How To Start An LLC : A Complete Step-By-Step Guide

Choosing a business structure is a crucial step for every entrepreneur who is just starting out. Despite the fact that there are a variety of business structures,  a limited liability company (LLC) has grown in popularity among small business owners due to its ease of use and versatility. Below, we will cover everything you need to know about how to start an LLC.

Even though forming an LLC is easy and needs minimal documentation, it might be difficult for a new business owner. With that in mind, there are a few things that every entrepreneur should investigate and appreciate before getting started in order to improve their chances of forming an LLC in any state.

Setting up a Limited Liability Company is an easy, efficient, and quick way to start a business (LLC). Let’s look at what an LLC is, its suitability, benefits, and drawbacks, as well as other key considerations that can help you determine if an LLC is suitable for you and your company. If you want detailed information, check our guide on the best online LLC formation services to set up your business.

For a variety of reasons, limited liability companies (LLCs) are a popular choice for new enterprises, but they’re only one option. Here, in this guide, we’ll show you how to start an LLC and all the tips, tricks, and things to think about before doing so in this guide.

Before we start, here are the top picks for Best Business Formation Services:

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What Is An Limited Liability Company?

A limited liability company (LLC) is a type of legal entity used to organize a business. It combines a corporation’s restricted liability with a partnership’s or sole proprietorship’s flexibility and absence of formality. An LLC should be considered by any business owner who wants to restrict his or her personal liability for business debts and lawsuits.

Its primary goal, similar to that of a corporation, is to insulate the company’s owners from being held personally accountable for the company’s debts and/or other liabilities. That is, an LLC can hold assets and bank accounts, as well as sign loans, contracts, and other contracts, as well as be accused or file a lawsuit. This means it is legally distinct from its owners, and its members are responsible for any company debts or liabilities.

An LLC, on the other hand, has one significant advantage over a corporation which is tax liberty. It can be handled like a sole proprietorship (in the case of a single-member LLC) or a partnership as a pass-through entity (multi-member LLC). In both situations, the profits and losses of the firm are distributed to each member, who subsequently fills out the necessary paperwork and connects them to their self-employment taxes. Read our guide on Sole Proprietorship Vs LLC: What’s The Difference?

This implies that, apart from a corporation, LLC members are only paid once. You can also choose to be taxed as a company to prevent being considered self-employed. However, you can choose to be taxed as an S-Corp instead of a C-Corp to avoid double taxation.

An LLC, for example, has the same corporate personhood as a corporation and it can buy property, open a bank account, hire staff, and so on. More crucially, the LLC protects your personal assets. Your personal things cannot be taken as compensation if your LLC is in debt or has legal issues; just the LLC’s holdings are accessible to your lenders.

How To Form An LLC?

LLCs are possibly the simplest formal company entities to establish. The articles of the organization, which serve to officially establish the business, should be filed with the Secretary of State by the LLC’s administrator.

An operating agreement, which regulates how your firm runs, should be created by the members of a newly formed LLC for functional and business reasons.

The following information is normally needed in the articles of incorporation:

While most states do not require you to file this paperwork with the Secretary of State, you should nevertheless prepare one to avoid future problems. It can include things like how much of the business’ revenues will go to each member, what happens if a member wishes to quit, how to add new members, and so on.

Setting up your operating agreement can be done in a variety of ways. With a little legal help from an attorney, you should be able to construct your own agreement. This method ensures that your contract is tailored to your company’s particular needs. You can also use a template from an online business creation service like ZenBusiness or Incfile. You should create an operating agreement that explains how your company will operate.

In case, if you don’t have time to submit the forms yourself, you can engage one of these firms to do it for you. This solution would allow you to concentrate more on the growth of your startup company. Also, read our guide on How To Franchise Your Small Business.

Why Choose An LLC?

As said before, forming and maintaining an LLC is relatively simple. When compared to corporations, the documentation required for incorporation is modest, and the list of yearly legal responsibilities is probably minimal.

However, avoiding paperwork shouldn’t be your sole motive for forming an LLC. Despite the fact that an LLC involves far more paperwork than a more casual company formation, it offers a significant benefit over a sole proprietorship or partnership agreement in relation to personal loss prevention.

