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Forming an LLC comes with a myriad of perks from personal liability protection to tax freedoms to help your business succeed. Knowing how to get an LLC off the ground, however, can be a daunting task. In this article, we reveal how to start an LLC in nine easy steps.
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Pros and Cons of How To Start an LLC
Starting an LLC can be a huge boon for your business. That said, there are a few negatives to consider before diving in. Let’s look at the pros and cons of how to start an LLC.
Pros
Limited Liability Protection
Unlike sole proprietorships and partnerships, LLCs come with personal liability protection. The business structure helps draw a clear line between personal and business assets.
In the event of unpaid debt or a lawsuit, other parties can’t come after personal property that’s not part of your business. Even if your company doesn’t have the means to make a payment, your personal things are safe.
When you start an LLC, it’s essential never to mix personal and business expenses in any way. Once you start to muddy the waters around what belongs to your LLC, your personal assets may no longer be protected.
Tax Options
LLCs don’t have a set tax classification and instead can take on the rules of another business type. In most cases, limited liability corporations opt for pass-through taxation similar to a sole proprietorship or partnership.
With pass-through taxation, your company does not pay taxes on the corporate level. All profits pass down to the owners, who pay income tax based on their portion. This is the default tax guideline that most LLCs choose to follow.
It’s also possible to adopt a C-corporation’s tax classification, where your company pays taxes at the corporate level. Members still pay taxes based on income.
Management Flexibility
As an LLC, you and your other members can choose how much of an active role you want in your business. You can handle day-to-day operations yourselves or hire a business manager to perform these tasks for you.
Business managers can be a huge help if your ownership isn’t experienced in running a company. Whatever you desire, starting an LLC gives you the flexibility to decide for yourself.
LLCs are not required to maintain a board of directors to serve as a decision-making body. There’s no rule about how many members your LLC can have, either.
Profit Distributions
Corporations pay out profits to shareholders based on their percent interest in the company, and partnerships must split all profits evenly between owners. LLCs, on the other hand, have no such requirements.
Members of your LLC get to choose how to distribute profits amongst themselves. If one particular owner invests more capital upfront or takes a more active role, they can earn a higher share than other owners.
The current ownership makes these determinations, and profit distributions can change as your company grows. You’ll need to carefully document these splits in your LLC operating agreement in case the IRS asks questions at tax time.
Uniqueness
In nearly every state, creating an LLC gives you unique access to whatever name you choose for your business. No matter the business type, other companies can’t use the same title as you in the state you do business in.
These rules only apply in the state you’re operating out of. If you ever plan to expand your business across state lines, it may be wise to reserve your unique name there as well. Many states will let you hold names for several months while you prepare.
Business Credibility
All business types are legitimate business models, but some look less credible than others on paper. Sole proprietorships and partnerships have to use the owners’ names as a business title on documents unless you’re “doing business as” something else.
Customers and other organizations tend to view LLCs are more trustworthy, credible, and professional. Your company’s legal title must include some form of “LLC” or “limited liability company” to make clear your business standing.
Minimal Paperwork
LLCs are pretty light on the document creation front. You’ll only need to develop an operating agreement and articles of organization when you start your business.
Most states do ask for annual reports summarizing changes to your company, but these requests are usually minimal. It helps if you maintain a record of changes throughout the year.
As an LLC, there’s no need to hold meetings or record meeting minutes. You don’t need to keep a board of directors or any paperwork corresponding to those roles.
Easy to Form
When it’s time, creating your LLC is fairly straightforward. Requirements vary slightly from state to state, but the process is something you can do entirely by yourself.
Good for Multiple Business Types
The sky’s nearly the limit when it comes to the types of businesses you can form with an LLC. Whether you offer a service or sell products, an LLC can be the perfect fit for you.
Cons
Issues With Member Turnover
Each member represents an owner of your business, and any turnover in these roles can lead to turmoil. Those remaining have to rework profit distributions, and some states may weigh in on how this can be done. Other states may require the dissolution of your LLC if even one member departs.
