It's easy to create a new LLC by filing paperwork with the state. But to set yourself up for success, you'll also need to think about your business name, finances, an operating agreement, and licenses and permits. Here's a step-by-step guide.
Ready to start your business? Plans start at $0 + filing fees.
Excellent
by Jane Haskins, Esq.
Jane has written hundreds of articles aimed at educating the public about the legal system, especially the legal aspe...
Updated on: March 21, 2024 · 20 min read
Limited liability companies, or LLCs, provide business owners with liability protection, less cost, and less complexity than a corporation. LLC owners have flexibility in managing their business and how it will be taxed. This makes it an appealing choice for small business owners.
Learning how to start an LLC isn't difficult, but there are steps to follow and things to think about along the way. Here's a seven-step approach for starting an LLC and starting it on the right foot.
One of the first steps you'll take when you create an LLC is to choose a name for it. Although state laws vary, your LLC name generally:
As the first impression of your LLC, selecting the right name is paramount. A unique, memorable, and appropriate name can set your business up for success. But it's not just about branding—your LLC name must also meet specific state requirements, which can vary depending on the type of LLC owner. For instance, the name should clearly indicate the services offered, must not be deceptive, and should reflect the business entity type.
When selecting an LLC name, consider the following:
Most states allow you to reserve a name temporarily if you've chosen an available name but aren't ready to file LLC formation paperwork yet. Submit your state's name reservation form and the required filing fee to reserve a name. Rules, fees, and forms vary by state.
Choosing an available name is only one part of the business naming process, says Emily Grubman, owner of Title Case naming consultancy. Grubman advises looking at trademark availability once you know the LLC or brand name you want to use. "The biggest hurdle when you want to grow your business is, 'Can we get this name from a trademark perspective?'" she says. Even if you don't plan to apply for trademark protection, your name might infringe on another company's trademark. "The last thing you want to do is to have to rename your business down the line."
Grubman notes that many LLCs operate under a "doing business as," or DBA, name. Knowing you can pick a DBA that meets your marketing and trademark needs can relieve some of the pressure of picking the perfect business name when you start an LLC.
"I always say the first principle of naming is, 'Do no harm.' It shouldn't hold you back or cause you problems or make things any harder than they need to be," Grubman says. That means names shouldn't infringe trademarks or be hard to spell or pronounce. "The other aspect is making sure there are minimal negative connotations. In terms of an LLC name specifically, that is the name that will show up on your contracts and your invoices, so you might want to opt for something a little more serious" and save quirky, off-color, or funny names for a DBA.
With the digital world's evolution, a domain name matching your LLC's name plays a pivotal role in building a robust online presence. A matching domain name enhances your brand identity and provides you with a personalized email address that contains your company's name, further bolstering your professional image.
Don't forget the importance of domain privacy services, which help protect your personal information from public exposure. To safeguard your trademark across multiple top-level domains (TLDs), register your trademark in each TLD, ensuring that no one else can use it.
A registered agent (also known as a resident agent or statutory agent) has one job: to receive legal documents, such as lawsuits and subpoenas, on behalf of your LLC and then deliver them promptly to the appropriate person at your business.
Every state has its own requirements for who can serve as a registered agent, but typically, the registered agent services must be either (1) a state resident over the age of 18 who has a physical address in the state (known as the "registered office''), or (2) a company authorized to provide registered agent services in the state. In most states, you can act as your own registered agent, name an employee or other individual as an agent, or hire a registered agent service.
Your LLC might need to hire a registered agent in some situations. For example, if:
There are numerous advantages to using a professional registered agent service. Some of these advantages include:
An operating agreement is a vital document that outlines your LLC's operational and financial procedures, including details on the business structure, ownership interests, and profit division. Even if not legally required, developing a detailed operating agreement is vital as it clarifies the management, financial rights, and responsibilities of LLC members.
Creating an LLC operating agreement independently may be suitable for single-member LLCs, but engaging a qualified attorney for LLCs with multiple owners is advisable. The operating agreement should outline the powers and responsibilities of the LLC's members and managers, the distribution of profits and losses, and the procedures for buyouts or dissolutions.
Having a comprehensive operating agreement offers several benefits:
After choosing a unique name and appointing a registered agent, you can proceed to handle the paperwork. At this stage, you might consider using online LLC filing services to form an LLC, streamline the formation process, and ensure all documents are accurately submitted. The necessary formation documents for an LLC may be referred to as "articles of organization," "articles of incorporation," "certificate of information," or "statement of information." You officially create an LLC by filing articles of organization with your state. The articles typically include the following information:
To complete the process, follow these steps:
Some states process LLC articles of organization instantly, while others take a few days to weeks. In some states, you can pay an extra fee to expedite processing. After your LLC paperwork is approved, you'll receive a certificate of formation from the state confirming that your limited liability company officially exists.
Once your limited liability company is official, you can apply for an employer identification number from the Internal Revenue Service. The EIN is a nine-digit number that identifies your business for federal tax purposes—similar to an individual's Social Security number.
You must have an employer identification number if your LLC has employees or more than one member. Single-member LLCs with no employees can use the member's Social Security number, but your financial institution may ask for an EIN to open a business bank account. An EIN also helps protect your personal SSN.
