How To Start An LLC: The Best Guide For Business Formation 2023
I earn commission from some products/services if you shop through some of the links below.No extra cost on you.
Starting an LLC ( a Limited Liability Company) can be an attractive option for entrepreneurs seeking to protect their personal assets while enjoying the flexibility and simplicity of managing a small business.
An LLC is a hybrid business structure that combines the limited liability protection of a corporation with the flexibility and ease of administration of a partnership. Recognized in every state, this business structure has become increasingly popular due to its many advantages, such as tax benefits and minimal paperwork.
To form an LLC, there are several steps to follow, which may vary depending on the state in which the business will be operating.
Generally, these steps include selecting an appropriate and available business name, filing organizational paperwork with the state, and creating an operating agreement to outline the financial, legal, and management rights of the LLC’s members.
Additionally, it is important to identify a registered agent and comply with the specific state regulations related to LLC formation.
By following these steps, entrepreneurs can ensure the successful formation of an LLC and pave the way for a prosperous business venture. The process may appear complex, but by breaking it down into manageable steps and leveraging available resources, one can confidently navigate the path towards launching a successful LLC.
Why Choose An LLC
Here are the reasons why you should form an LLC. This section talks about the benefits of forming an LLC.
1. Limited Liability Protection
One of the primary reasons to choose a limited liability company (LLC) as a business structure is the limited liability protection it offers. Owners of an LLC, called members, are not personally responsible for the company’s debts or liabilities. This means that their personal assets, such as homes and personal bank accounts, are protected from creditors if the business faces financial difficulties or legal issues.
2. Tax Benefits
Another advantage of an LLC is the tax benefits it provides. Unlike corporations, LLCs have pass-through taxation, which means that profits and losses of the business are reported on the individual members’ tax returns. This eliminates the double taxation faced by corporations, where profits are taxed at both the corporate and individual levels. Additionally, LLCs have the option to choose how they want their entity to be taxed – as a sole proprietorship, partnership, or corporation.
3. Management Flexibility
LLCs offer flexibility in terms of management and operation. While corporations have strict requirements regarding the creation and maintenance of a board of directors, annual meetings, and documentation, LLCs have fewer restrictions.
Members of an LLC can determine their own management structure and decision-making processes within the operating agreement, which is a document detailing the financial, legal, and management rights of all members. This flexibility allows LLCs to adapt and grow with the needs of the business.
Note: An unpopular benefit of starting an LLC is that you use it to open a business Stripe account if you live in an unsupported country.
How To Start An LLC
There are certain steps to take when forming an LLC. This section discusses the procedures to start an LLC.
Naming Your LLC
Before choosing a name for your LLC, it is crucial to verify its availability. You want to ensure the desired name is not already in use by another company. To do this, search the state’s database of registered business names to ensure the name you want is available. Each state typically has a business name search option on their Secretary of State website or a similar agency.
Once you have identified the name’s availability, ensure it stands out from existing business names. A unique name is important for branding and helps avoid potential legal issues.
A strong LLC name should be memorable, easy to spell, and related to the company’s industry or purpose. Consider the following points when creating a unique name:
- Start with a hard consonant or vowel to make it sound strong and distinct
- Keep it simple and avoid using overly complicated words, numbers, or special characters
- Check for similar-sounding names in your industry to avoid confusion
After selecting a unique name, consider protecting it by registering a trademark. A trademark prevents other companies from using a similar name or logo, offering legal protection for your brand. You can check the United States Patent and Trademark Office (USPTO) database for potential conflicts with existing trademarks, and apply for a trademark registration online using the USPTO website. Another option is to use the Incfile trademark service.
In some states, you can reserve your desired LLC name for a specified period before actually forming the LLC. This is useful when you need more time to prepare the formation documents and complete the registration process.
To reserve a name, visit the appropriate state agency’s website and follow their specific procedures. Name reservation typically has a small fee and a limited timeframe, so ensure you complete the LLC formation process within the given time limit.
Creating Articles of Organization
Information To Include
The Articles of Organization serve as the foundation for your Limited Liability Company (LLC). It is a document submitted to the Secretary of State that includes essential details about your company, such as:
- Company name
- Purpose of the business
- Name and address of the registered agent
- Length of its existence, if not perpetual
- Contact information
Remember, the Articles of Organization will become a public document once filed with the state.
