How to Create an LLC - The Ultimate Guide
A limited liability company is a business entity that marries an owner-friendly pass-through tax structure with limited protection from legal and financial liabilities. Add management flexibility and ease of formation to the mix and you'll understand why this company type has been the most popular choice among small business owners since an IRS ruling clarified the innovative new corporate structure’s tax status in 1988.
If you’ve made a decision to structure your sole proprietorship as a limited liability company or you want to start a completely new business but don’t know how to create an LLC, we suggest you keep reading our comprehensive guide.
We’ll walk you through the LLC creation process, share all the important steps you need to take after forming your company, explain all the differences between LLCs and other popular entity structures, and let you know how to find additional state-specific information.
Before we elaborate on how to start an LLC, let’s take a look at some pros and cons.
Benefits of Forming an LLC
The advantages of structuring your business as an LLC - rather than operating as a general partnership or sole proprietorship, or starting a corporation - surpass its drawbacks in most cases.
- Limited liability: Probably the most apparent advantage of creating an LLC is shielding your personal valuables by limiting the liability to the resources of the company itself. In most cases, the LLC members' personal assets will be protected from legal claims against the company.
- Pass-through taxation: As "pass-through" or "flow-through" entities, LLCs do not pay any entity-level taxes as C corporations do. LLC income is “passed-through" to members, who report it on their personal tax returns.
- Flexible membership: Unlike S corporations which are much more restricted in regards to who can be a shareholder, LLCs come with the benefit of flexible membership. Members (owners) can be individuals, partnerships, corporations, and trusts. There are no limits to the number of members.
- Management: In contrast with corporations, which are managed by a board of directors, LLCs can be managed by their own members or by a management group.
- Enhanced credibility: Creating an LLC may help a new company increase its credibility, especially in comparison to businesses operating as partnerships or sole proprietorships.
- Limited compliance requirements: Businesses structured as LLCs face fewer state-imposed formalities - such as annual compliance requirements - than almost any other company type.
Disadvantages of Forming an LLC
There are a few disadvantages of LLC formation, too. However, in most cases, the benefits significantly outweigh the drawbacks of this company type.
- Cost: In comparison with a partnership or sole proprietorship, an LLC can be a little more expensive to form and maintain. On top of the start-up filing fees, many states also impose ongoing charges such as annual report fees.
- Transferable ownership: Transferring ownership is more complicated with an LLC than it is with a corporation. In most cases, all members must approve alterations in ownership percentages of existing members and adding new members.
How to Create an LLC in Six Easy Steps
Providing that you know what you’re doing, starting your own business doesn’t have to be complicated, especially if you decide to structure it as a limited liability company. However, although the LLC formation procedure isn’t as complex as starting a corporation, there are still several steps you need to follow to make sure that you’ve done everything correctly. To help you get started, we’ve broken down all LLC formation-related activities into six steps.
1. Choosing your state of formation
Although you are allowed by law to establish an LLC in any state - even if your company won’t be operating there - most new business owners choose to form an LLC in the state they live in, which is usually also the state where they plan to do business.
When selecting your state of formation, it's important to remember that the registration costs, taxation rules, and LLC laws can vary widely from state to state, making some parts of the country more favorable for certain small business owners. That's why some entrepreneurs assume they will save money by incorporating in a state with low fees (such as Delaware or Nevada), even if they don't plan on conducting business in that state.
Bear in mind that LLCs formed in one state but operating in another must obtain a foreign qualification in each state of operation. In other words, if your business will have some type of physical presence (offices, storefronts, sales reps, etc.) in different states, you'll have to register a foreign LLC in every state of operation. Note that this may significantly increase your administrative costs.
2. Naming your LLC
There are two important aspects to choosing a name for your new LLC.
First, you need to pick a name that hasn't already been taken by another domestic or qualified business entity in your state of formation. To determine whether the name you want is available, conduct a search on your Secretary of State's website. If you’re not ready to file your LLC formation paperwork just yet, we recommend you reserve the name that you like. Most states let you make a temporary business name reservation for a small fee.