You can get an employer identification number at no cost on the IRS website. Once you have an EIN, you can set up a business bank account and deposit company funds. Use your business account for all income and expenses, and don't mix business and personal finances. Keeping your accounts separate helps you protect your business and personal assets. You risk losing personal liability protection if you combine business and personal funds.
Securing tax identification numbers, like an Employer Identification Number (EIN), is necessary for:
Depending on the type of business you have and where it's located, you may need one or more licenses or permits to operate legally. Here's an overview of some of the more common ones.
Industry trade associations and local and state government offices are good resources for determining the types of licenses and permits your business may need.
Meeting with a tax adviser at the beginning of your business life can save you money in the long run. A CPA can advise you on the best tax classification, what business expenses are deductible, the kinds of financial records you need to keep, and the tax forms you'll need to file. "Having that conversation with an accountant sets things up really nicely" and avoids complications down the road, says corporate accountant Kayla Peña, the owner of Accountful Advising.
From a tax standpoint, LLCs are unique because the IRS does not have a specific LLC tax classification. By default, the IRS classifies one-member LLCs as sole proprietorships or “disregarded entities." Multi-member LLCs are classified as partnerships. But an LLC can also elect to be taxed as an S corp or a C corp by filing a federal tax election form with the IRS.
You're self-employed if your LLC is classified as a sole proprietorship or partnership. You'll report business income and expenses on your personal tax return (partnerships also file a partnership return). You'll pay income and self-employment (Medicare and Social Security) taxes on your share of business profits. Estimated taxes should be paid quarterly to avoid fees and penalties. The default taxation system is simple, especially for single-member LLCs, but some profitable LLCs save on self-employment taxes by electing S corp taxation.
In an S corp, profits also pass through to the owners' personal tax returns. But S corp owners can be company employees who pay Social Security and Medicare taxes only on their salaries, not on the company's entire profit. Salaries must, however, be reasonable for your work and the company's income. To be taxed as an S corp, an LLC must be eligible and meet election form filing deadlines.
S corporations aren't for everyone, Peña says. "You have to make sure the business is stable enough to pay your salary. You should be making a certain amount of money. Converting to an S corp comes with additional costs. You'll need to run payroll, you may have additional back tax returns and forms to file, and you may have to enroll in state workers' compensation and unemployment programs. Most small businesses don't make enough money in the early stages to convert to an S corp."
For most new businesses, Peña recommends setting up accounting software so you can track your income and expenses and understand your cash flow, income, and expenses. That's the approach she's taken with her LLC, and she now has financial data over time that can show whether it would make sense to elect S corp taxation. Every business is unique, however, and questions about tax status, reasonable salaries, and deductible expenses can best be answered by a tax professional who can look at the specifics of your LLC.
Once your LLC is operational, it is of utmost importance to uphold compliance and remain in good standing with state regulations. This involves:
By maintaining compliance and good standing, you protect your personal assets, ensure the legal operation of your business, and reinforce your credibility with clients, customers, and partners. This diligent approach sets your LLC up for long-term success.
Maintaining a separate business bank account is crucial for protecting your personal and business assets and personal liability protection. Consider acquiring a business credit card to separate your business and personal finances further.
Keeping your LLC active and compliant with state regulations is essential to ensure its continued success and protect your personal assets from potential liabilities.
Ready to start your business? Plans start at $0 + filing fees. Check availability
The success of your business hinges on selecting the appropriate LLC structure. There are various types of LLC structures available, such as:
Each structure offers unique benefits and considerations, depending on your business needs and goals.
Single-member LLCs are suited for individuals who want to operate a single-member LLC independently, while Multi-Member LLCs are ideal for businesses with multiple partners or investors. Professional LLCs are designed for licensed professionals, like doctors and lawyers, while Series LLCs allow for multiple subdivisions within one entity, separating different ventures or properties.
Consider your industry, the number of members, and the desired level of liability protection when choosing the right LLC structure for your business. Careful planning and evaluation of your business objectives will guide you toward the most suitable structure for your venture.
Forming a limited liability company (LLC) or a limited liability partnership has several advantages, such as personal liability protection, tax flexibility, and straightforward formation. Creating a limited liability company and forming your LLC can safeguard your personal assets from business debts and lawsuits. Also, LLCs provide various tax options, allowing you to choose the most advantageous structure for your situation.
However, there are potential drawbacks to consider when forming an LLC, including limited life, self-employment taxes, and a less established structure than corporations. Maintaining your LLC may also involve ongoing fees and paperwork, which can be cumbersome for some business owners.
Weighing the benefits and drawbacks of forming an LLC is essential for making an informed decision about your business structure. Understanding potential challenges and opportunities can help determine if an LLC is the right choice for your venture.
Comparing LLCs with other business structures, like sole proprietorships, partnerships, and corporations, is necessary to identify the best choice for your venture. Each business structure has advantages and disadvantages, depending on taxation, asset protection, and operational needs.
