How to Start an LLC (10 Easy Steps to Business Formation)

Before your limited liability company can legally operate in the state, certain steps must be followed for the business to be approved.

My experience as a seasoned consultant specializing in LLCs and other business forms has enabled me to gain considerable knowledge about the industry.

Together with in-depth research and collaboration with our panel of experts, I’ve compiled a comprehensive guide on how to start an LLC in 7 easy steps.

Quick Summary

• Starting an LLC involves choosing a suitable name, selecting a registered agent, filing Articles of Organization, and complying with state-specific regulations.
• An LLC provides personal liability protection, pass-through taxation, and a flexible management structure to LLC owners.
• Given that 20.8% of U.S. private sector businesses fail in the first year, the 79.2% success rate for those, including LLCs, that exceed this period underscores the significance of early strategic planning and legal compliance.
• I am convinced that the advantages of an LLC, especially in terms of personal asset protection, far outweigh the initial setup complexities and costs.

How to Form an LLC

1. Choose the Type of Your LLC (Mandatory)

Choosing the right type of LLC for your business in your specific state involves understanding the various structures available and weighing their advantages and disadvantages.

Here are the common types of LLC structures:

• Single-Member LLC: Ideal for sole proprietors.

Advantages: Complete control over decisions, simple tax filing process.

Disadvantages: Limited growth potential, personal liability can be a concern in some states.

• Multi-Member LLC: Suitable for businesses with more than one owner.

Advantages: Shared responsibility, potential for more capital investment.

Disadvantages: More complex decision-making, potential for conflicts among members.

• Series LLC: Good for those who own multiple properties or businesses.

Advantages: Separation of assets and liabilities across series, cost-effective.

Disadvantages: Not recognized in all states, complex structure.

• Professional LLC: For licensed professionals (doctors, lawyers, etc.).

Advantages: Liability protection, professional credibility.

Disadvantages: Limited to professionals, more regulatory requirements.

• Anonymous LLC: Offers privacy protection.

Advantages: Owner's identity is not public; added layer of personal security.

Disadvantages: Only available in certain states; might raise trust issues with some clients.

The right choice depends on your business needs, goals, and the specific laws of your state.

It's advisable to consult with a legal professional to determine the most suitable LLC structure for your situation.

2. Choose a Name for Your State LLC (Mandatory)

Whatever your business structure, choosing a suitable business name for your LLC is an essential step in starting your business.

Choose a unique name with no patent or not taken by other entities in the state where you plan to register [1].

You can also search for name availability on the state's business name database and the U.S. Patent and Trademark Office's database [2].

Furthermore, choose a name that accurately reflects your business's products or services, easy to remember and pronounce.

"Your brand is a story unfolding across all customer touch points."

- Jonah Sachs, Co-founder and Former CEO of Free Range Studios.

Ensure your business name isn’t prohibited by the law from being registered.

For example, you can't use the following:

• In most states, you’re not allowed to use  "bank" in a business name
• "Co" or "Company" can only be used in business names if they follow the naming standards of that state
• Using any variation of words such as "Enterprises," Inc., and Co. is not allowed
• You can’t use any name resembling government entities like State Department, IRS, etc.

After choosing a name, register it with the Secretary of State of your region.

If you have picked an available name but are not set to start the business, you have the option to reserve it with the Secretary of State. Depending on the state, the name will be reserved for a definite period, usually between a month to 120 days.

3. Select a Registered Agent (Mandatory)

Everyone looking to start an LLC must choose an LLC registered agent.

A registered agent is the representative of your company who is designated to handle legal and administrative documents on your LLC’s behalf. This includes important documents like tax forms and lawsuits.

Your registered agent must have a physical address in the state where your LLC is formed and be available during regular business hours.

You can choose to be your own registered agent. However, being your own registered agent may not be the most convenient option if you keep moving or changing addresses frequently.

This is why, we personally use and recommend a premium registered agent service.

4. File Articles of Organization (Mandatory)

For your LLC to become a legal business entity, there are some legal documents you have to file with the state agency through your registered agent.

One of those documents is called Articles of Organization, also known as a Certificate of Formation in different states.

Certificate of Formation (or Organization) is one of two documents filed with the SOS or other designated person for an LLC to become legal and recognized by law as a separate entity from its members and managers.

To file the Articles of Organization, you’ll be required to provide a filing fee and submit the document to the Secretary of State's office in the state where your LLC is formed.

The second document needed describes the company's capital structure, business structure and rights.