Your business and personal finances are one and the same if you’re a sole owner or general partner. As a result, if your company runs into financial difficulties, your car, property, and other assets may be used as recompense. As an LLC, however, you won’t have to deal. Only your business assets are at risk in a lawsuit if you form and manage your LLC in accordance with state rules, while your financial possessions are secured by the individual’s private limited provision.

Another benefit of an LLC is that you can select the taxing method that best suits your needs. Taxation as a corporation or as a pass-through organization is two choices. Your business will not file its own tax return as a pass-through entity; instead, you will be required to submit an explanatory document outlining how much cash your business gained or wasted.

Individual members earn revenue from the LLC under this taxation model (the quantity each member gets is specified by the partnership agreement), and each member declares that income on his or her own tax return and pays the related taxes.

Unless your LLC was taxed as a C corporation, it would be liable to pay tax as a separate company, at the corporate income tax rate of 21%. Your members would be subject to double taxes under this model because profits are taxed first at the corporate level and then taxed again at the individual level after the company transfers the profits to the specific individuals. This payment procedure is generally recommended only if your members have a high income and save money by eliminating excessive personal tax rates.

Ultimately, an LLC can be categorized as an S corporation, which is essentially a combination of the two choices we’ve mentioned so far. Most aspects of the pass-through model apply to S corp taxation, with the exception that your owners can eliminate self-employment tax because the S corp model treats them as staff. Moreover, S corp qualification is subject to a number of limitations, leaving this a quite uncommon choice.

Advantages Of An LLC

There are various benefits of starting an LLC, which are as follows:

1. It is simple to form and maintain

In today’s America, LLCs are the most straightforward official business structure to establish, especially when compared to corporations.

Other business kinds have more legal hurdles to jump through, however, an LLC’s fundamental formation requirement is simply to prepare and file your articles of incorporation with your state government.

LLCs, on the other hand, do not have as many maintenance responsibilities. In general, an LLC must file an annual report and pay any state costs, and in some states, a franchise tax must also be paid as part of the maintenance procedure. These are rather straightforward criteria in terms of ongoing compliance difficulties.

2. Lesser formalities and paperwork to deal with

Companies are required by law to save a slew of documents, including bylaws, minutes from shareholder and director meetings, financial ledgers, and more.

The requisite procedures are sometimes regarded as inconvenient, and that’s before even considering the incorporation process, which takes significantly more time and work than establishing an LLC.

Fortunately, LLCs are exempt from these obligations. An LLC is required to keep some business records, but not to the same level as a corporation. Members can hold a meeting at their leisure, whereas corporations are required to hold meetings for both company and its shareholders of directors.

3. Asset protection for individuals

An LLC has what’s described as a “corporate veil” because it’s a formal business entity. The veil creates a separation between your business and personal finances. The significance of this distinction cannot be emphasized.

The reason for this is that if the LLC gets into debt or gets into legal difficulties, someone has to pay, but thanks to the corporate veil, the LLC will cover the costs. Your personal funds and assets cannot be used to make up the difference if your company’s finances are insufficient.

Here is an example, let’s say you own and operate a bicycle repair shop. You finish a regular tune-up for a customer, but the biker crashes due to a loose item you fixed. The client is suing for damages after breaking multiple bones in the fall. Your modest repair shop doesn’t have enough money to cover the compensation.

If you’re a sole proprietor, in this case, you’ll be forced to pay these costs out of your personal assets, which could include your car, home, and other valuables. As an LLC, you would not have to deal with this issue. Hopefully, liabilities and disputes will be few in your commercial activities, but if they do occur, the corporate veil will shield you.

4. Versatile membership structures 

Companies follow certain structural procedures that sometimes be difficult to follow. While an LLC can create its own management structure, corporations must conform to strict guidelines, with a board of directors, nominated officials, and stockholders all playing different responsibilities.

S corporations are also subject to significant regulations. An LLC or C corporation, unlike an S corporation, could have a single member, a dozen members, or a hundred members there is no limit to how many representatives an LLC or C corporate entity can have.

Therefore, your members can be foreign investors as well as citizens of the United States. You can’t have any nonresident foreign owners in an S corporation, and you can’t have much more than 100 members too.

