so that it is recognized as an LLC business.
2. Select Your State
Laws, regulations, tax requirements, as well as the exceptional attributes of each state, play into this very significant decision.
The cost to form an LLC, annual fees, and ongoing compliance obligations are things to examine when determining what state will work best for you.
States such as Delaware and Nevada are home to a number of business-friendly rules and regulations, as well as certain tax advantages, and draw many people interested in starting an LLC there.
Alternatively, sometimes, sticking with your home state can be easier and more convenient to form an LLC, as you do not need to register it as a foreign LLC when your business or operation expands outside of the state of formation.
It is essential to look at where your target market is located and how being incorporated into a specific state will impact the brand and product that you look to promote.
In the end, just make sure you go through the whole process of weighing the pros and cons of each state you’re considering, look at the legal requirements, and consult with professionals.
3. Choose a Registered Agent
One of the first and most essential steps to start an LLC is selecting a Registered Agent. The Registered Agent, known as Reg Agent or RA, acts as the primary point of contact between your LLC and state offices.
This includes receiving confirmation and annual report forms, tax forms, and any notices or legal documents (service of process) that your business might receive.
You can be your LLC’s Registered Agent, a friend, or a family member, or you can hire a professional Registered Agent service.
At first glance, many LLC owners think they will just “be their own Registered Agent,” or they will appoint one of their family members or employees.
But it’s not that easy, and here’s why... Legally, you can be the Registered Agent for your LLC if you live in the same state where your business is formed.
But... you’re going to need a helping hand. Being the Registered Agent for an LLC is not just about signing a document every year and forwarding some mail.
You will need to be accessible at a legal address (not a PO box) Monday through Friday from 8 a.m. to 5 p.m. to accept legal documents on behalf of your business.
4. File Articles of Organization
Filing your LLC Articles of Organization is how you officially form your LLC with your state’s Secretary of State or appropriate state agency.
Your Articles of Organization will ask some key questions about your business. General requirements of Articles of Organization typically ask questions about your LLC’s:
- Address in the state
- Registered Agent
- Purpose Management structure.
While requirements will vary by state, and it is important to always double-check with your filing entity, here’s more information on the specific sections in your Articles of Organization overview.
Filling out forms and paying the filing fee is only step one, though. There may be additional steps, such as creating an LLC operating agreement or an organizational resolution for certain types of LLCs.
These documents set out how your LLC will operate and be managed behind the scenes.
Once your Articles of Organization are filed and accepted, your LLC is officially formed and recognized by the state. You will typically receive a certificate of formation or some kind of acknowledgment from your filing entity.
5. Create an Operating Agreement
Creating an operating agreement is a crucial strategic step in organizing the framework and activities when you start a Limited Liability Company. It may not be required by some states, but it is a very useful tool to have, especially for a multiple-member LLC.
It is an invaluable document, as it stipulates the financial arrangements, management plate, profit dispersion ethic, and decision process within your LLC organization.
It avoids the probability of any friction or tension in the days to come because it clearly outlines all members’ powers, capacities, and rights.
For a single-member LLC, the operating agreement is a legal document between the business and the owner, but for a multiple-member agreement, it is the same between the members of the LLC.
Creating an operating agreement is a relatively easy and costless process. For a single-member LLC, an operating agreement can simply consist of the selection you made on the “check-the-box” domestic revenue service, which can either be that of an individual or a corporation.
The operating agreement can be just a few paragraphs long, and it can also be many pages long as well. Several websites can easily provide you with these operating agreement models, and you can always customize them to make them suitable for your business.
For a more complicated operating agreement (like today, for example), it is surely a great idea to work with a knowledgeable attorney.
An attorney can draw up a more carefully created draft of the agreement to suit the needs of the LLC. An attorney can also help you with other legal needs for your business and answer any questions as well.
6. Obtain an Employer Identification Number (EIN)
The next step in creating an LLC is to get an Employer Identification Number (EIN). An EIN, also known as a Federal Tax Identification Number, is a number issued to you by the Internal Revenue Service (IRS).
This number will determine your company to the IRS but works even with businesses that are not trying to protect themselves. An EIN is mandatory if you would like to pay employees, pay federal taxes, or open a business bank account.
