Cheapest Way To Start an LLC (Affordable Business Formation)
Forming a limited liability company is an important step, but this process doesn't have to be expensive.
With insights from our seasoned LLC experts, we've crafted this guide to help you start an LLC affordably. Drawing on over a decade of in-depth research and hands-on experience in business formation, we provide reliable, expert advice tailored to save you time and money.
Quick Summary
- The cheapest way to start an LLC is by filing your formation documents directly with the state and obtaining an EIN for free from the IRS.
- While initial filing fees vary by state, it's essential to consider additional costs when forming an LLC outside your home state.
- LLC owners should draft an operating agreement to ensure operational efficiency and protect investments, as 73% of small businesses found beneficial, according to the National Small Business Association.
- While DIY formation can save costs, I emphasize on being thorough and understanding the responsibilities, especially if acting as your own registered agent, to avoid potential pitfalls.
1. File the Formation Documents Yourself
When I started my first LLC, I took the DIY route. I secured a unique business name, appointed myself as the registered agent, and filed the Articles of Organization with the Secretary of State.
Here's how:
Name Reservation
Before attempting to form an LLC, securing a name is a good idea. This reduces the likelihood of your LLC registration being denied due to using an already-used name.
The good news is that many states provide online databases where you may check the availability of any name you like.
The Division of Corporations of the Secretary of State is generally where LLC names are reserved for a small fee. Still, the reservation is optional if you launch your LLC immediately.
Filing the Articles of Organization
Once you have a name for your business structure, you can file the formation paperwork and pay the filing fee to the Secretary of State's office.
When the Secretary of State accepts the Articles of Organization, your LLC is formally constituted, and you can enjoy personal liability protection and pass-through taxation benefits.
The Articles of Organization include information about your organization, including the following:
- The company's name and address.
- The members' and managers' names and addresses.
- A declaration that states whether the firm will be run by management or its members.
- The name and address of the LLC's registered agent.
2. Use a Cheap Incorporation Service to File Your LLC Paperwork
For my second business venture, I wasn't too confident doing it all by myself. So, I opted for an affordable, well-grounded LLC formation service. It was a breeze, and they handled everything for a minimal fee.
Retain an incorporation service that offers a free basic plan with comprehensive filing and drafting of your legal documents.
The LLC service provider should have affordable packages that include name searches, registration, and filing of the Articles of Organization. It's even better to hire an LLC service provider that offers free professional registered agent services for the first year in their basic plan.
Along with offering paid services, you should hire a professional who offers a useful collection of free service features, including a how-to-start business handbook, a DIY emailing course, an LLC operating agreement template, and a small business running checklist.
3. File in a State Where the Fees Are Cheaper
I remember considering Nevada for launching my LLC due to its lower fees, but after some research, I realized my home state was more cost-effective in the long run.
For instance, the LLC filing fee cost in Kentucky is $45, while in Massachusetts, it's $500. Hence, it's cost-effective to start an LLC in Kentucky.
However, additional LLC costs can be involved with establishing an LLC in another state.
Typically, you must apply for foreign qualifications and engage a statutory agent who lives in that state who'll receive your company's official mail from the state.
4. Designate Yourself as the Registered Agent
Being your own registered agent can cut costs, but it comes with responsibilities. Mistakes can lead to financial or legal issues for your business.
It's critical to comprehend the specifics of becoming your own registered agent before making the decision and what you'll need to do to set yourself up for success.
As a registered agent, you must publicize the street location of your LLC; if it's your residential address, your home address will be made public.
Additionally, receiving lawsuits in front of your neighbors can be embarrassing.
As your own LLC statutory agent, you'll also have to be available all year round during regular business hours. This commitment will be challenging if you're someone who frequently travels or has a flexible schedule.
5. File for Your Own FEIN Number
You must obtain a Federal Employer Identification Number (FEIN) once your LLC has been approved. Your business entity is identified for tax reasons by this unique nine-digit number that the Internal Revenue Service issues [1].
It is crucial to note that according to the Small Business Administration, over 80% of legal business entities in the United States are required to have an FEIN for tax filing and reporting purposes.
An EIN is also necessary for small businesses to register a business bank account, pay taxes, and hire personnel.