5. Flexibility in taxation

LLCs have the option of being taxed as either a corporation or a pass-through company. This flexibility is unusual in the company, and it allows LLC members to choose the tax strategy that best suits them.

Most LLCs choose the simple option of being taxed as a pass-through corporation. The LLC does not pay the taxes under this tax strategy. Rather, the LLC’s profits are distributed to its members, who ultimately report them on their individual tax returns.

Increasing taxes LLCs like companies work in a reverse way, the LLC pays its own taxes. This method necessitates the LLC to pay corporate income tax and is often only chosen if the LLC’s owners have a significant income and the corporation tax rate is much lower than their individual income tax brackets.

6. Credibility

Since LLCs are a widely recognized corporate structure, forming your company as an LLC offers you credibility and shows your customers that you are respectful and professional about how you manage your company.

7. Access to business loans

Once your LLC has been formed, you may begin creating a credit history that will allow you to obtain credit facilities and personal loans to help you grow your company.

8. Flexible profit distribution

LLCs have the option of distributing profits to their owners in any way they see fit – the distribution does not have to be balanced among members or equivalent to shareholding proportions.

Disadvantages Of An LLC

There are various drawbacks of an LLC, let’s see some of them below:

1. Taxes on self-employment

While taxation benefits LLCs in most cases, it harms them when it comes to personal taxes. Its because all LLC owners are considered self-employed, which means they must pay the 15.3 percent self-employment tax, which covers both the employer and employee parts of Social security benefits. Corporation owners, on the other hand, are not considered legally self-employed people and are thus free from contributing taxes.

2. Legalities differ from one state to other

One disadvantage of the LLC is that each state is free to establish its own rules regarding how they’re being established and maintained. As a result, determining exactly what your LLC is required to do, especially if your company operates in numerous jurisdictions, can be tricky.

Furthermore, because the LLC is a relatively new addition to the American corporate environment, there may be considerable discrepancy and uncertainty in how judges in different jurisdictions handle disputes involving LLCs due to the lack of precedence in some states.

3. Operating a formal business is more difficult

While the LLC has a benefit over corporations in this regard, it still takes longer, more effort, and more money to organize and maintain than a limited sole proprietorship or partnership. There is no creation process, no maintenance needs, and no fees to pay with these informal business forms. In fact, sole proprietors and general partnerships have downsides (such as no individual loss prevention), but the LLC is more difficult to set up and maintain.

4. Difficult to raise money through investing

Although LLCs are allowed to raise cash through outside investments, most investors prefer corporations. For starters, LLCs are unable to issue stock, that’s why almost all investors prefer to invest in corporate stock. Moreover, venture capital firms practically rarely invest in LLCs since the pass-through organization type is extremely costly to them.

5. Life span is limited

The duration of an LLC’s members determines how long it can exist. While there are distinctions between states, when a member of an LLC departs, the business is liquidated or stops existing in most of them, requiring the remaining members to complete any outstanding business or legal obligations in order to close the business. The remaining members have the option of forming a new LLC or breaking apart.  By inserting proper clauses in the operating agreement, an LLC’s vulnerability can be solved.

Steps For Starting An LLC

Whether you’ve determined that forming an LLC is the best choice for your company, it’s time to get started on the documentation. Please remember that the exact steps will vary by state, so make sure you research your state’s requirements to verify you’re performing the task perfectly. In most states, these are the processes you’ll need to do to form a registered LLC.

Here’s a simple step-by-step instruction to help you understand how to start an LLC:

1. Select Your State

The best option for most new business owners is to register an LLC in the state where they live and plan to do business. If you plan to operate businesses in multiple states, you’ll need to form LLCs in each of the states where you’ll be doing business. Consider incorporating an LLC in one of the business-friendly states, such as Delaware, Nevada, Wyoming, and many others.

2. Choose A Name For Your LLC

In any state, the first step is to come up with a great name for your new LLC. The name of your LLC is important since it is your company’s best chance to make a good impression on target users, and you want to make an excellent one. Choose something unique that represents your company’s objectives.