Your EIN would be almost equal to a security number, but for your company. An EIN is acquired fairly easily - just apply online at the IRS page.
You will need to give information about the LLC, for instance, name, address, and the names of the members that have influential control. You can use Form SS-4 if you would prefer not to file online, mail, or fax this form.
Keep in mind, however, that it is important to get an EIN as early as possible, making a late failure in the process or potentially affecting your company’s ability to continue operating in an LLC format.
7. Comprehend Tax Implications
Understanding your LLC’s tax responsibilities will help you stay in compliance and effectively manage your finances. As an LLC, you have the option to be taxed in several different ways.
If you are the only owner of the LLC, you will be taxed as an individual. All of the tax benefits, deductions, credits, and pitfalls of the business will go on your Form 1040 income tax return.
An LLC with only one owner files a Schedule C as part of Form 1040 and may or may not have a separate EIN number for the business for tax purposes. The government considers this monopolizing treatment as the default for single-member LLCs.
If the LLC was formed with more than one partner, it can be taxed as a partnership. In this case, the LLC will file by May 31 a Form 1065 United States Partnership Return of Income, and each LLC member will receive a Schedule K that breaks down their share of the business income and expenses.
Each LLC member then includes their Schedule K amount on their personal tax returns (Form 1040, line 12), writes “LLC” at the end of the line, and returns Form 1040 to the IRS.
An LLC with more than one owner checks the “Limited Liability” box on the front of Form 1065 and reports the partnership earnings and write-offs on Form 1065.
Steps After Forming an LLC
While it’s important to know how to start an LLC, there are other pieces of the puzzle that can help set you up for success with your new company or may be required steps for you to continue running your existing business.
Obtain Business Licenses And Permits
Getting the necessary business licenses and permits is a crucial step in ensuring that your LLC remains compliant with the law. The licenses and permits required by your business specifically depend on a number of things, which include your industry, location, and even specific activities.
The general business licenses, sales tax permits, health permits, zoning permits, as well as professional licenses are applicable in your case.
Make sure to find out all the available options of business licenses and permits that you will require for your business to operate inside of the red tape of the law.
This usually means contacting different local resources and entities in your area, including local government, county government, and state governments. Remember that each industry within each locale can have different licensing requirements.
Open a Business Bank Account
Running an independent business account for your limited liability company (LLC) is mandatory to help keep your personal and company expenses separate.
A business banking account benefits include full bookkeeping efficiency, easy tax preparation, and greater liability safety.
Common essentials for opening a bank account for an LLC typically include the submission of your limited liability company establishment files, a duplicate of your federal employer identification number (EIN), and the presenting of valid identification.
Shop around different banks for convenient fees, reliable service, and appropriate locations.
By operating a bank account exclusively for your business transactions, you should be able to balance reliable records and manage a more accurate tally of your expenses and revenues.
Handling a separate business bank account imparts a professional appearance and provides credibility to your LLC.
File Annual Reports And Pay State Fees
LLC owners are required to file an annual report and pay state fees on an ongoing basis. Annual or biennial reports typically require updated information on the company’s officers, ownership, contact information, and the nature of the company’s business activities.
This information is used to maintain correct public records for your business and confirm that your LLC is in good standing.
In addition to the report, almost all states impose an annual fee or franchise tax on LLCs, which must be paid to keep the LLC in active status.
Because late fees and interest can become costly, especially in states that impose high fees and harsh penalties for late reports and fees, it’s a good idea to know when these annual state compliance filings are due.
Failure to file the report and pay the fee can result in your LLC being suspended, administrative dissolution, or the loss of your company name, so don’t put it off.
Keep Accurate Records
Accuracy and organization are keys to running a successful LLC, and maintaining accurate records is a fundamental aspect of running an LLC.
Accurate record-keeping provides the necessary documentation for an LLC. That documentation can be financial, legal, or operational records.
Arguably, the most important is financial records, so income, expenses, revenue, receipts, and contracts shall always be recorded. There can be important legal reasons to keep good records, as the record-keeping could have an effect on the governance of the LLC.
Operational records such as employee payroll and accounting can be very important as well. Proper record-keeping ensures compliance with tax laws and, usually, legal requirements.
