Interested in setting up an LLC (limited liability company)? We’ll show you to create an LLC, so you can protect your personal assets and solidify your business.
There are many benefits of forming an LLC. For example, you can report an LLC’s profits and losses on your personal taxes rather than filing a separate business tax statement.
How to Start an LLC
The process for starting an LLC varies by state, but is generally straightforward.
1. Research where starting an LLC is best for you
If you’re a small business owner, you may have heard that starting an LLC in business-friendly states like Delaware and Wyoming is a good idea.
However, this isn’t necessarily the case for your business.
For instance, if you’re a small business owner, you should register your LLC in the state where your business operates because that’s where you’ll be paying taxes anyway. Furthermore, if you’re a licensed professional, some states may require you start a PLLC instead of an LLC.
There are two main reasons you should be wary of starting an LLC in a different state. First, if you register in another state, you have to find and appoint a registered agent in that state.
A registered agent must be an individual or organization residing in that state, so you’ll need to pay them for their services. This extra expense makes it a less appealing option for small business owners.
You’ll also be required to register your out-of-state LLC in your home state as a “foreign LLC.” That means you’ll end up paying two sets of state filing fees, as well as annual filing fees (an annual fee is $800 in California, and varies by state).
2. Name your LLC
The next decision you’ll need to make is what to name your LLC. Here are a few things to consider before landing on a name and sticking to it:
First, most states require you to end your LLC’s name with “LLC”, “L.L.C.”, “Limited Liability Company”, or some other legally permissible variation.
Second, you must pick a unique name, otherwise you may infringe on another LLC’s copyright. Some states (like California) have online tools that let you check whether an LLC name is available. You can check the US Patent and Trademark Office too.
Third, you can’t pick a name that might confuse people about what your company does (such as “Bank” or “Insurance Company”) or what it is (you can’t call an LLC a “Corporation” or “Corp.” as corporations and LLCs are entirely different types of businesses).
You should also consider:
- Whether the domain name is still available online for your chosen LLC name. For example, if you want to call your LLC “Monster Digital Content, L.L.C.,” is monsterdigitalcontent.com still available, or will you have to settle for a less exact URL?
- Whether your chosen name might limit future expansion. For instance, if you call yourself “Louisville Tree Surgeons LLC” because you’re setting up an LLC in Louisville, KY, what happens if you want to expand your business to Frankfort, KY?
3. Choose a registered agent
LLC filing rules in each state require you to name a registered agent for your LLC.
The registered agent is responsible for receiving legal documents such as a court summons, as well as filing other documents, like tax reports.
Your LLC’s registered agent must reside in the state your LLC is registered in, and can be an individual or organization.
If you open LLCs in several states, you’ll need a different registered agent in each state, since they have to legally reside there.
If you register LLCs in several states, you could seek the services of specialized registered agent companies that have a presence in all 50 states (and Washington, D.C.) to save time and money.
4. File Articles of Organization
Forming an LLC requires you to file your LLC’s articles of organization. Articles of organization are the legal documents necessary for becoming an LLC, according to the laws of your state.
You can obtain your articles of organization from the Secretary of State department in your state, many of which provide standard, fill-in-the-blank templates for your convenience.
Filling out the articles of organization is straightforward. You’ll usually need to provide the name of the LLC, its registered address, and the names of its owners, and you’ll have to name your registered agent too.
Your articles of organization should then be submitted to the Secretary of State’s office. Depending on your state, you may be able to file online — otherwise, you’ll have to send the physical documents by mail.
It’s at this point that you’ll need to pay the filing fee. The amount depends on your state, but the average is $135, with Massachusetts charging the highest filing fee to form an LLC ($500) and Kentucky charging just $40.
5. Draft an LLC Operating Agreement
Creating an LLC operating agreement is an essential part of LLC formation, despite not being required by most state’s laws.
An operating agreement functions in a way similar to corporate bylaws. Specifically, it sets out the rules for how the LLC operates, including:
- How it will be managed (member-managed vs manager-managed llc)
- How voting will work
- Each member’s rights and responsibilities
- Each member’s percentage of ownership
- What happens if a member wants to sell their share, dies, or is incapacitated
- How much money (capital) each member is contributing to the LLC
- What share of the profits each member will receive
- How new members can join the LLC, and how departing members can leave
You don’t legally need an attorney to read over your operating agreement, but you should if you have the resources.
You can also alter the terms of your agreement in the future (if necessary) by using an LLC operating agreement amendment.
6. Obtain an Employer Identification Number
An employer identification number (EIN) is like a social security number for a business. Obtaining one from the IRS is a key part of getting an LLC up and running.
You’ll need your EIN when you hire employees, file your tax returns, and open business bank accounts.
The IRS lets you apply for an EIN online.
7. Gather necessary business licenses
You may need to apply for a business license from your state before your business begins operating. Since many states allow cities and counties to regulate businesses, you may also need a license from this level of government too.
For example, Napa, California businesses must apply for a license to operate. Certain businesses in this city must apply for a special license, including ice cream vendors, fortune tellers, and businesses that use a set of scales.
In particular, if you’re selling alcohol or firearms, you’ll need to obtain the proper licenses from the federal government as well as the state and city governments where you’ll be doing business.
8. Set up an LLC bank account
Once you have your EIN and articles of organization, you’ll be able to open a business bank account.
It’s vital to open an LLC bank account to keep your personal assets separate from your business assets. One of the advantages of obtaining an LLC is protecting your personal assets in case of legal action against your business.
By making it clear what belongs to your company, the courts can’t deprive you of your personal assets.
When you create an LLC business bank account, you’ll also need to specify who can sign checks on the LLC’s behalf.
How to Get Your LLC Registered
Creating an LLC is a straight forward, eight-step process.
- Decide which state to set up your LLC in
- Pick an appropriate name
- Name the owners and a registered agent
- File the articles of organization with your secretary of state
- Draft an operating agreement
- Obtain an EIN
- Apply for the relevant licenses
- Set up a bank account
Now that you’re ready to form an LLC of your own, make sure you understand how LLCs are taxed.