There’s typically less chaos in a corporation, where company shares flow more fluidly. Having a thorough Operating Agreement can curb some of the issues with LLC member turnover.
Self-Employment Taxes
The IRS considers members of your LLC as self-employed unless you’ve taken on a corporate tax structure. Self-employed business owners must pay social security and Medicare taxes on top of regular taxes from income.
Role Confusion
LLCs don’t have specific guidelines they need to follow regarding leadership structure. If not clearly stated, there can be confusion among members about responsibilities or even what employees have the power to do.
An Operating Agreement can clarify what each person in the organization does. You’ll still need to think through company roles so there’s no ambiguity.
Difficulties Raising Capital
Corporations can sell shares to raise money for expansion and future projects. LLCs don’t have the same luxury, as it’s not nearly as easy to add a new owner to your current ranks.
Potential investors can also be turned off by an LLC’s tax-exempt status that can generate taxable income for them.
Cost
A limited liability company is more costly to start than a sole proprietorship or partnership. It costs money to have a registered agent, and many states charge fees into the hundreds of dollars per year.
For a business just starting out, these expenses can be difficult to overcome.
How To Start an LLC
The guidelines for creating your LLC may vary slightly from state to state, but these general guidelines apply no matter where you are. Take advantage of this nine-step process when it’s time to start your LLC.
Step 1: Choose a State
While it may seem cut and dry, you have some flexibility surrounding which state you wish to file in.
If your LLC is a brick-and-mortar building, it makes sense to use your home state as your base of operations. Chances are you already have knowledge of how the state runs and any specific rules that may apply to your business. Whatever location you choose, you’ll need to follow that state’s specific guidelines.
Online businesses aren’t tied to a physical location and can therefore use any state to start an LLC. The same rule generally applies to e-commerce setups, where filing in the state you live comes with the perks of already knowing the guidelines.
Still, there’s no requirement to build your empire in an area you’re familiar with. States like Delaware and Wyoming are known for business-friendly practices and tax breaks appealing to new businesses.
Should you wish to move or grow your enterprise across state borders, you’ll need to file anew in the state you’re venturing into. While you can reach more customers this way, you’ll have to deal with additional costs and paperwork.
Step 2: Come Up With a Name
Your LLC’s name is crucial for branding and marketing purposes as you try to sell products or services. It should be memorable and easy to pronounce while depicting precisely what your company does. A moniker that’s too confusing or misleading can cause customers to run instead of doing business with you.
Each state has different rules about naming conventions you can use. You’ll usually need to come up with a unique name unlike any other business currently operating within its borders.
As you think through ideas, you’ll need to incorporate some form of “limited liability company” or “LLC” in your final concept. It’s important to avoid anything that may confuse your company with a government entity, such as “treasury” or “state department”. You also can’t use terms that imply your company conducts business in an area it does not.
Most states have a name search tool you can use to whittle down your ideas. You’ll want to submit your forms with as much confidence as possible that the state will approve your choice.
The state ultimately decides whether a name meets the criteria or not. You’ll have to go back to the drawing board if you suffer a rejection, which can significantly delay the formation process.
Consider a Domain
Whether you plan to take your company online now or sometime in the future, this is also the time to register an internet domain. Customers will become confused if your business uses one name but your website differs completely.
If the web address you want isn’t available, you may want to consider an alternative solution where the two line up.
Step 3: Choose a Registered Agent
All LLCs must have a registered agent. A registered agent is an individual or company that receives and handles legal documents on behalf of your business. These documents can be anything from lawsuits to subpoenas or other official matters.
Anyone over the age of 18 with an address in your state can be your registered agent. Whoever you end up choosing as your registered agent must keep regular business hours.
If you’re up for it, you can name yourself or one of your employees to fill in this role. However, it’s wise to bring someone on board with an innate understanding of local laws. In most cases, hiring someone specifically suited for this role is best, even when there’s an additional cost involved.
