Entrepreneurs who are looking to start a business might consider forming an LLC. Research shows there are 2.2 million LLCs in the U.S. and is a popular choice among new business owners. For those new to the business world, we’ll explain how to start an LLC and answer some frequently asked questions about the topic.
What is a limited liability company or LLC?
An LLC, which stands for “Limited Liability Company,” is a business structure that’s easy to set up and maintain. As the name suggests, this type of business limits personal liability, so if something goes wrong, personal assets are protected.
It is one of several different types of business entities that entrepreneurs can set up. Different entities are explored later in this article.
What are the benefits of an LLC?
An LLC has many benefits. Here’s a look at the biggest advantages of starting an LLC:
Limited personal liability
With an LLC, the business owner holds limited liability during a crisis. It separates personal assets from business assets, so if something happens to the LLC, personal assets are protected. For example, if an LLC is sued or can’t meet financial obligations, the owner’s personal assets are protected. The company is still responsible for any debts, but a creditor or lawyer couldn’t go after the business owner’s personal bank account or home.
Less administrative work
Limited liability companies aren’t required to do as much administrative work as that of a corporation. Corporations have to hold shareholder meetings, file annual reports, and keep meticulous records. An LLC doesn’t have any of those requirements.
Informal business structure
With an LLC, a formal business structure isn’t required. With corporations, there’s a board of directors to handle company policies and there are officers who handle the day-to-day operations. This isn’t necessary with an LLC, which provides more flexibility and freedom for the owner.
An LLC provides a business with credibility and proves that it’s a legitimate company for customers to purchase from. It can also provide the credibility that vendors need to support your company.
What steps are taken to form an LLC?
To start an LLC, there are certain steps entrepreneurs should take. Generally, all of these steps can be completed online, but there are state offices (and LLC formation services) that can help entrepreneurs file the paperwork in person if preferred. Entrepreneurs should check their state guidelines, but in general, the steps taken to start an LLC are:
1. Select the state to file in
You should start your LLC in the state where you live or where you plan to do business. If a business has multiple locations, the owner is required to file for an LLC in each state.
2. Name your LLC
It’s time to decide the name of your company. When selecting an LLC name, there might be specific state rules that you must follow. In general, these are the naming rules most states adhere to:
- Businesses must have a unique name. Before registering, owners must enter the name into a database to see if it’s already been taken. If it is, another business name must be selected.
- The company name must include “LLC” or the actual words, “Limited Liability Company.”
- Any words that confuse consumers into believing your company is associated with a government agency can’t be used in the name, like FBI, Bank, EPA.
3. Select a registered agent
During an LLC formation, a registered agent must be selected. While the title sounds official, a registered agent is simply someone who sends and receives legal documents regarding the business.
In many states, the owner of the LLC can serve as the registered agent. Owners can also elect another state resident, company colleague, or work with a registered agent service.
4. File the LLC
An LLC must be filed with the state. This process can be done online. Essentially, “filing” means an owner is registering the business with the state. In more technical terms, the owner will file Articles of Organization. The name may vary by state, but it’s the process of legally filing an LLC. Expect to pay a filing fee to do so.
5. Establish an operating agreement (optional)
Most states don’t require an operating agreement to set up an LLC, but a handful do. To see if your state requires it, check on the website of the secretary of state.
Even if it’s not required, an operating agreement is helpful for newly formed businesses. The LLC operating agreement explains the business structure. It lists the LLC owners and additional members, explains voting, lists contributions made by each LLC member, explains how members are added and removed, and has a plan in place should the business fail.
A clear understanding of the business structure that’s decided as soon as a new LLC is established is a wise move for the future.
6. Get an EIN
To conduct business as an LLC, each small business is assigned an EIN, an employer identification number. This unique number, which is also called a tax ID number, is issued by the IRS and can be obtained through the IRS website.