Financial records are essential to being able to manage a business. They allow a small business to see if they will have enough money to make it for the next several weeks or months. It will also allow a small business to show lenders or investors.
Again, if one knows where every dime is and how every dime is committed to be used, it would seem fairly easy to make financial decisions.
File Federal And State Taxes
For a Limited Liability Company (LLC), filing taxes both federally and at the state level is an essential responsibility. As an LLC, there are several tax filing options depending on how you would like to classify your company for tax purposes (disregarded entity, partnership, or corporation).
Generally, single-member LLCs report their business income and expenses on an attached Schedule C to their personal tax return.
For multi-member LLCs, the company files an information return (Form 1065) for the partnership, and a Schedule K-1 is sent to each member to report their share of the partnership’s profit or loss on their personal tax return.
Depending on your state, you may also be required to file state income taxes. It is vitally important to stay up-to-date with any changes to tax laws and tax filing due dates to avoid penalties or interest charges.
Consider working with a tax advisor or accountant familiar with small business taxes to ensure that you are filing your taxes correctly and to identify which deductions you may be eligible to take.
Renew Registered Agent Services
Your Registered Agent services must be renewed each year or within the timeframe allowed by your state. Failure to renew can result in unanswered important communications and potentially damaging legal consequences.
With your renewal, take a close look at the terms and fee structure of your current Registered Agent service provider. Evaluate their reliability, accessibility, and timely delivery of documents, and if necessary, find another that meets your needs.
Stay in compliance with your state and ensure your business's important communications are handled efficiently by keeping your Registered Agent service up-to-date.
Update And Review the Operating Agreement
Lastly, review and make adjustments to your LLC operating agreement. Businesses change with time, and so do dynamics among the members.
Just make sure your operating agreement reflects the purposes, processes, and procedures of your LLC at any given time so as to avoid problems and unnecessary arguments among members.
Use the agreement review process to make necessary changes in areas such as ownership, management, and operations.
Modifying the agreement and keeping it current protects the rights of everyone involved, ensures that there is communication, and, probably most importantly, gets you what you signed up for.
If you decide that any changes must be made, then work with a lawyer who specializes in business law to ensure compliance with all state laws and some minimum level of implications.
Forming an LLC provides entrepreneurs with a flexible structure for operating a full spectrum of legitimate businesses.
These seven simple steps can help: choose a name, select a state, appoint a registered agent, file the Articles of Organization, create an operating agreement, obtain an EIN or Employee Identification Number, and anticipate tax implications properly.
Bear in mind there may be additional perfunctory tasks like applying for licenses and permits, opening a business bank account, filing annual reports and paying state fees, and, importantly, maintaining clear and accurate company records.
Proper planning and attentiveness can set the company up for both near-term and long-term accomplishments as an entrepreneur working with an LLC.
Frequently Asked Questions
What Are the Differences Between an LLC And a Corporation?
The actual differences between an LLC and a corporation pertain to who owns them, how they are managed, and how they are taxed. With a corporation, there are typically shareholders and a board of directors. An LLC is owned by its members, who can manage directly.
How Long Does It Take to Start an LLC?
How much time it takes to start an LLC will depend on the state and how efficient you are in filing the documents. In general, once you finish filing the necessary documents, it takes a few weeks to a few days to complete the rest of the formation process.
Do I Need a Registered Agent for an LLC?
Yes, most states actually require LLCs to constantly have a registered agent. A registered agent is a person who resides within your state, and they are there to receive any legal or official documents that are sent to your LLC. In general, the registered agent also has to be available during ordinary business hours and must have a physical address in the state.
How Much Does It Cost to Form an LLC?
The cost to form an LLC will also depend on the state. The filing fee for each state is different. The average cost to form an LLC in the US, however, ranges from $50 to $500. This is in addition to any other fees for registered agents or any professional services you may require.
What Is an LLC Operating Agreement?
An LLC operating agreement is a legal document that outlines the ownership structure, management, and operating procedures of a limited liability company (LLC).
Is an Operating Agreement Required for an LLC?
In most jurisdictions in the United States, an operating agreement is not legally required, but it is highly recommended. It helps define the internal workings of the LLC and can be crucial in legal and operational matters.