Step 4: Create your Articles of Organization
The next order of business is to create your articles of organization to communicate your business and its purpose to the state. Each state has a unique form, so be sure to check with your local governing body before proceeding.
Generally, an articles of organization requires your company name, business address, and who your registered agent is. The document must also have each owner’s name and how long you expect your LLC to exist.
You’ll also need to specify what your business plans to do, such as selling a certain product type or providing a particular service. Your state won’t hold you to this verbatim; they’re just looking for an idea of what your operation entails. Most states will ask you to update this document annually to reflect any changes that happened during the previous year.
Step 5: Prepare an Operating Agreement
An operating agreement functions as the foundation of your LLC’s rules and regulations. Inside, you’ll list in detail financial, legal, and operational matters that can come into question as you do business. Examples of appropriate content include profit distributions, where your capital comes from, and what to do should a member leave.
While most states don’t require an operating agreement, creating one can eliminate confusion and headaches when issues arise within your organization. This holds especially true when you have several owners and varying responsibilities.
It’s not always easy to think through all the facets of your business when drafting this document. To save you the stress, we’ve created an operating agreement template you can use to do it right the first time.
Step 6: Announce Yourself to the World
A handful of states require new LLCs to publish a notice of your formation in local newspapers. Where this rule applies, you’ll need to follow specific publishing guidelines in terms of content and timeframe.
The newspapers you choose generally have to be in the country where your LLC’s address is located. Work with your county’s clerk for a list of approved media outlets.
Step 7: Obtain an Employer Identification Number (EIN)
An employer identification number (EIN) serves as your company’s unique code for tax purposes. Any LLC with more than one member must have an EIN.
You’ll need this nine-digit number for paying your taxes each year or when you open a bank account for your LLC. It may also come in handy when you file for business licenses with the state.
Single-member LLCs can make do with the owner’s social security number, but it’s still a good idea to get an EIN. If nothing else, using an EIN keeps that clear break between personal and business finances that keeps personal assets protected should your company find itself in hot water.
Step 8: Check Business License and Permit Needs
Certain businesses require licenses or permits in order to operate in your chosen state. Licenses and permits may exist at the local, state, or even federal level.
Common permits ensure your building is up to code or your restaurant meets health and safety requirements. You may also need a permit you sell taxable goods or services.
Business licenses are for a specific service, such as construction, child care, or healthcare. Ventures buying and reselling goods to avoid sales tax may need a special license to do so.
Step 9: Open a Business Bank Account
As you lay the groundwork for your LLC, another crucial but not mandatory step is to open a business bank account. As with an EIN, having an account specific to your company keeps your personal and business funds completely separate.
When searching for the best business bank accounts for your LLC, keep in mind the perks and pitfalls of each account type. For anyone just starting out, you’ll want to find the ideal mix of low fees and minimum balance requirements your finances can handle to access interest rates and services.
Save Time With an LLC Formation Service
Even with our step-by-step guide, forming an LLC requires a lot of time and energy. If you feel your time is better spent elsewhere, consider an LLC formation service to handle the process for you.
For a fee, these services can create your paperwork for you, only collecting core business information such as your name and address. Many companies can also serve as your registered agent, removing the task of finding one from your plate.
Because LLC formation services are so knowledgeable, they can navigate the nuances of the process with little issue. This often leads to a quicker turnaround time and a high probability of success the first time through.
As you consider an LLC service to help get your business off the ground, we recommend one of the following:
- ZenBusiness
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- NorthWest Registered Agent
How to Start an LLC Frequently Asked Questions (FAQs)
Bottom Line on How to Start an LLC
Forming your own limited liability company comes with several benefits to help your business reach new heights. Learning how to start an LLC can be pretty painless by following the steps above. If you need to form an LLC quickly, LLC formation services such as ZenBusiness or Incfile can really expedite the process.