The form to start an LLC should include:

• The business name of your LLC
• The registered agent's name and address
• A statement about who is in charge (members, managers, or both)
• The purpose of the business
• The date it was filed with the SOS or other designated person
• The name and address of a person to contact for more information about the Articles
• Additional provisions agreed upon

Once everything is approved, your LLC is officially established.

Steps to Take After Forming an LLC in Your State

Upon forming an LLC in your state, there are several crucial steps you need to take to ensure your business operates smoothly and complies with state regulations.

This process involves more than just establishing your LLC; it's about setting a solid foundation for your business's future.

5. Creating an LLC Operating Agreement (Optional, but Recommended)

Operating agreements are documents that govern the operations and management of an LLC.

This operating agreement contains operating rules for the LLC members or owners, capital contributions, and buy-sell arrangements, among other things.

Therefore, an operating agreement can help avoid conflicts and misunderstandings between members by clearly defining expectations and responsibilities.

It also protects your LLC's limited liability status by demonstrating that it is a separate legal entity from the small business owners, meaning they aren't affected by the business debts.

In most cases, the law enforces operating agreements, which means they must be appropriately drafted at all times.

You may consult an attorney before making any final decisions. They can advise you on how to set up your business and what kind of license law requires.

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6. Apply for an Employer Identification Number (EIN) (Optional, but Recommended)

An EIN, essentially a social security number for your business, is issued by the IRS and is crucial for various business activities.

It's required if your LLC has more than one member, hires employees, or opts for taxation as a corporation instead of a sole proprietorship.

Even for single-member LLCs, having an EIN can enhance credibility with banks and vendors, as it allows you to open a business bank account and handle business finances separately from personal ones. This separation reinforces the liability protection that an LLC provides.

The application process is straightforward and free of charge, typically completed online through the IRS website. Acquiring an EIN is a smart move to maintain your business's legal and financial integrity.

7. Open an LLC Bank Account (Optional, but Recommended)

Drawing from my extensive professional experience, I recommend that, to protect your assets as well as the properties of all members of the LLC, you open a separate bank account to handle and safely keep the finances of the business entity.

An EIN or employer identification number, is a prerequisite to opening a bank account for your business assets, and it may be made available by applying with the Internal Revenue Service or IRS.

8. File Your State LLC Annual Report

Filing an annual report is a critical requirement for LLCs in many states.

This report, typically submitted to the state's Secretary of State, keeps your business in good standing and ensures that the state has your most current business information.

The specifics, such as deadlines and fees, vary by state, but generally, the report includes details like your LLC's name, principal address, names of members or managers, and sometimes financial information or changes in business activities.

Failure to file this report can lead to penalties, fines, or even the dissolution of your LLC. Therefore, it's important to be aware of your state's filing schedule, whether it's annual or biennial, and comply accordingly.

Many states offer online submission for convenience. Staying diligent with your annual report filings is essential to maintaining your LLC’s legal status and operational privileges within the state.

9. Obtain Business Licenses and Permits

For a company to legally operate, a business entity is required to obtain permits and licenses. Specific requirements vary depending on the nature of the business and the state where the LLC is registered.

The most common requirements include the following:

General Business License (Operating License)

Some states require LLCs to have a general business license. You can call or visit your city or county office to determine whether you need an operating permit.

Seller’s Permit

A seller’s permit is a license that allows you to levy taxes on goods or services your business offers. Note that a seller’s permit is not required in Alaska, Delaware, Montana, New Hampshire, or Oregon.

Federal Business License

If you intend to sell products regulated by the government, such as alcohol, tobacco, meat, and crops or produce, you must acquire a federal business license.

Professional License

If your LLC offers professional services related to medicine, law, accounting, plumbing, or any other specialized work, you are required to obtain a professional business license.

DBA License

A “Doing Business As” license is required if you registered an LLC under a fictitious name. This is true for entrepreneurs who intend to operate under a different trade name.

10. Choosing Your Tax Structure

Before you register your limited liability company with the state, you need to determine which LLC structure is suited for your business. Each classification is taxed differently.

Here are the following LLC structures:

• Single-Member LLC

A single-member LLC is a business entity with only one member. It is considered as a “disregarded entity” by the IRS, as such, it is taxed as a sole proprietorship.

However, single-member owners can opt to be taxed differently – C Corp or S Corp.

• Multi-Member LLC

A multi-member LLC is owned by several people who benefit from pass-through taxation. This means that the business itself is not subject to corporate taxes. Instead, taxes are “passed-through” to the LLC members and paid on their individual tax returns.