On a side note, we also suggest you perform a trademark search of your desired name to ensure you don't confuse your customers or violate any intellectual property regulations.
Second, your company's name must comply with certain state-specific LLC regulations. While each state has somewhat different rules in regards to LLC names, there are some general guidelines:
- The phrase "limited liability company" or its abbreviation (LLC or L.L.C.) must form a part of your business's name.
- Words that could confuse your limited liability company with a government agency are off-limits, and so are the terms “corporation” and “incorporated.”
- Words such as "insurance,” "attorney,” "bank,” or "university" are prohibited unless a licensed individual such as a lawyer or doctor will be a part of your LLC. Note that forming your company may require some additional paperwork in this case.
3. Appointing a registered agent
An LLC’s registered agent (also referred to as agent for service of process) is a person or business that sends and receives official correspondence such as document filings and legal summons on your behalf.
Whether you are forming a new LLC or registering an existing one to operate in a foreign state, you are obliged by law to appoint a registered agent with a physical street address (not a PO box) in the state of registration.
Even though one of the LLC's owners can also represent the company as its registered agent, we highly recommend hiring a professional for this responsible job.
4. Filing your LLC with the state
To officially create an LLC, you’ll need to file your formation document with the secretary of state’s office. This document is best known as the LLC articles of organization, however, in some states, it’s referred to as the certificate of formation or the certificate of organization.
While no two states have exactly the same LLC registration documents, they mostly consist of common elements such as:
- Business’s name, purpose, and principal location
- Registered agent’s name and physical address
- LLC's management structure (member-managed or manager-managed)
Note that you’ll be charged a state filing fee, which may vary across the United States. Once your request has been approved, you’ll receive a confirmation document. Issued by the state, this document serves as proof of the LLC’s legal status and can be used to obtain an EIN and open a business bank account.
In some states, you may also be required to publish an LLC registration notice, usually in a local newspaper.
5. Creating an LLC operating agreement
Although most states may not officially require it, we recommend you create an operating agreement for your LLC. This internal document outlines the member roles and ownership structure of your new company. Should you decide not to create an operating agreement, state laws will dictate how your limited liability company operates.
An LLC operating agreement has the following six main sections:
- Organization: States when and where the LLC was created, lists the company’s members, and describes its ownership structure.
- Management and voting: Addresses how the company will be managed and outlines the members’ rights, responsibilities, and voting powers.
- Capital contributions: Lists the members who will support the LLC financially, and outlines a plan on how additional funds will be raised moving forward.
- Distributions: Describes how the LLC’s profits and losses will be shared among its members.
- Membership changes: Covers the process of adding or removing members along with the mechanism of transferring ownership shares.LLC Dissolution: Defines the circumstances under which the company may be dissolved.
6. Getting an EIN
After your official LLC creation, you’ll need to apply for an EIN to be able to open a business bank account and hire employees. Provided by the Internal Revenue Service (IRS), an Employer Identification Number (EIN) works like a Social Security number for your company.
Note that, even if you don’t plan on hiring employees, but have formed a multi-member LLC, you’ll still need this identification number. You can acquire your EIN by filling out an application form online, by phone, or by fax. Alternatively, you can hire an LLC service provider to do it for you.
Additionally, in each state of operation, you’ll need to apply for a Sales Tax Identification number from the State's Tax Department and register with the Labor Department.
Important Steps After Starting an LLC
Congratulations, you’ve formed your LLC! Don’t spend too much time celebrating, as you’ve still got some post-formation work to do. Here’s an overview of all additional steps that you’ll have to take before officially opening for business.
Open a Business Bank Account
While this step can’t be considered a legal requirement, separating your company’s finances from your personal ones by opening a separate business bank account is a key best practice for new LLC owners.
