TABLE OF CONTENTS
- How to Create an LLC: Getting Started
- Step 1: Determine a Name for Your LLC
- Step 2: Decide on a Registered Agent
- Step 3: File Your LLC’s Articles of Organization with Your State
- Step 4: Develop an Operating Agreement
- Step 5: Choose Your LLC Management Structure
- Step 6: Apply for an Employee Identification Number (EIN)
- Step 7: Open an LLC Business Banking Account
- Step 8: Hire an Accountant to Set up LLC Finances
- Step 9: Apply for Licenses & Required Permits
- Step 10: Purchase Business Insurance
- Step 11: Register for State and Federal Taxes
- Step 12: Learn about Hiring Laws in Your State
- Step 13: Set up Your LLC in Other States
- Forming an LLC FAQs
- Final Thoughts: Benefits of Starting an LLC
If you’re starting a new business, you may be wondering what the best business structure is for your future venture. There’s good reason to contemplate this question, as the structure can have long-lasting implications on your business’s taxing, hiring, and funding. That said, if you’re having difficulty deciding between any other business structure and an LLC, this article will help you weigh the benefits against the drawbacks of an LLC business structure. Additionally, this article explains how to start an LLC, outlines costs to consider, and answers questions you might not even know to ask yet. Let’s dive in.
How to Create an LLC: Getting Started
Starting a limited liability company (LLC) is a state-dependent process. That said, please note that all information in this guide is generic by design. You’ll need to look into your specific state’s process for more details. Regardless of state-specific details, this guide will absolutely give you a sense as to whether creating an LLC is the right decision for your business.
Without further ado, below are the 13 steps for how to start an LLC in the United States.
Step 1: Determine a Name for Your LLC
The first step to starting an LLC is determining your business’s name. There are two types of business names: your “doing business as” (DBA) name and your legal name.
- A legal name is the name you use on all legal documents, tax filings, business licenses, and insurance policies.
- A DBA name is the name you use when presenting yourself to customers.
For example, Betty’s Flower Shop may be a business’s DBA name, while Betty Smith LLC may be the same business’s legal name. All marketing materials say Betty’s Flower Shop, but all tax filings say Betty Smith LLC.
In most states, you need to include “LLC,” “L.L.C.,” “Limited Liability Company,” or “Limited” in your legal name to designate that the structure is an LLC. Your legal name also needs to be completely unique within your state, which is often why the DBA and legal names do not match.
Step 2: Decide on a Registered Agent
When setting up an LLC, you must decide who your LLC’s registered agent will be. A registered agent is the designated person responsible for sending and receiving legal documents on behalf of your business. The person (or, in some cases, the company) must live in the state where the LLC was formed.
In many cases, it’s advisable to hire a professional registered agent to ensure your business stays in compliance with the law.
Step 3: File Your LLC’s Articles of Organization with Your State
The next step in our guide on how to start an LLC is filing the Articles of Organization with your state. In some states, the Articles of Organization are known as a Certificate of Formation or Certificate of Organization. The Certificate of Formation outlines basic details like:
- Your business’s legal name and DBA name (if appliciable)
- A description of the business
- Your business’s mailing address
- The name and mailing address of the registered agent
- Information about company owners, managers, and officers.Legal Zoom. “LLC Articles of Organization”. Accessed March 23, 2022.
This document can be self-prepared. You can also hire someone to put this information together and submit it on your behalf. When you submit this document, you also need to remit your filing fee. This fee averages around $100, but varies by state.
Step 4: Develop an Operating Agreement
When learning how to start an LLC in your specific state, you may find that your state doesn’t require an operating agreement. While not all states require this step when starting an LLC, it can be a good idea to create one regardless.
An operating agreement is a legal document that outlines the functional and financial details of your business, such as its rules for:
- Management and voting
- Capital contributions
- Membership changes
Step 5: Choose Your LLC Management Structure
When creating an LLC, the management structure is the next important decision you’ll need to make. You may choose to be member-managed or manager-managed.
Member managed means the members run the day-to-day operations and have complete authority to make business-related decisions. Manager managed, on the other hand, means only elected members have complete authority to make decisions. Manager managed may also refer to a business managed by a team separate from the day-to-day operations altogether.
Note: Owners of an LLC are called members.
Step 6: Apply for an Employee Identification Number (EIN)
Your LLC’s EIN is free to apply for and can be set up in minutes. Your EIN is your business’s tax ID number. You will need it to file taxes, hire employees, apply for business bank accounts, and complete other necessary tasks.
Step 7: Open an LLC Business Banking Account
Now that you understand how to start an LLC, it’s time to open a business bank account.
Even if you are a solo-member LLC, having separate bank accounts for your business’s funds and your personal funds will make your life a lot easier during tax season. And by keeping your revenue in a business bank account, it will also be a lot easier to manage your business’s cash flow.
Once you have a business bank account, you can apply for a business debit or credit card.
Step 8: Hire an Accountant to Set up LLC Finances
Additionally, an accountant can help you with some of the last steps in our guide on how to start an LLC, like registering for taxes, determining your sales tax nexus, setting up your LLC in other states, and more.
Step 9: Apply for Licenses & Required Permits
Most businesses need a combination of licenses and permits to operate. These will, for the most part, vary by state and city, though some are required on the federal level. In particular, if a federal agency regulates your business activities, you need certain licenses to operate.
If you don’t know whether your industry is subject to federal licenses or permits, the Small Business Administration has a list of necessary federal licenses and permits by industry.