You may get an EIN from the IRS if you are a sole proprietorship, C-corporation, single, or multi-member LLC. Applying online is the quickest way to receive an EIN. However, you can also download Form SS-4 and submit it by mail or fax [2].
While professional legal services charge state filing fees for this application, you can obtain an EIN for free with the IRS.
Here are a few brief pointers to assist you in navigating the procedure:
- Access the online EIN application on the official IRS website using a web browser to submit your application online.
- Online applications are the quickest, and you'll have your EIN immediately. You have 15 minutes to complete the application if you are applying online. Ensure you have all your information on hand; if not, you will need to start over.
- You must print the application and mail it if you decide to submit it by mail; this process might take up to four weeks. The EIN will typically be provided in four business days if you submit your application via fax.
6. Minimize Other LLC Formation Costs
Forming a limited liability company can be expensive, but you can minimize other LLC formation costs and lower the overall expenditure.
Operating Agreements
LLC owners should write their LLC operating agreement to guarantee that operations are carried out efficiently and that investments are safeguarded.
An operating agreement describes the internal workings of your company, including member obligations, ownership, capital contributions, and internal operations.
This is an important business document, and while hiring a lawyer to draft it may cost you anywhere from $200-$1000, it's cheaper to draft it yourself.
In fact, according to a survey by the National Small Business Association, approximately 73% of small businesses reported that having a formal operating agreement contributed significantly to their operational efficiency and protection of assets.
"The senior management and board of directors depend on a documented operating agreement to guide their decision-making processes."
- Jon Morgan, CEO, Co-Founder & Editor-in-Chief of Venture Smarter
Avoid Corporate Kits
As a small LLC, you don't need a LLC corporate kit. You can use a normal file folder in a drawer to hold your documents, then purchase an expensive binder with an embossed cover.
A properly made corporate kit gives your firm a sense of validity while you're trying to raise money, keeps your formal documentation organized and accessible, and lends credibility to your fundraising efforts.
However, this item is not necessary if you're searching for a spot to cut expenditures right away.
You can purchase it later on once your business is profitable enough to increase expenditure without harming its profitability.
Cut Down Office Costs
When starting the LLC, you should consider the office costs like rent, furniture, stationery, and other supplies.
- If you're looking for office space, rent the cheaper one.
- Buy affordable but quality furniture.
- Opt for online cloud storage of your documents other than printing each document and incurring paper and printing costs.
Benefits of DIY LLC Formation
Opting for a DIY (Do-It-Yourself) approach to LLC formation can offer several advantages for budding entrepreneurs:
- Cost Savings: By handling the formation process yourself, you can avoid the fees associated with hiring a professional service, making it a more cost-effective option.
- Personal Understanding: Taking a hands-on approach allows you to gain a deeper understanding of the legal and administrative aspects of your business, ensuring you're well-informed from the outset.
- Flexibility: DIY formation gives you the freedom to work at your own pace and make decisions based on your specific needs, rather than relying on a third party's timeline or package offerings.
- Direct Control: Handling the process personally ensures that all documents are filled out to your exact specifications, reducing the risk of errors or miscommunications that can arise when outsourcing.
- Satisfaction: There's a sense of accomplishment in setting up your own business structure. Knowing you've navigated the complexities of LLC formation on your own can boost confidence in your entrepreneurial journey.
While DIY LLC formation has its perks, we recommend being thorough, doing your research, and ensuring you're meeting all state-specific requirements to set your business up for success.
FAQs
Do You Have To Pay For an LLC Every Year?
Yes, you have to pay for an LLC every year through taxes, annual reports, or biennial reports. The annual fee depends on the state you're transacting in.
Does Having an LLC Help With Taxes?
Yes, having an LLC can offer tax advantages. LLCs benefit from pass-through taxation, where profits and losses flow through to individual owners' tax returns. This structure allows for flexibility in choosing tax classifications and potential deductions, making it a tax-efficient option for many small businesses.
What State Has the Lowest LLC Taxes?
The state with the lowest LLC taxes often varies based on specific tax considerations, but Wyoming, Nevada, and South Dakota are frequently cited for having no state income taxes, making them attractive options for LLCs seeking minimal tax burdens.
References
- https://www.irs.gov/businesses/small-businesses-self-employed/employer-id-numbers
- https://www.irs.gov/pub/irs-pdf/fss4.pdf
