Learning how to start an LLC can be a vital step in establishing your business. In this guide, we’ll walk you through the process in 7 straightforward steps.
What you'll learn:
➤ What Is an LLC?
An LLC, short for Limited Liability Company, is a legal entity that business owners in the United States can choose to operate their businesses under. It offers protection for your personal assets in case your business encounters legal issues or bankruptcy.
Additionally, it provides flexibility in terms of taxation, allowing you to select the most suitable tax option for your business.
Whether you want to be taxed as a sole proprietorship, a corporation, or something else, an LLC can accommodate your preferences. If you’re unsure about the best tax option for your LLC, consider consulting a tax advisor.
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➤ How to Start an LLC
Follow these seven steps to establish your LLC:
1️⃣ Decide on a Business Name
Selecting a name for your business is essential. Keep in mind that it not only needs to align with your brand but also comply with state laws.
Ensure your chosen name isn’t already in use by another business in your state. Most states also have rules on using specific words in your business name.
2️⃣ Designate a Registered Agent
Every LLC must have a registered agent who receives official or legal documents on behalf of the company. You can be your LLC’s registered agent, or you can appoint someone else or a registered agent service.
The registered agent should have an address within your state and be available during regular business hours.
3️⃣ Get a Copy of Your State’s LLC Articles of Organization Form
To establish your LLC as a legal entity, you’ll need to file the articles of organization with the state agency responsible for business filings in your state. The specific form and requirements may vary by state.
4️⃣ Prepare the LLC Articles of Organization Form
You’ll need to provide essential information, such as your business name, principal place of business address, the purpose of the business, how the LLC will be managed, contact information for the registered agent, and, in some states, the agent’s signature.
One or more business owners or organizers will need to sign the form.
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5️⃣ File the Articles of Organization
Carefully review your articles of organization before submitting them to your state. Be prepared to pay a filing fee, which varies depending on your state.
Once your formation documents are approved, you’ll receive a certificate from the state, indicating that your LLC is formally registered. You’ll need this certificate for tasks like opening a business bank account and obtaining a tax ID number.
6️⃣ Create an Operating Agreement
An operating agreement outlines the financial, legal, and management aspects of your LLC. This includes profit distribution, how members can leave the LLC, and capital contributions.
Even if your state doesn’t require one, it’s beneficial to have an operating agreement, especially if you have multiple members. Templates are available online for single-member LLCs, but consider consulting an attorney for more complex situations.
7️⃣ Keep Your LLC Active
Establishing your LLC is just the beginning. You must ensure that your business remains in good standing with your state. This often involves filing an annual report to update your LLC’s information and paying an annual filing fee.
➤ LLC Important Tasks
Besides the seven steps outlined above, there are a few other crucial tasks to consider for the success of your LLC:
Obtain Business Licenses and Permits
Depending on your business type, you might need to complete additional forms and pay fees for business licenses and permits. These requirements are usually available through your state’s business filing office.
Get an Employer Identification Number (EIN)
An EIN is essential for separating your business finances from your personal finances. Many banks require an EIN when you open a business account. Additionally, some businesses must have an EIN. Apply for one as soon as your LLC is established.
Divide Business and Personal Assets
Taking steps to separate your personal assets from your business assets is crucial. Obtaining an EIN and opening a business bank account are effective ways to begin this process.
When you need to pay yourself, you can make withdrawals from the business account, designating them as “owner’s draws” to keep your business and personal expenses separate.
Register Your Business in Other States
You have the option to register your business in multiple states if needed. The state where you establish your domestic or in-state entity doesn’t have to be where you live. You can set up a foreign LLC if you have a registered agent within that state.
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➤ LLC Benefits
LLCs are a popular choice for entrepreneurs and groups starting new business ventures for several reasons:
Low Startup Cost
Forming an LLC is often more cost-effective and straightforward compared to establishing a corporation. Some states charge less than $100 in fees for LLC formation, making it an attractive option for those starting a business on a budget.
LLCs offer flexibility in how they are taxed. They can be treated as pass-through entities, allowing income to be claimed on personal taxes while separating business assets from personal finances. This can help prevent double taxation, a concern with other business structures.
