How to Start an LLC: A Step by Step Guide
Last Updated: January 11, 2023
As a prospective business owner, one of the most important decisions you need to make concerns the structure of your company.
And an LLC is one of the most popular types of business structures In this guide, we will reveal everything you need to know about how to start an LLC and the benefits that are associated with doing so.
What is an LLC?
LLC stands for Limited Liability Company. This is a type of business structure whereby owners are not held personally liable for any debts or liabilities the company has.
This type of business structure is a hybrid entity that combines characteristics of a sole proprietorship or partnership with traits of a corporation. Some would say that it is the best of both worlds.
If you create an LLC and your business is unable to meet its obligations or pay its debts, only the company assets will be at risk of a lawsuit. Your own personal assets are protected. You do remain liable for any personal wrongdoing or negligence, though.
There is great flexibility associated with an LLC. You can opt for taxation as a corporation or tax under the same banner as a partnership or a sole proprietor.
How to Start an LLC — The Step-by-Step Guide
If you have decided that an LLC is right for you, you will need to follow these steps to form your company correctly:
Select a name for your LLC
Before you put your creative hat on, please refer to the state-specific requirements. Here are some examples of required words for LLC names per state:
- Alaska: “Limited Liability Company,” “L.L.C.,” “LLC,” “Limited,” “Ltd.,” “Company,” or “Co.”
- New York: “Limited Liability Company,” “L.L.C.,” or “LLC.”
- Wisconsin: When you set up an LLC online, it must end with either “Limited Liability Company,” “Limited Liability Co.,” “L.L.C.,” and “LLC.”
- Virginia: “Limited liability company,” “Limited company,” “LLC,” “LC,” “L.L.C.,” and “L.C.”
- Ohio: “Limited Liability Company,” “LLC,” “L.L.C.,” “Limited,” “Ltd.,” and “Ltd.”
- Montana: “Limited Liability Company,” “Limited Company,” “L.L.C.,” “LLC,” “L.C.,” “LC,” “Limited,” “Ltd.,” “Company,” or “Co.”
While LLC license rules do change from state-to-state, some remain constant. As you can see, most states require your name to end with an LLC designator, such as Limited Company, or its abbreviation. Some states, like New York, have fewer variations than the likes of Montana.
You will be able to reserve your LLC name for a short period until you have filed your articles of organization. This will cost you a small fee, though.
The main reason to reserve your small business name is to buy time. You don’t want someone else to claim your name before you get the chance to.
The majority of reservations will last between 30 days to one year, and the most common reservation period is 120 days.
It is important to note that one state has made it a legal requirement to reserve your business name when you create an LLC, and this is Alabama. It will cost you $10 to do so. In all other states, reservation is a choice.
The cost does differ from state-to-state as well. Here are some examples:
- Louisiana, $55
- Kentucky, $15
- Illinois, $25
- District of Columbia, $85
- Connecticut, $110
- California, $14
- Virginia, $20
- North Dakota, $10
- North Carolina, $130
- Texas, $65
Please note that business name reservation is not available in Florida.
Select a registered agent
To form an LLC, you need a business or individual that will agree to accept legal papers on behalf of your Limited Liability Company.
The agent needs a physical street address in the state whereby the LLC is registered.
In most states, a list of private service businesses that can act as an agent for a fee tends to be maintained, so you can always refer to this.
Furthermore, an LLC member can act as the LLC’s registered agent.
File Articles of Organization
To set up an LLC, you need to file articles of organization with the corporate filing office in your state, which is typically the Secretary of State.
In some states, such as Washington, New Jersey, and Delaware, the term “certification of formation” is used instead.
In Pennsylvania and Massachusetts, people refer to this as a “certificate of organization.”
No matter their name, they can typically be completed online via the website for your Secretary of State. You’re going to need your registered agent, LLC name, and other pieces of basic information.
You must pay a filing fee at this point, which tends to be around $100.
Like the name requirements you need to adhere to when completing your LLC filing forms, the rules can differ depending on the state you are based in. For example, in California, an operating agreement is required, yet it can either be written or oral. You need to keep written agreements and any amendments with any other company records.
In Maine, an operating agreement is a requirement. However, it can be oral or even implied. It can also be put together at any time, i.e., before, during, or after submitting your LLC filing form. We do recommend putting your operating agreement in writing, though, so you can avoid any issues.
The regulations are stricter in places like New York, where LLCs need to have a written operating agreement that includes information on the business, member responsibilities, and their rights, limitations, and preferences.
Decide on the management style
Another vital step in LLC formation is to determine whether you should opt for a manager or member management.
A lot of small LLCs decide that their members will directly manage the company. However, you do have the option of hiring one or several outsiders to manage your company – very much like a board of directors in a corporation.
Managers would vote on key issues, such as changing strategic plans, purchasing real estate, and taking out a loan.