Read Our Guide On How To Search Your Business Name

However, there are some common guidelines to follow while selecting a business name:

• The abbreviation (LLC, L.L.C., or Ltd) or the phrase “limited liability company” should be included at the end of the business name
• Should not include restricted phrases such as university, bank, or attorney, as this may involve additional paperwork or the employment of a qualified individual
• The title should never be identical or similar to any other existing firm in your state of incorporation
• Terms like insurance, FBI, and Treasury, among others, will not be included in your business name since they may create confusion with government entities

All the above-mentioned guidelines imply you’ll need to run a complete name search to verify you’ve selected the correct name.

Create a Name Reservation (optional): The simplest method for deciding on a name is to submit three business names in terms of priority. Your corporation will be given one name from the list by the secretary of state. The great news is that you can reserve a business name for 60 days until it becomes accessible for registrations.

3. Choose a Registered Agent

A registered agent is required for every LLC operating in the United States. Receiving key document deliveries from the state (such as service of procedure documents and yearly report reminders), notifying you of arrival, and sending the documents to your business are all part of this function. In brief, the registered agent guarantees that every company operating inside the state’s borders has a reliable point of contact.

We also propose that you choose a competent registered agent service to provide you peace of mind and assist you to stay on the right side of the law.

When incorporating an LLC, most states require that you name a registered agent. A resident of the state in which you’re doing business, or a corporation allowed to do business in that state, must serve as your registered agent.

4. File Your LLC Formation Documents

This is the most crucial stage in the formation of your LLC. The Articles of Organization are the most common term for these documents, however, some governments call them something else, like the Certificate of Organization.

You have the option of completing the information on the formation forms yourself (and then filing them online or by mail) or hiring an LLC formation service to do it for you. The typical state filing fee for forming an LLC is around $100. Before you begin, make sure you have all of the necessary information for your state.

Read our guide, on Steps for setting up a business in the US as a foreigner

The data you’ll need for this filing varies by state, but you’ll generally need to include the name of your LLC, the principal office and mailing addresses, the registered agent’s name and address, and whether the LLC is handled by members or managers, and the name and address of at least one member or manager. However, the specific information can vary, and each state has its own response time, so be sure you have all of the relevant details for your state before you start.

5. Develop A Management Structure

LLCs, give you the freedom to choose your company’s management structure. If members do not want to be engaged in the day-to-day operations of the LLC, they can assign that authority to one person or a group of LLC members to act as manager (s).

6. Draft An Operating Agreement For Your LLC

Most states do not require an operating agreement, yet it is quite necessary. An LLC operating agreement is a document that defines the ownership structures and responsibilities of each LLC member. Because an LLC does not require the formation of a board of directors, as a corporation does, an operating agreement can be used instead. If you don’t have an operating agreement, state law will dictate how you run your business.

Whereas most states do not require you to establish an operating agreement when forming an LLC, it is still a good idea to do so. An operational agreement is divided into six sections:

• Organization
• Voting and Management
• Contributions to Capital
• Distributions
• Changes in Membership
• Dissolution

Although if you already own and run a single-member LLC by yourself, you should create an operating agreement because it allows you to distinguish the LLC from yourself as a person, which is important for personal asset protection.

7. Get An EIN From The IRS

The next step is to obtain a federal tax ID number from the Internal Revenue Service (also known as an EIN or employer identification number). The EIN is a nine-digit number that is used to identify your corporation for taxes purposes, comparable to a Social Security number for an individual. An EIN can assist your LLC in a variety of ways, including opening business bank accounts, employing workers, and so on.

8. Create A Financial Infrastructure For The LLC

The next step is to open a business bank account and set up an accounting system. All you have to do to get a business bank account is bring your EIN to the bank of your choice and tell them you want to open a business account. Once you’ve set up the account, make sure you only use it for company spending and income. Combining your business and personal assets is a risky strategy that can lead to lawsuits, administrative dissolution, and other issues.

9. Obtain The Necessary Licences And Permits

While some states require LLCs to get a general business license in order to operate legally, others do not. Whether or not your state requires a general license, your LLC will almost certainly need at least one license or permit. Agriculture, aviation, mining, weapons, broadcasting, and other businesses, for example, all require state or federal licensing.