When filing the Articles of Organization with the Secretary of State, a filing fee is required. The average filing fee in the United States is around $132. However, fees can range from $40 on the low end to $500 on the high end, depending on the state. Generally, you can pay for filing fees using a debit or credit card if you form your LLC online.
There are service providers that you can use to form your LLC online. They include Incfile, Northwest Registered Agent and ZenBusiness. They make LLC formation cheaper, easier and faster than using a lawyer or trying to do it yourself.
Certificate Of Formation
Once the Articles of Organization are filed with the Secretary of State and the fee is paid, you will receive a Certificate of Formation. This document signifies that your LLC is now an officially recognized business entity within the state.
It is crucial to keep the Certificate of Formation for record-keeping purposes and to complete additional steps in the LLC formation process, such as creating an LLC Operating Agreement and obtaining an Employer Identification Number (EIN) from the IRS.
Drafting An Operating Agreement
Ownership And Voting Rights
When starting an LLC, it is critical to draft an operating agreement that outlines the ownership structure and voting rights of the members. In this legal document, you should detail the percentage of ownership each member holds, as well as their voting rights based on their share of ownership. This ensures that decisions made by the LLC are aligned with each member’s interests and investments.
|Member||Ownership Percentage||Voting Rights|
The operating agreement should also clearly outline how the LLC will distribute profits and losses among the members. Typically, this is proportional to each member’s ownership stake in the company.
However, you may also decide on alternative methods of distribution, such as performance-based payouts or fixed amounts. The primary goal is to ensure each member is fairly compensated for their contribution to the business.
To illustrate profit distribution, consider the following example:
- John (60% ownership) will receive 60% of the LLC’s profits and will bear 60% of the losses.
- Jane (40% ownership) will receive 40% of the LLC’s profits and will bear 40% of the losses.
Duties And Responsibilities
Another essential aspect of your LLC operating agreement is defining the duties and responsibilities of each member. This can encompass various aspects, such as:
- Day-to-day management
- Financial management
- Marketing efforts
- Legal compliance
- Dispute resolution
- Decision-making processes
By specifying each member’s duties and responsibilities, you can create a smooth operating structure and minimize the potential for conflict as the company grows.
In summary, when drafting an operating agreement for your LLC, you should focus on three main areas: ownership and voting rights, profit distribution, and duties and responsibilities of the members. By addressing these topics, you can establish a robust foundation for your company to thrive and succeed.
Obtaining An EIN
Why You Need An EIN
An Employer Identification Number (EIN) is a federal tax ID number issued by the Internal Revenue Service (IRS) and is essential for various aspects of running a Limited Liability Company (LLC). Obtaining an EIN is crucial for the following reasons:
- Pay federal and employment taxes
- Hire employees
- Open a business bank account
- Apply for business licenses and permits
EINs are unique to each LLC and provide a way for the IRS to identify and track a company’s tax obligations.
Applying for an EIN is a relatively straightforward process, and there are multiple methods by which an LLC can obtain one:
- Online: The fastest way to get an EIN is by applying online through the IRS website. This option is available for LLCs whose principal business is located in the United States or U.S. Territories, and the applicant must have a valid Taxpayer Identification Number (SSN, ITIN, EIN). Note that the online application is limited to one EIN per responsible party per day.
- Fax or Mail: If the online application is not suitable for the applicant, they can apply using Form SS-4 via fax or mail. This method may take longer, but it is still an effective way to obtain an EIN for an LLC.
If you are a non US resident and you to form an LLC, you can use an LLC formation service that will help you to get your EIN. They will do this for your seamlessly.
Regardless of the method chosen, obtaining an EIN is free of charge. For international applications, the process might vary slightly.
In summary, obtaining an EIN is an essential step in setting up an LLC due to its importance in tax filing, hiring employees, and other business operations. The application process is simple and available through various channels, making it easy for LLC owners to secure an EIN and meet their legal obligations.
Choosing A Registered Agent
There is no way you can avoid a registered agent. It is necessary for LLC formation. In this section, you will learn about the role and responsibilities of a registered agent.
Role And Responsibilities
A Registered Agent is a crucial role when forming an LLC, as they are responsible for receiving legal documents and state notices on behalf of the company.