If your personal and business assets are mixed, you run the risk of losing your personal valuables (such as your home and car) in the event legal action is taken against your LLC. That's why using separate bank accounts is necessary to shield your business' corporate veil.
Applying for a business bank account is simple and easy. With most banks, you’ll be required to provide some basic information, such as the LLC’s formation date and the owners’ names and addresses. Given that some banks may have additional requirements, we suggest you contact your provider of choice prior to opening an account.
Register Your LLC with Relevant Tax Authorities
As far as state taxes go, both the nature and location of your business will determine your LLC’s requirements. You may even need to register for multiple forms of state tax. The most common forms include:
- Sales and use tax: If you’ll be selling goods and collecting tax from your consumers, you’ll need to remit a percentage of the selling price to the government.
- Franchise tax: Although not required nationwide, this tax is based on how much an LLC earns annually.
- Withholding tax: Withheld from employee paychecks to be given to the government, this type of tax is paid by business owners who have employees.
- Unemployment insurance (UI) tax: UI tax rates are set by state laws. The funds accumulated through this form of tax are used by the government to cover unemployment benefits.
Set up Accounting
Keeping track of your LLC’s finances can be daunting, but it must be done properly. If you’re a new business owner, you’ll be surprised at the amount of expenses you’ll need to keep up with even before officially opening for business.
As soon as you register your LLC, you’ll need an effective accounting system in place to help you supervise your business finances (including bills, income, and expenses), plan the budget for running and growing your LLC, and simplify your annual tax filing.
If you can’t handle this aspect of the business by yourself, we recommend you either hire a certified accountant or explore the best accounting software options.
Obtain LLC Licenses and Permits
Depending on the nature of your business, you may need to obtain certain licenses and permits to start operating and stay compliant. While business license requirements usually vary depending on your state, county, and city laws, some business activities require permits and licenses on the federal level. The activities in question involve:
- Alcoholic beverages
- Ammunition and firearms
- Fish and wildlife
- Waterborne transportation
- Nuclear energy
- Mining and drilling
- Television and radio broadcasting
- Transportation and logistics
If you need help researching LLC license requirements for your company and submitting applications, we suggest you hire a professional. Most companies that offer LLC services make obtaining business licenses a part of their portfolio and provide convenience and reassurance that you’ll get everything you may need.
Get Business Insurance
Business insurance protects businesses from financial damage due to unexpected events such as accidents, professional errors, property damage, workers compensation claims, and more. There are several types of business coverage that you should consider, especially as a small business owner:
- Workers’ compensation insurance: Mandatory in almost all 50 states, this type of insurance covers work-related injuries, diseases, rehabilitation costs, and lost wages no matter who is at fault.
- General liability insurance: Also referred to as commercial liability insurance or small business liability insurance, this type of coverage protects your business against claims such as bodily injury, property damage, and advertising liability. Although you’re not legally required to get general liability insurance, we strongly recommend you do. Without this type of coverage, a lawsuit could force your LLC out of business.
- Professional liability insurance: Also known as errors and omissions coverage, this type of insurance protects you if you fail to do something that you should have, or if you end up doing something that you shouldn’t have. Professional liability insurance also guards you from mistakes made by your employees and subcontractors.
Follow Hiring Laws
Your business is expanding and you’re looking to bring your first employees on board. While that’s great news for your limited liability company, keep in mind that the hiring process comes with several legal requirements. Here’s what you’ll need to do:
- Make sure that your prospective employees are able to work in the United States. In some situations, services of background check companies can be helpful.
- Report your new hires to the state.
- Provide all employees with workers' compensation insurance.
- Withhold employee taxes.
- Pay your workers at least the federal minimum wage, as frequently as your state requires.
LLC vs. Other Business Entity Types
In addition to LLCs, S corps (also known as S corporations, subchapter or small business corporations) and C corps (C corporation) are the other two main types of for-profit business structures. Each of these company types comes with its own set of advantages and disadvantages.