• C-Corp

C-Corporation owners are referred to as shareholders instead of members. The company’s earnings stay in the business and can be grown through investments.

However, the business classification is subject to double taxation. Profits are taxed at both corporate and personal levels.

• S-Corp

An S-corporation is advisable for small business owners because it features pass-through taxation.

If an LLC is taxed as an S-corporation, members are only required to pay Social Security and Medicare taxes instead of income tax.

How To Start an LLC - Custom State Guides

• Alabama
• Alaska
• Arizona
• Arkansas
• California
• Colorado
• Connecticut
• Delaware
• Florida
• Georgia
• Hawaii
• Idaho
• Illinois
• Indiana
• Iowa
• Kansas
• Kentucky
• Louisiana
• Maine
• Maryland
• Massachusetts
• Michigan
• Minnesota
• Mississippi
• Missouri
• Montana
• Nebraska
• Nevada
• New Hampshire
• New Jersey
• New Mexico
• New York
• North Carolina
• North Dakota
• Ohio
• Oklahoma
• Oregon
• Pennsylvania
• Rhode Island
• South Carolina
• South Dakota
• Tennessee
• Texas
• Utah
• Vermont
• Virginia
• Washington
• Washington D.C.
• West Virginia
• Wisconsin
• Wyoming

Benefits and Drawbacks of an LLC

Benefits:

• Personal Liability Protection: Members of an LLC are not responsible for business debts or losses the company may incur beyond their invested capital. This means that their assets are protected from lawsuits or claims that may arise against the company.
• Pass-Through Taxation: Limited liability companies are tax efficient because of pass-through taxation. The profits of the business are not subject to corporate taxes. Instead, taxable profits are “passed-through” to the LLC’s members and paid as personal income on their individual tax returns.
• Easy and Inexpensive to Set Up: With 1.4 million new establishments reported by the US Small Business Administration from March 2021 to March 2022, LLCs offer a simpler, less paperwork-intensive option for the growing wave of entrepreneurs [3].
• Flexible Management Structure: The management of limited liability companies is less structured as compared to corporations. LLC members have the option to manage the company themselves or appoint a specific member for the position.
• Business Credibility: Forming an LLC instead of a sole proprietorship or a partnership improves its credibility and legitimacy. Clients, other companies, and financial institutions prefer to conduct business with a structured entity.

Drawbacks:

• Limits Of Personal Liability: LLCs feature personal liability protection, however, the extent may be limited if a member does not distinguish business from personal assets. When entering into business transactions, it must be made clear that you act on behalf of the company.
• Limited Existence: An LLC may be dissolved voluntarily if the purpose of the business has been achieved. The dissolution may be sanctioned by the state if the business entity fails to conform to legal requirements, such as failure to submit annual reports, tax delinquency, or fraud.
• Appeal To Investors: Investors prefer to inject capital into corporations instead of limited liability companies. LLCs do not feature investment portfolios like established corporations.

DIY vs. Professional LLC Formation

When deciding between DIY and professional LLC formation, it's important to weigh the pros, cons, and risks of each option.

This decision should be tailored to your individual needs, considering factors like cost, time, legal knowledge, customization, compliance assistance, and peace of mind.

DIY LLC Formation

Pros

• Cost-Effective: Generally cheaper as you're not paying for professional services.
• Control and Learning: Direct involvement in the process enhances understanding of your business’s legal structure.

Cons

• Time-Consuming: Requires personal time investment to research and complete all steps correctly.
• Potential for Errors: Without legal expertise, there’s a higher risk of making mistakes in forms or missing critical steps.

Professional LLC Formation Services

Pros

• Expertise: Professionals are knowledgeable about legal requirements and can navigate complex regulations.
• Time-Saving: Outsourcing the work saves you time, allowing you to focus on other aspects of your business.
• Compliance Assistance: Many services offer ongoing support for staying compliant with state laws.

Cons

• Cost: More expensive than DIY, as you're paying for expertise and services.
• Less Personal Control: Some business owners might prefer to be more hands-on in every aspect of their business formation.

FAQs

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References:

1. https://www.investopedia.com/articles/investing/111014/patents-trademarks-and-copyrights-basics.asp
2. https://www.uspto.gov/trademarks/search
3. https://advocacy.sba.gov/wp-content/uploads/2023/11/2023-Small-Business-Economic-Profile-US.pdf