Put together an LLC operating agreement
An operating agreement is an internal document that will establish how your LLC will be run, including how you will manage your business.
If you start an LLC, an operating agreement is a wise idea, even though this is not a legal requirement in many states. There are online legal services that can assist with this. Without this, the state law will govern the operation of your LLC.
Comply with regulatory and tax requirements
Some additional regulatory and tax requirements may apply to your LLC, so it is vital to consider this when you set up a new company. This includes the following:
- Employer and Sales Taxes – You may need to register with an appropriate state taxing authority in some instances. For example, if you have employees or if you are selling items and collecting sales tax.
- Business Licenses – Depending on where your company is based and the type of business you run, you may need to acquire other state and local business licenses. Check with your appropriate state agencies to make sure you are correctly licensed, registered, and permitted to conduct business activities in your state.
- EIN – If you run an LLC that has more than one member, one of the critical LLC requirements is to acquire an EIN. This is the case even if your business does not have any employees. If your LLC only has one member, a Federal Employer Identification Number is only needed if the LLC is going to have employees or you have determined to tax it as a corporation rather than a sole proprietorship. There is an online application on the IRS website for those looking to obtain an EIN.
File yearly reports
Knowing about your yearly tax requirements is an important aspect of understanding how to start an LLC. You will need to file a yearly report in most states, and you need to pay a filing fee to do so. These fees can be significant in some states. For example, in California, it can be as much as $800 per annum.
Consider registering your LLC out of state
Finally, if you are interested in doing business in another state, you may want to know more about getting an LLC license for these areas. You should register the LLC in the state you’re interested in, and appoint a registered agent. You can use the advice provided earlier regarding finding a registered agent service.
What are the benefits of forming an LLC?
Many benefits are associated with creating an LLC, including:
- Limited personal liability — One of the main reasons people decide to go down this route is to protect their personal assets. This means that your company’s financials will not impact your bank account, home, or other personal assets.
- Profit distribution is flexible — Setting up an LLC means that you are free to distribute profits to owners in a manner that you see fit. You are not required to distribute profits according to ownership percentages or in an equal manner.
- Flexibility — Flexibility is why most people decide to start an LLC as opposed to a different business type. There are no restrictions on the type and number of owners you can have. You also don’t have to deal with the fixed management structure that is a staple of corporation set-ups.
- Tax advantages — There are a number of tax advantages to be gained by starting an LLC. You get the best of both worlds. As an LLC, you will not have to obtain your own federal tax classification. However, you can choose to take on the tax status of C corporations, S corporations, partnerships, and sole proprietorships. This gives you the flexibility to choose a taxation set-up that is right for you.
- Paperwork is reduced — Finally, an LLC means less paperwork! Corporations need to make annual reports and hold yearly shareholder meetings, with significant recordkeeping requirements. You don’t have to worry about this.
As you can see, there are a lot of benefits associated with setting up an LLC. Hopefully, you now feel more prepared in terms of how to form an LLC. From lower levels of paperwork to greater flexibility, there are a lot of advantages, but you need to make sure it is appropriate for you.
Your choice of business structure impacts all of your processes and decisions going forward, so it is vital to get it right.
An LLC doesn’t have to make money in order to maintain its status. In fact, any sort of small business can structure itself as a Limited Liability Company as long as they follow the rules regarding formation.
The cost of an LLC can differ depending on where you are based, with the amount ranging from $40 to $500.
There are also some other costs that need to be factored in, including:
- Permit fees
- Business licensing fees
- Publication fees in New York, Nebraska, and Arizona
- Optional fictitious name fee, which is also known as a DBA name
- Optional LLC name reservation fees, which are a requirement in Alabama
Filing your own incorporation statements may be the cheapest way to form an LLC, depending on the LLC filing fees that are charged within your state.
Some of the cheapest states for forming an LLC include Mississippi, Oklahoma, Iowa, Hawaii, Colorado, and Arkansas.
Provided you want to get paid via dividends, an LLC registered as an S Corp is the best option. It’s important to keep in mind that LLC and S corp refer to different things. LLC is a business structure, and an S Corp is a tax classification. So an LLC can be taxed as a sole proprietorship, a partnership, an S Corp, or even a C corp.
Yes, it is possible for you to register your LLC in another state, so long as you are in compliance with the regulations and laws of both states. If you’re wondering how to form an LLC in multiple states, you need to comply with all of their regulations and need a registered agent for each one.
You need to have an Employer Identification Number if you have any employees working at your business. If you are the only member, you may not need an EIN. Ultimately, whether or not you require a Federal Tax Identification Number depends on the structure of your LLC.
LLC owners receive a share of the profits. This will either be split evenly or based on allocation shares. When considering if and how to start an LLC, the owners (called members) need to decide whether the profits will be split evenly or based on share allocation.