How to Start an LLC (7 Easy Steps to Business Formation)
Before your limited liability company can legally operate in the state, certain steps must be complied with 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.
- To start an LLC in 2023, you need to choose a name, select a registered agent, file articles of organization, obtain necessary licenses and permits, and create an operating agreement.
- An LLC provides personal liability protection, pass-through taxation, and a flexible management structure to LLC owners.
- It is important to consult with legal and financial professionals to ensure compliance with state laws and regulations and to make informed decisions about your LLC.
7 Easy Steps to Form an LLC in 2023
1. Choose a Unique Name for Your LLC
Whatever your business structure, choosing a suitable business name for your LLC is an essential first 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 .
You can also search for the name availability on the state's business name database and the U.S. Patent and Trademark Office's database .
Furthermore, choose a name that accurately reflects your business's products or services, easy to remember and pronounce.
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.
2. Choose the State for Your LLC
The next step after selecting a name is to choose the state where you want to form your limited liability company. Here is a quick guide to the best states to form your LLC.
Additionally, based on the state you've chosen, the cost to start an LLC will be different.
Most businesses choose a state where they're located, but there are some exceptions.
For example, if you're planning to do business in multiple states, you may look for a state with favorable tax laws and business regulations.
Remember that each state’s requirements and procedure for forming an LLC are different. Thus, be sure to research the specific rules for your chosen state.
You'll typically need to file Articles of Organization and pay a filing fee to register your LLC with the state.
Some states may also require you to publish a notice of your LLC formation in a local newspaper.
3. Nominate a Registered Agent
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. Prepare and File LLC Articles of Organization
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 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.
5. Create an LLC Operating Agreement
Operating agreements are documents that govern the operations and management of an LLC. Although not a basic requirement by law, it's highly recommended that LLCs create one.
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. Obtain Necessary Permits and Licenses
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.
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.
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.
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.
7. Open a Business Bank Account
To protect your assets as well as the properties of all members of the LLC, it is recommended to 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 open a bank account for your business assets, and it may be made available by applying with the Internal Revenue Service or IRS.
How To Start an LLC - Custom State Guides
- New Hampshire
- New Jersey
- New Mexico
- New York
- North Carolina
- North Dakota
- Rhode Island
- South Carolina
- South Dakota
- Washington D.C.
- West Virginia
LLC Structures and Classifications
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:
1. 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.
2. 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-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.
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.
Advantages and Disadvantages of an LLC
The advantages and disadvantages of an LLC are the following:
1. Advantages of an LLC
There are several benefits when you structure a business as an LLC. These are the reasons why it is the preferred platform by new small business owners and entrepreneurs.
a. Personal Liability Protection
The main advantage of a limited liability company is personal liability protection. Essentially, 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.
b. 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.
Unlike corporation-structured businesses, LLCs avoid double taxation.
c. Easy And Inexpensive To Set Up
LLCs are relatively easier to form and maintain. There are fewer legal requirements to conform with and less paperwork involved.
The filing fee is the main expense required by most states, and the business does not pay taxes on the corporate level.
d. 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. This arrangement is referred to as a member-managed LLC.
The LLC owners may also employ an independent professional or management service that is not directly affiliated with the business.
In this case, the company becomes a manager-managed limited liability company.
e. 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.
2. Disadvantages of an LLC
Like most endeavors, LLCs may present certain setbacks as a business structure. There are certain limitations when setting up a limited liability company.
a. 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.
b. 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.
c. Appeal To Investors
In general, investors prefer to inject capital into corporations instead of limited liability companies. LLCs do not feature investment portfolios like established corporations.
Is Setting up an LLC Easy?
Setting up an LLC is easy, although the time you will spend waiting for the legal papers to complete may vary depending on the state.
The more you know about tax implications for single-member LLCs or multi-owner companies, and tax requirements for your state the easier it will be to set up an LLC.
Do I Need an Attorney to Set Up an LLC?
You don't necessarily need an attorney to form an LLC. However, we advise that you find one, especially if you're new to the business.
Legal experts can help you create an LLC operating agreement and articles of organization, obtain business licenses, and keep detailed records of how you conduct business.
Can I Use My Personal Address for My Limited Liability Company?
You can use your personal address for LLC, but you must be aware of certain circumstances when this move is not recommended.
Consider also registering it under another name and physical address. This may provide privacy and protection in case of lawsuits or creditors looking to seize your personal assets.
Can I Use a Virtual Address for LLC?
You can use a virtual address for your small business LLC. Setting up your virtual address for an LLC will depend on whether you want a mailing address or just an online presence.
However, certain states have specific regulations regarding virtual addresses. So, check with your state's requirements before using one.
Does a Single-Member LLC Need Its Own Business Bank Account?
A single-member LLC should have its own bank account to keep personal and business finances separate. This helps with accurate record-keeping, tax reporting, and liability protection.
An independent federal tax law expert can review your situation to determine what types of accounts are also appropriate for you.
Can an LLC Owner Be an Employee?
An LLC owner can also be an employee of their company. You’ll receive wages and benefits as any other employee, similar to a sole proprietorship.
However, the tax and legal implications of this arrangement can be complex and vary depending on the LLC’s specific situation.
Therefore, consult a qualified legal or financial professional before making any decisions.
Is Starting My Own LLC a Difficult Process?
Starting your own LLC can be a bit challenging, but it doesn't have to be difficult.
Simply follow the required steps, from selecting a name to obtaining any required licenses and permits. While these steps may seem daunting, there are many resources available online that can guide you through the process.
Additionally, hiring ZenBusiness can help ensure that everything is done correctly.
Overall, with a little research and planning, starting your own LLC can be a manageable and rewarding process.