In addition, county and municipal governments demand a variety of permissions, including alcohol sales and occupancy permits. Remember to check with every government body that has authority over your business (federal, state, county, and municipal) to make sure you’re up to date on all registration and regulatory needs.

Read More: What Does Doing My Business Mean?

10. Obtain Business Insurance

In most areas, if your company has employees, you will be obliged to get workers’ liability insurance. Even if your business is incorporated in Texas,  you should still get protection. A general liability policy is generally always a good option, especially for businesses with retail sites where customers visit in person, and there are several industry-specific insurance policies that can be beneficial depending on the type of your business.

What Should You Do After Forming An LLC?

After you’ve formed, registered, and certified your LLC, there are a few things left to do to get it completely functional.

Taxes and unemployment insurance should be set up

To begin, make sure your LLC is registered for state taxes. If you’re selling a tangible item, you’ll need to file for sales and use tax, and if you have employees, you’ll need to register for unemployment benefits and income tax with the state.

Choose who will be in charge of your accounting

After that, decide how you’ll handle your bookkeeping. If you decide to do it yourself, you should look into the top accounting software to assist you to keep a record of everything. You can also employ a certified public accountant to help you set up your financial reporting or do it for you.

Obtain the required permits

If your company requires a permit for some other purpose, now is the time to apply. Many business activities, such as the sale of alcoholic beverages, mining and drilling, transportation and logistics, and aviation, require federal permits. Permit factors which affect by state and locality.

Make a decision on commercial insurance policies

You should also think about acquiring business insurance. Most states mandate insurance, usually workers’ compensation at the very least. Professional liability insurance protects your company’s assets from lawsuits by protecting injuries, damage to property, personal liabilities, advertising obligations, and legal case.

Check the hiring laws again

Lastly, ensure sure you’re complying with all applicable federal and state hiring rules. The following are the most important hiring criteria:

• Employees must be able to work in the United States.
• Any new hires must be reported to the state.
• Employees must be covered by workers’ compensation insurance.
• Employee taxes must be paid.
• You must print compliance posters and publish them in prominent locations across your company.
• You must pay employees at least minimum wage on a regular basis, as required by the state

How To Hire An LLC Formation Service?

Is this a time-consuming procedure? Would you rather pay someone else to set up your LLC so you can focus on building your company? Thankfully, there are numerous reliable LLC formation services that can provide expert advice for a fraction of the cost of hiring a lawyer.

These days, there are thousands of different organizations that provide LLC creation services, and it can be tough to figure out which one is best for you. That’s why we put together this comprehensive list of the best online LLC formation services.

We strongly advise all of our readers to look over that advice and select the best provider for their needs:

When Is the Best Time to Form a Limited Liability Company?

It’s challenging to know when your LLC should be formed. Every firm has its own set of priorities, and what works for one businessman may not work for you. However, we believe that forming your LLC before doing your first business deal is usually a good idea.

If you conduct business before starting your LLC, you will be treated as a sole proprietor or general partnership by nature. That means that all these transactions are not covered by the corporate veil, which is a layer of separation between your personal and business assets that the LLC provides. Even if you later form an LLC, you as the business owner will be legally responsible for the transactions you made before to the formation of the LLC.

Considering that you have nothing to gain by delaying the formation of your LLC, we believe it is always a smart option to register your LLC as soon as you have a clear understanding of your business idea and title.

What Is The Cost Of Forming An LLC?

Another concern we frequently receive from businesses is how much it costs to form an LLC. Aside from the price you pay the state for filing your formation documents, there are often extra costs associated with the LLC formation process. It’s worth mentioning that, similar to how each state establishes its own rates for LLC formations, the added expenses can differ from state to state and in certain situations, industry to industry.

Let’s have a look at some of the other possible costs. A name registration fee, which is mandated by law in Alabama but is flexible elsewhere, is one that isn’t usually required. In most states, reserving a name costs only a few bucks — in many cases, only $10-20.

Another aspect that can raise prices is whether or not you use an LLC formation service, as most of these businesses add their own provider costs on top of the state’s formation fee. Therefore, choosing whether or not to use a registered agent service will have an influence on the earnings of your new LLC. If you hire a lawyer instead, your costs will almost surely boost.