Sole proprietorships are the simplest type of business operation, but they offer no personal liability protection and may not be suitable for ventures with significant risks. In contrast to a sole proprietorship, partnerships involve shared responsibilities among partners, but liability protection varies depending on whether it's a general or limited partnership.
On the other hand, corporations offer a more formal structure with greater liability protection but are subject to double taxation and have more stringent operational requirements. By understanding the unique characteristics of each business entity, you can make an informed decision about the most suitable structure for your business.
When contemplating LLC formation, including a foreign LLC, you could either opt for a DIY approach or seek the assistance of professional services or a business attorney. Each method has pros and cons, and the choice depends on your unique needs, budget, and expertise.
DIY LLC formation allows you to save money and maintain full control over the process, but it can be challenging and time-consuming, especially if you're unfamiliar with state regulations and filing requirements. On the other hand, professional LLC formation services provide expert guidance, compliance assurance, and peace of mind. However, these services come at a cost, which may concern some entrepreneurs.
Ultimately, the choice between DIY and professional LLC formation depends on your needs, budget, and expertise. Carefully weigh the pros and cons of each method to determine the best option for your business venture.
As a business owner, it is crucial to comprehend the tax implications that come with forming an LLC. One of the primary tax benefits of an LLC is pass-through taxation, which means that business profits are directly reported on the owner's personal tax return without being taxed at the business level. This simplifies tax filing and ensures that business income is taxed only once.
However, LLCs also have the option to elect S corporation or C corporation taxation, which can provide additional tax benefits and flexibility. S corporations are exempt from federal income taxes, with shareholders subject to individual taxation. Conversely, C corporations are subject to corporate income tax, but they may offer more tax planning opportunities and benefits for certain businesses.
When considering tax implications for your LLC, it's essential to consult with a tax professional or accountant to determine the most advantageous tax structure for your specific situation. By understanding the various tax options available to LLCs, you can make informed decisions to help your business thrive.
In conclusion, forming an LLC is an exciting and rewarding journey that can provide numerous benefits, such as liability protection, tax flexibility, and ease of formation. By following our comprehensive step-by-step guide, understanding different LLC structures, and considering the potential drawbacks and tax implications, you can decide whether an LLC is the right choice for your business venture.
There is no filing fee for articles of organization to form an LLC in California. However, every LLC registered in California must pay an annual $800 minimum franchise tax, even if it isn't doing business. LLCs that make more than $250,000 in California must also pay an annual fee starting at $900 and increasing proportionately to income.
Under legislation passed in 2020, the $800 in franchise taxes was waived for the first year for LLCs formed between Jan. 1, 2021, and Dec. 31, 2023. The fee is also waived for businesses with a tax year of 15 days or less and did not do any business in California. After the first year, LLCs must pay franchise tax by the 15th day of the fourth month of the tax year.
In most cases, the simplest and least expensive place to start an LLC is the state where you live. If you form an LLC in another state, you'll also need to register your LLC as a foreign business entity in your state. You'll need a registered agent in both states and be responsible for filing annual reports in both states. Regardless of where you form your LLC, you'll have to pay applicable taxes in the state where you conduct business.
Here are four types of LLCs:
If you aren't sure what type of LLC you should form, get legal advice.
Owners of sole proprietorships and general partnerships have unlimited personal liability for business debts. Partners in a general partnership can also be liable for their partners' actions. When you create an LLC, you establish a new legal entity that exists separately from its owners. An LLC can have its own money, bank accounts, and assets and sign contracts. Because the LLC is a separate entity, the members are generally not personally liable for business debts or the actions of other members. They remain liable for their own negligent or intentional conduct and for any obligations for which they've signed a personal guarantee. Business insurance can further minimize liability for you and your business.
The amount of money you need to start a new business will vary, depending on the state of your business. A business plan will help you estimate your expenses and how much money you'll need to get your business off the ground and keep it running.
There are a few costs related specifically to LLC formation and maintenance. You should have enough money to file formation paperwork, pay for legal and tax advice, hire a registered agent if necessary, and pay annual report filing fees and any annual franchise or operating taxes levied or required by law in your state.
In most states, LLCs are inexpensive to set up and maintain. Many attorneys recommend that small business owners form an LLC because it provides liability protection at a minimal cost. But some states are more expensive than others. If you aren't sure whether an LLC is worth it, get advice from an attorney and a tax adviser.
The UK doesn't have a business entity that offers the same features as an LLC. A limited company has similar protection as an LLC. However, no UK entity has the flexibility to be taxed as a sole proprietorship, partnership, or corporation. Always get tax advice before setting up a business entity in a foreign country.
You may also like
What is an LLC? Limited liability company definition
An LLC (limited liability company) provides more flexibility than a corporation, and more robust liability protection than a sole proprietorship.
March 21, 2024 · 14min read
How to form a single-member LLC (SMLLC)
If you’re the sole owner of your business, a single member LLC can help protect you from liability for business obligations. Learn more about the advantages of a single-member LLC and how to set one up.
March 21, 2024 · 4min read
How to get an LLC and start a limited liability company
Considering an LLC for your business? The application process isn't complicated, but to apply for an LLC, you'll have to do some homework first.
March 21, 2024 · 11min read