The EIN is required for business-related actions, including:
- Filing taxes and obtaining tax returns
- Setting up a business bank account
- Hiring employees
To get the EIN, entrepreneurs must fill out several forms, but they will receive the number immediately after submitting the paperwork.
What should you do after setting up an LLC?
Setting up an LLC is just the start of getting a business up and running. What should be next on your list? Here’s what to do after filing an LLC with your state:
Apply for business licenses and permits
Filing an LLC with the state might not be the only paperwork needed to launch a business. In some states, businesses need licenses or permits to operate. In many states, a seller’s permit is needed.
To see if your business needs to apply for any licenses or permits, check your state’s business website or the secretary of state’s website for more information.
Open a business bank account
As an LLC, it’s imperative to keep business and personal finances separate. To do so, business owners should set up a business bank account. In addition, a business credit card is also a good idea to ensure a simplified financial recording.
Another item on your startup checklist is to insure your business. While personal assets are protected by an LLC, your business assets can be safeguarded by insurance. Consider liability insurance or a business owner’s policy. You can shop for and purchase business insurance online.
Establish a team
Entrepreneurs who don’t have an accountant and a lawyer to speak with should ask for references from friends and family. At some point, both an accountant and a lawyer will be needed, and it’s always best to have a working relationship with them rather than find one during an emergency.
How much money do you need to start an LLC?
The act of setting up an LLC does cost money, and the amount varies by state. LegalZoom estimates the cost of starting an LLC can be up to $500, depending on the state.
Here’s a list of potential fees you can expect:
- Articles of Organization filing fee: This is one of the biggest fees that business owners will pay while forming an LLC. When an LLC is established, the Articles of Organization must be filed with the state, which can cost anywhere between $50-$500. About half of the states in the U.S. charge between $150-200, according to LegalZoom.
- Expedited processing: If you need to file paperwork immediately, you can pay extra to expedite it.
- Business name reservation fee: As mentioned, no two businesses can have the same name in a state. As a result, some states allow business owners to reserve a name before filing an LLC. It “holds” the name so it can’t be taken by another company for a certain period of time.
- Filing in multiple states: If a company plans to operate in multiple states, an LLC must be formed in each state. Each state will charge a fee to do so.
- Working with a registered agent service: Every LLC needs a registered agent or a person who is willing to send and receive legal documentation on behalf of the company. While most business owners act as their own registered agents, large companies or those with locations in several states might work with registered agent services. This service handles legal documents and other official paperwork like an annual report that is sent to companies. The cost to use a registered agent service is between $100-300 a year.
What other types of businesses can be established besides an LLC?
Establishing an LLC isn’t necessary for every business. There are several business entities to choose from. Here’s a quick snapshot of other types of businesses:
- DBA (Doing Business As): Under this classification, a business is not separate from its owner, it simply operates under a different name. The owner is personally liable for the company and its debt. It is also called “sole proprietorship” or “fictitious name.”
- C-Corporation: This type of business is separate from its owner and can buy real estate and sell company stock. (It’s typically for larger businesses).
- S-Corporation: Small businesses can elect an “s-corp status,” which may offer tax breaks to certain businesses in certain states.
There are several entities available to entrepreneurs. To help make the right choice for your business, you should talk with a lawyer and an accountant for advice and guidance.
No. You don’t need a lawyer to form an LLC. If you want to have a lawyer draw up the paperwork, you can, but there are professional business formation services, like BetterLegal, that provide all of the necessary paperwork for you. These services can also help you file that paperwork.
Yes. With the help of online tools, entrepreneurs can file an LLC on their own.
By following the steps below, an entrepreneur can fill out the paperwork online, submit it to the right government agencies, and have an LLC up and running quickly.
While it’s possible to set up an LLC on your own, it might be a wise investment to speak with a lawyer or an accountant for guidance and advice before moving forward. Of course, consultations like these will cost money.
In addition, there are filing fees associated with this process, so keep that in mind as you plan a budget.