A limited liability company (LLC) is a business entity that comes with several advantages and is typically the choice for small businesses. It offers little liability protection and pass-through taxation.
If you’re interested in setting up an LLC, we’ll help guide you through the process of creating one, so you can protect your assets and solidify your business.
8 Steps to Form an LLC
- What is the best state to start an LLC
- Name your LLC
- Choose a registered agent
- File Articles of Incorporation
- Draft an LLC Operating Agreement
- Obtain an Employer Identification Number
- Gather necessary business licenses
- Set up an LLC bank account
The process for starting an LLC varies by state but is generally straightforward. You can use our LLC operating agreement to help establish your LLC.
1. What is the best state to start an LLC
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 to start a PLLC instead of an LLC.
You should be wary of starting an LLC in a different state for two reasons. First, if you register in another state, you must find and appoint a registered agent.
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 as a “foreign LLC in your home state.” That means you’ll pay two sets of state filing fees and annual filing fees (a yearly cost is $800 in California and varies by state). You should research how much it costs to start an LLC.
2. Name your LLC
You’ll need to make the next decision 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 to 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, LLC,” 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, and 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 must 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 Incorporation
Forming an LLC requires you to file your LLC’s articles of incorporation. Articles of incorporation are the legal documents necessary for becoming an LLC, according to the laws of your state.
You can obtain your articles of incorporation from your state’s Secretary of State department, many of which provide standard, fill-in-the-blank templates for your convenience.
Filling out the articles of incorporation is straightforward. You’ll usually need to provide the name of the LLC, its registered address, and the names of its members, member role, or title, and you’ll have to name your registered agent too.
Your articles of incorporation 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.
At this point, 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 laws (however, sometimes banks will require an operating agreement to open a business account).
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 contributing to the LLC
- What percentage 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 vital for getting an LLC up and running.
You’ll need your EIN to 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 companies, you may also need a permit from this level of government too.
For example, in Napa, California, businesses must apply for a license to operate. Certain companies 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 and the state and city governments where you’ll be doing business.
8. Set up an LLC bank account
Once you have your EIN and incorporation articles, you can open a business bank account.
Opening an LLC bank account is vital to keep your 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.
The courts can’t deprive you of your personal assets by clarifying what belongs to your company.
When you create an LLC business bank account, you’ll also need to specify who can sign checks on the LLC’s behalf.