How to Start an LLC: An LLC (Limited Liability Company) is a business structure that provides the benefit of limited liability protection for company debts and flexible tax options for the owner. Here is a step-by-step guide for starting an LLC.
On this page, you’ll learn about the following:
How to Start an LLC
Creating a Limited Liability Company or Limited Company is a simple process. With these simple – but essential – steps, you can save a significant amount of time.
STEP 1: Pick a State
Ideally, your LLC should be registered in the state where you live or intend to do business. However, suppose your business will operate in multiple conditions. In that case, you will need to set up a foreign LLC in each state where you plan to do business.
STEP 2: Give Your LLC a Name
First thing first: decide the name of your LLC. Check the availability of business names by doing an LLC name search through the secretary of state’s website. Meanwhile, here are the naming specifications:
The phrase “limited liability company” or abbreviations such as LLC or L.L.C. should appear in the company name.
The company name should not contain any words that could be confused with the name of a government agency (i.e., FBI, State Department, Treasury, etc.).
Words like bank, attorney, university and others are restricted. They may necessitate additional paperwork and a licensed individual such as a doctor or lawyer working for the company.
Other information about naming a business can be found in the How to Name a Business guide.
STEP 3: Select a Registered Agent.
The person who organizes and handles legal documents on your company’s behalf would be the registered agent. Official correspondence, such as state filing notices and legal summons, would be among the papers.
When forming an LLC, all states generally require businesses to name a registered agent or private service companies accredited by the state where you want to start your LLC. Keep in mind that your registered agent should be a resident of the state you are establishing your business or a corporation authorized to do business in that state.
Learn more about Registered Agents or formation companies, so you know what to look for when selecting an agent, and look into the best LLC services that offer professional registered agent services.
STEP 4: Submit the LLC Formation Documents.
The formation documents are essential for forming an official LLC. Depending on the state, this document is known as a Certificate of Formation, Articles of Organization, or Certificate of Organization. You must submit this to the Secretary of State. You can file online or by mail, and the filing fee is usually around $100.
STEP 5: Draft an Operating Agreement for an LLC.
The LLC operating agreement is not required, but it is recommended. This legal document describes the organizational structure and roles of your LLC’s members. Keep in mind that you should have already decided whether your LLC will be member-managed or manager-managed.
The following are the major sections of an operating agreement:
- Contributions in Kind
- Distributions of Dissolution
- Changes in Management and Voting Membership
Learn more about LLC Operating Agreements and how to properly file them.
STEP 6: Obtain an EIN
Employer Identification Number (EIN) is an abbreviation for Employer Identification Number. Some people refer to it as a Federal Employer Identification Number (FEIN) or a Federal Tax Identification Number (FTIN) (FTIN). It’s just like a Social Security number (SSN) for your LLC. The EIN is an acronym for Employer Identification Number. The EIN is necessary if you intend to hire employees or open a business bank account.
There is no cost to obtain an EIN, and you can do so through the IRS website, fax, or mail. More information about EIN can be found in our articles on what an EIN is and why you need one.
Other Requirements for LLCs
- Separate business assets from personal assets: Your LLC protects you from liability in a limited way. It is critical to keep your business banking and credit accounts separate from your personal accounts. Otherwise, if your LLC is sued, your personal assets (home, car, and other valuables) will be at risk.
- Create a Business Accounting System: It is critical to have a business accountant who can assist you in taking advantage of tax breaks. It will save you and your company a lot of money in taxes every year.
- Acquire Business Licenses and Permits: You must determine whether your business will require business licenses or permits to remain compliant. Licensing requirements would differ depending on state and county or city laws.
- Find Out Federal Tax Options for Your LLC: Pass-through entities are taxed as LLCs. It means that all of the company’s profits are reported on the tax returns of the LLC members. The member is then responsible for paying self-employment taxes and income tax on their share of the business’s after-tax earnings.
Meanwhile, LLCs can be taxed as S corporations (S corps) or C corporations (C corporations) (C corps). The former allows members of an LLC to be taxed as employees. In certain circumstances, it reduces the tax burden.
- Register Your Limited Liability Company (LLC) for State Taxes: The taxes that would be required of you would rely on the nature and location of your business.
- Purchase Commercial Insurance: Workers‘ compensation insurance is generally required for businesses with employees. Meanwhile, while general liability insurance is not required by law, it is highly recommended to protect your company’s assets from lawsuits.
Review of LLC Formation
Time needed: 1 hour and 5 minutes.
Again, here are the simple steps on how to form an LLC. To read the full description of each step in this list, click on the link.
- Select a state
The first step is to select the state where you will operate your LLC, as requirements differ by state.
- Choose a name for your LLC.
The next step is to choose a company name that includes “limited liability company” or one of its abbreviations (LLC or L.L.C.) in it.
- Select a registered agent.
In most states, you must choose a registered agent for your LLC. Check out our list of the Top 5 LLC Services in the United States.
- Complete and file formation documents
Documents about the formation of a company should be When forming an LLC, a formation certificate must be filed. States would have different terms to refer to this document: Certificate of Formation, Articles of Organization, or Certificate of Organization.
- Make an operating agreement.
When forming an LLC, you should consider drafting an operating agreement. The operating agreement is not a legal requirement but is recommended.
- Obtain an EIN
The Employer Identification Number (EIN), also known as the Federal Tax Identification Number, identifies a business entity. It works in the same way that a social security number does for an individual.
An LLC, unlike a sole proprietorship, is a separate legal entity from its owner. Sole proprietors typically benefit from converting their business to an LLC, which provides liability protection while also being inexpensive to start and maintain. Meanwhile, because there is no legal separation between a sole proprietor and the business, only businesses with no liability must operate as sole proprietorships.
An LLC, or limited liability company, helps protect your personal assets while also increasing the credibility of your business. In terms of formation and maintenance, these are the most straightforward and cost-effective legal business entities. However, when it comes to attracting investors, LLCs aren’t the best option.
Without a doubt, you can form an LLC on your own by following our LLC formation guides.