There’s also the problem of initial and annual reports to consider. Although initial reports aren’t needed in many states, they are an essential part of the formation process in those that do. Most states require LLCs to submit annual reports, and the fees can range from as little as $10 in Wyoming to as much as $320 in Hampshire.

Lastly, while LLCs are typically pass-through organizations, they may be subject to state-specific tax obligations such as franchise taxes for the right to conduct business in the state. Generally, some LLCs have a lot of fees associated with them, while others may get by with a lot less. It all relies on where your business stands and what industry it works in.

How Does LLC Differ From Other Business Entities?

We’ve discussed the benefits and drawbacks of the LLC in comparison to other types of commercial enterprises throughout this post.  If you want to know an in-depth article about how an LLC compares to a sole proprietorship, general partnership, or corporation.

Check our blog on the difference between Professional Corporation Vs Professional LLC.

Let’s take a quick look at the similarities and differences between these business structures so you can decide whether an LLC is an appropriate fit for your organization.

• LLC vs. General Partnership / Sole Proprietorship: Basically, a single proprietorship and a general partnership seem to be the same thing. The main distinction between a sole proprietorship and a general partnership is that a sole proprietorship is a one-person firm, whereas a general partnership includes at least two people. As said before, these business types do not provide personal asset protection, which is such a significant drawback that we would never advise using a sole proprietorship or partnership agreement rather than an LLC.
• LLC Vs Corporation: The distinction between a limited liability company (LLC) and a corporation (corporation) is a little more complicated. The LLC offers a number of tangible advantages over the corporate, including tax flexibility, business structure flexibility, ease of registration, fewer formalities, and (typically) cheaper maintenance costs. However, the corporation has several advantages of its own, such as the right to impose stocks and draw private investors, as well as the company’s well-established legal principles. The LLC is the ideal entity type for most small businesses, while there are a few exemptions.

What Are The Things To Consider Before Starting An LLC?

Before you decide how to form an LLC, there are some questions you must ask yourself to make you understand whether your motive for business formation has some serious goal or not. Here is a list of questions you must consider:

What is your level of commitment to your company?

This may seem to be a silly question but stay with us. We can’t count the number of times we’ve witnessed people register LLCs only to get nothing from them. As a result, we believe it’s at least worth asking yourself if you’re serious about forming an LLC before going through the expense and hassle of doing so. If you’re ready to do business, that’s wonderful! However, if you’ve just got an unplanned idea and don’t know whether you have the time to commit to a serious business, you might not be ready yet.

What is your budget analysis?

Forming an LLC might be costly depending on the state. While some states charge only a few dollars to incorporate an LLC, others demand big bucks. If you’re on a limited budget, you might have to put off your company goals a little longer than you’d want.

Do you have any plans to grow into other states?

If you only intend to run your business in one state, you can register an LLC straight away. A corporation, on the other hand, maybe a better option if you plan to do business in many states. Because corporations are the same in all 50 states, yet each state has its unique form of LLC, this is the case. As a result, while the legal and technical components of a corporation are similar across the United States, the LLC differs widely across the country.

Will you be looking for outside funding?

It’s a basic sense, LLCs do not draw a lot of outside capital. They are still unable to sell a stock, giving companies an enormous advantage, and venture capital firms rarely invest in LLCs.

Conclusion

Starting an LLC isn’t difficult, but it isn’t easy too. Before you start your company, be sure you understand all of the essential terms. To optimize the profitability of your business, you must first know the structure and its implications.

A limited liability corporation is the most simple and easy-to-create business structure, according to our brief step-by-step guide on how to start an LLC. As a result, it is the greatest option for a new company or a business owner who wants to preserve their financial property even while receiving tax advantages.

Since it combines some of the advantages of corporations with those of informal organizations like general partnerships, the limited liability company (LLC) is a prevalent business entity structure.  As a result, the business structure is fluid and agile while still maintaining integrity and authenticity.

However, the conclusion we want to make is that the LLC may not be for everyone. While it has several important advantages over corporations (as well as informal entities), it also has several drawbacks that may apply based on your specific circumstances.

Are you planning to start an LLC? If you have any questions, don’t hesitate to leave them in the comment section below!

FAQs On How To Start An LLC