Step 10: Purchase Business Insurance
The reason many entrepreneurs choose an LLC instead of, say, a sole proprietorship structure, is because the business owner’s personal property receives some limited legal protection, thus the name limited liability company. That said, in the event of the unexpected, insurance can fill the gaps to protect your business and personal assets.
Federally, every business with employees must have:
- Worker’s compensation insurance
- Unemployment insurance
- Disability insurance U.S. Small Business Administration. “Get Business Insurance”. Accessed March 23, 2022.
Note: Additional insurances might be required by your state.
Step 11: Register for State and Federal Taxes
After applying for your EIN, you are registered and eligible to pay federal taxes. It’s important to know that when you create an LLC, that business structure plays a large role in determining what federal taxes you’re expected to pay and how you’re expected to pay them. The five types of general federal taxes include:
- Employer tax
- Estimated tax
- Income tax
- Self-employment tax
- Excise taxU.S. Small Business Administration. “Pay Taxes”. Accessed March 23, 2022.
You may be required to make multiple payments within one calendar year, so talk to a tax professional to understand your tax obligations.
Each state has different requirements for registering for taxes. Additionally, the types of taxes your LLC owes will depend on your operations.
Step 12: Learn about Hiring Laws in Your State
Each state has its own laws regarding hiring and labor. Some states are strict, others more lenient. Fortunately, the Employment Law Handbook has a database of employment and labor laws by state.
Step 13: Set up Your LLC in Other States
The final step in our guide on how to start an LLC is registering your LLC in other states. (That is if you plan to operate across state lines.) The process for how to create an LLC that functions across state lines is often quite simple, but the requirements vary by state, so you may want to consult a tax professional to help you with this process.
Forming an LLC FAQs
Now that you know how to start an LLC, we’ll answer some frequently asked questions regarding the LLC business structure below.
How much does it cost to start an LLC?
On average, it costs $100 to register your LLC. This cost varies by state, so consult your state registry for specific information. Some states cost significantly more, others cost less.
How long does it take to set up an LLC?
An LLC can be set up relatively quickly, but the process depends on your state, processing delays, and the preparation you’ve done ahead of time.
In some states, you can form an LLC in as little as three business days. In other states, this process can take closer to a month.
Will I need help to start an LLC?
While the steps above may have taught you how to start an LLC, it’s often advisable to consult with professionals to ensure you do it correctly and in the manner most favorable for your business. Remember that when you start an LLC, you are putting into motion a framework with business tax and liability implications.
Is forming an LLC better than a sole proprietorship?
There are pros and cons to both business structures. When comparing an LLC vs sole proprietorship, here are a few considerations to make:
- Your comfort with personal liability
- The number of owners or members you’d like to have
- How you’d like your taxes structured
- How you plan to raise capital
Consult a professional to determine the choice that’s best for you and your business. In general, a sole proprietorship is the quickest and simplest business structure but leaves your personal assets vulnerable in the event of a lawsuit. A limited liability corporation, on the other hand, protects some of your personal assets but takes more time and money to set up.
Should I start a corporation or an LLC?
If you’re deciding between an LLC or a corporation structure for your business, you’ll be happy to know that corporations and LLCs share a lot of similarities. However, one major difference between the two is that a corporation is owned by shareholders, while an LLC is owned by individuals.
Additionally, corporations have very different implications for personal tax liabilities than LLCs. Consider consulting a tax professional to determine the choice that’s best for you and your business.
Can I form an LLC in any state?
You do not need to be a resident in the state where you form your LLC. However, it’s often advisable to form your business where you live. This is because your personal tax liability depends on your residence. So, if you form a business in Nevada but operate in California, you may find yourself paying double the filing fees and taxes in California, anyway.
To find the most favorable state for you and your business, contact a tax professional.
Are there any disadvantages to creating an LLC?
There are a few disadvantages to creating an LLC, which include:
- Higher costs to form
- Difficult to transfer ownership
- Owner must immeditatly recognize profits, meaning LLCs are taxed on the corporation’s profits (as opposed to C-corporations that may distribute profits to shareholders as dividend)
Additionally, some businesses are not eligible to form an LLC.
How do I know which management structure is best when setting up an LLC?
In general, a member-managed LLC may make more sense for your business if it’s small, the members are experienced, and the members plan to be active in management.
A manager-managed LLC may make more sense for your business if it is large, has a lot of assets, or has inactive or inexperienced members.
Can you start an LLC before you start your business?
Yes, you can start an LLC before you start your business. By setting up your LLC ahead of time, you can launch your business with the legal protections of an LLC, instead of switching your structure after you’re operational.
Can I form an LLC even if I have bad credit?
Yes. In fact, forming an LLC is often advisable if you have personal bad credit. This is because the LLC becomes a legal entity separate from your personal assets, meaning that it is eligible for its own credit score. By separating your personal and business assets, you may find that banks are more willing to open a business bank account for you.
What will I need when starting an LLC?
In terms of how to start an LLC, we recommend following our above 13 steps to get started. The requirements vary by state, but, in general, you will need the following to start your LLC:
- An EIN
- A business legal name
- A registered agent
- Articles of organization
- An operating agreement
- A business bank account
- Any required licenses or permits
- Business insurance(s)
- A tax or legal professional
Can two owners set up an LLC?
Yes, two owners can set up an LLC together. This process is similar to forming a single-member LLC.
Final Thoughts: Benefits of Starting an LLC
An LLC is an incredibly popular business structure because of its favorable liability implications, tax treatment, added credibility, and other various elements. (And better yet, if you decide to go this route, you now know exactly how to start an LLC!) With the scalable nature of an LLC, you’ll be accepting payments for your venture in no time, all while working within a business structure ready to support your business as it grows.