To decide whether to start an LLC, a C corp, or an S corp, you’ll need to take several factors into account such as taxation, flexibility, ownership structure, and treatment of shares or ownership interest.
To help you choose the best entity type for you as a business owner, we’ve broken down the differences and similarities between the three company structures.
Finding State-Specific Information
When setting up an LLC (or any other type of business structure) you need to make sure that you are well-informed about the regulations and tax filing requirements of your state of formation. Your state's Secretary of State website is an excellent place to start.
To help you gather all the information as fast as possible, we’ve compiled a list of website links and telephone numbers for Secretary of State offices of all US states and territories. Note that, where it was possible, we made sure to include the phone numbers of Secretariats' business service departments:
You can either form your LLC on your own, hire an attorney to do the work on your behalf, or use an online LLC service provider to help you go through the process. No matter which approach you decide on, remember that there are several steps to forming an LLC.
These include choosing your state of formation, picking a name for your LLC, appointing a registered agent, creating articles of organization and filing your paperwork with the state, creating an operating agreement, and getting an EIN.
A limited liability company is a flexible business structure and, therefore, a popular incorporation option for many small business owners. Setting up and maintaining an LLC is relatively simple with most states. However, it’s important to learn all about your state’s business regulations and tax filing requirements to be able to fill out the paperwork correctly.
When deciding in which state to apply for your LLC, there are quite a few factors to take into account. No two states are the same when it comes to regulatory burden, tax requirements, and workforce availability.
In most cases, the best choice is the state where you live and plan on conducting your business activities. If you’d like to explore other options, note that there are sometimes benefits to forming an LLC in a state with business-friendly laws and taxes, such as Delaware, Nevada, or Wyoming.
However, note that you’ll need to get a foreign qualification if you plan on forming your company in one state and conducting business in another.
The primary cost of registering a limited liability company is the state filing fee. Depending on your state of formation, this fee can range between $40 and $500. If you decide to hire an attorney or use an LLC service provider to help form your new company, keep in mind that you’ll have to face additional charges on top of state fees.
Note that in some states such as Nebraska, Arizona, and New York, you’ll also be required to publish a statement of formation of your new LLC. Usually done in a local newspaper, publishing can cost you anywhere between $40 and $2,000.
In comparison to creating a corporation, forming an LLC is a relatively quick process. On average, the whole procedure takes between two weeks and a month.
However, note that this is only an estimate as exact LLC formation times can vary widely depending on unique factors such as name availability, state-specific regulations, and whether you’re preparing the documents on your own or using a filling service.
To put it simply – no, you are not required to hire an attorney when forming a limited liability company. With most states, you can either prepare and file the paperwork yourself, or use an affordable business formation service to help you get through the registration process.
Much like the individual Social Security number, the Employer Identification Number (otherwise called the Federal Tax ID) is issued to business entities by the IRS for tax filing purposes. Unless you run a single-member LLC and don’t plan on hiring employees, you’ll need to apply for an EIN with the IRS.
Unlike a corporation that is considered a separate tax entity, an LLC is a pass-through entity. Similarly to the taxing process of sole proprietorships and partnerships, all the profits and losses of a limited liability company “pass through” the business to the LLC members (the company’s owners) who then need to report this information on their personal income tax returns. In most states, the LLC itself doesn’t pay any federal income taxes.
If you’ve been wondering how to create an LLC online, you’d be happy to hear that the process is relatively simple with most states. While the application process is fairly easy, keep in mind that there are several steps you need to follow to ensure that you’ve done everything by the book. To learn more about state-specific online application LLC requirements, contact your state’s Secretary of State business office.
I have always thought of myself as a writer, but I began my career as a data operator with a large fintech firm. This position proved invaluable for learning how banks and other financial institutions operate. Daily correspondence with banking experts gave me insight into the systems and policies that power the economy. When I got the chance to translate my experience into words, I gladly joined the smart, enthusiastic Fortunly team.
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