An LLC provides members and owners with limited liability protection. This means that the business’s assets are protected in case of legal action, safeguarding members’ personal assets from being affected.
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➤ LLC Types
When it comes to starting your own LLC, there are various types of LLC structures to choose from. Understanding these options is crucial for picking the right one that aligns with your business’s nature and operations. Let’s explore some common LLC structures:
This type of LLC is owned and operated by a single individual. It’s similar to a sole proprietorship, but it offers extra tax benefits and liability protection.
Standard LLCs with more than one member, which can be organized into manager-managed or member-managed entities.
L3C (Low-Profit Limited Liability Company)
L3Cs act as a bridge between nonprofit and for-profit LLCs, emphasizing the business’s social mission over profits.
Series LLCs are a unique structure where one top-level LLC owns a series of lower-tiered LLCs, providing independent operation and asset separation.
PLLC (Professional Limited Liability Company)
This specialized LLC is available only to certain licensed professionals.
These LLCs are exempt from taxes during their first ten years and cannot make distributions to members, a fact that must be stated in their articles of organization.
Although not legally designated, an LLC becomes “anonymous” when its owner’s identity is not publicly disclosed. This can be valuable for maintaining privacy, and this option is currently available in Delaware, Nevada, New Mexico, and Wyoming.
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➤ LLC Costs
The cost of forming an LLC varies from state to state, ranging from as low as $40 to as much as $500 for filing the LLC paperwork.
These costs do not include additional expenses, such as reserving a business name or expediting the process. You may also need to obtain business licenses and permits for your LLC.
Additionally, consider ongoing expenses like registered agent fees and annual reports when determining the overall cost of running your LLC.
➤ LLC vs Other Businesses
Many entrepreneurs opt for an LLC because it’s a cost-effective and straightforward way to start a business. However, other business structures are worth considering. Let’s explore a few alternatives:
The simplest way to run a business, where you operate without establishing a formal organization. Income and taxes are reported on your personal tax returns, but there’s no liability protection.
A for-profit business established when two or more people join forces. There are general, limited, and limited liability partnerships, each with different levels of control and liability.
C, S, B, and closed corporations are options within the United States. C-corps are separate tax-paying entities, S-corps are “pass-through” entities, and B-corps focus on creating social good. Closed corporations operate with a private group of shareholders.
These entities exist for purposes other than generating income. Tax-exempt status is a benefit, but strict requirements must be met.
Owned and controlled by its users to meet their needs, cooperatives are prevalent in various industries. They are not tax-exempt and may be subject to various taxes.
These options have their advantages and drawbacks, so it’s essential to consider your business’s specific needs before making a decision.
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➤ LLC Taxes
The tax treatment of an LLC depends on the state and the owner’s tax election. If treated as a pass-through entity, the LLC’s income is reported on the owner’s personal tax returns.
If taxed as a corporation or partnership, additional taxes may apply. In some states, franchise taxes affect LLC owners.
Remember to determine your tax obligations when forming an LLC, as complying with tax requirements is essential for maintaining your business’s good standing.
➤ How to Start an LLC FAQ
Here are answers to some common questions about LLCs:
Do I need an LLC for my business?
It depends on your business needs. A sole proprietorship may suffice for freelancers or solopreneurs, but an LLC offers legal and financial protection and tax flexibility.
Can I set up an LLC for free?
While some companies offer “free” LLC formation, you’ll still need to pay the state’s filing fee, which varies by state.
How long does it take to get an LLC?
If filed online, it can take as little as two to four business days. Mailed submissions may take longer.
Do I need a registered agent for an LLC?
Each LLC is required to have a registered agent, but you can act as your own agent, appoint an LLC member, or hire someone else for this role.
Can an LLC own another LLC?
Yes, an LLC can own another LLC through various methods, such as filing paperwork or selling the entity.
Can a trust own an LLC?
Yes, a trust can own an LLC, with the trust named as a member in the articles of organization.
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➤ Final Thoughts
Creating an LLC is a relatively straightforward process, and various resources are available to guide you through the necessary steps.
Remember that the specific requirements and procedures may vary from state to state, so it’s essential to consult your state’s business filing office for the most accurate and up-to-date information on forming an LLC.
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