The agent must have a physical street address within the state where the LLC is registered, and they should be available at that address during normal business hours, usually Monday through Friday from 9am – 5pm.
In most states, a Registered Agent can be an individual who is at least 18 years old or a company that provides registered agent services. Their primary job is to promptly and reliably accept legal documents, such as subpoenas or other court-related notices, and ensure that they are forwarded to the appropriate person within the LLC. This helps keep the company in good standing, as missing important legal documents can have serious consequences.
Whether you reside in the US or not, you can use any of the several LLC formation service providers as a registered agent. Although this service is not free if you use Incfile, they will give you a first-year free registered agent. You will only start to pay for a registered agent in the second year.
Service Of Process
Service of process is the procedure by which a party to a lawsuit provides appropriate notice of initial legal action to another party, such as a defendant. The registered agent plays a vital role in this process, as they are the designated recipient of these notices on behalf of the LLC.
Since the registered agent is the primary point of contact for the authorities, it is important that they are reliable and available to accept these documents during normal business hours.
They must also immediately inform the relevant members of the LLC about the service of process so that appropriate action can be taken.
To summarize, the registered agent ensures the smooth handling of legal matters pertaining to the LLC.
When choosing a registered agent, it is essential to consider their reliability, availability, and track record. You may opt to designate an individual or a registered agent service company depending on your needs and preferences.
Regardless of your choice, keep in mind that a competent registered agent is a vital asset for the overall success and legal compliance of your LLC.
Banking And Financial Setup
Opening A Business Bank Account
Opening a business bank account is a critical step for any new LLC, as it helps separate personal and business finances. It also provides legal compliance and protection, as well as benefits for customers and employees.
To open a business bank account, you should first determine the type of account that suits your LLC’s needs. Next, contact your preferred bank to inquire about the necessary documentation. Typically, banks require the following documents:
- A copy of your LLC’s articles of organization, certificate of formation, or an equivalent document
- Certificate of Formation
- If the LLC is doing business under a different name, one of the following:
- Business License
- Trade Name Certificate
- Fictitious Name Certificate
- Certificate of Trade Name
- Certificate of Assumed Business Name
It is essential to have these documents ready to smooth the account opening process.
Raising capital is crucial for an LLC to grow and expand. There are several ways to raise capital for your business, including:
- Personal Savings: Many entrepreneurs opt to utilize their personal savings to finance their business in the initial stages.
- Friends and Family: Seeking financial support from friends and family is a common approach. This option may provide more flexibility and lower interest rates compared to traditional lenders.
- Bank Loans: Applying for loans from banks can be a viable option, particularly for businesses with a solid business plan, profitable projections, and collateral.
- Credit Cards: Some entrepreneurs use credit cards to finance their business. While this option offers quick access to funds, it is essential to manage credit responsibly and understand the high-interest rates involved.
- Crowdfunding: Online platforms like Kickstarter and Indiegogo allow businesses to raise funds from a large number of people, who typically receive a reward, such as an early version of a product.
By understanding various financial options, you can determine the best route to secure the needed capital for your LLC. It is crucial to weigh the pros and cons of each method before making a decision.
Compliance And Ongoing Maintenance
Most states require LLCs to file an annual report with their state regulatory agency. This helps ensure the LLC remains in good standing and up to date with state regulations.
As of 2023, the average LLC annual fee in the US is $91. However, the specific fees and filing requirements vary by state. Be sure to check your state’s specific requirements and deadlines to maintain compliance.
In addition to filing an annual report, LLCs may need to obtain and maintain various state licenses depending on the nature of their business. Examples of businesses that may require state licenses include:
- Retail sales
- Food and beverage services
- Professional services, such as legal, accounting or engineering services
It is essential to research any licensing requirements in your state and stay current with any renewal or reporting requirements associated with those licenses.
Maintaining good standing as an LLC includes adhering to state law requirements, such as:
- Paying applicable fees and taxes
- Supplying accurate and timely documentation
- Meeting any additional compliance demands in your particular location
Additionally, it is recommended that LLCs maintain and update an operating agreement outlining the roles, rights, and responsibilities of the business owners. Some states, such as New York, even require the operating agreement to be filed with the state.
In summary, Compliance and Ongoing Maintenance of an LLC involve submitting annual reports with the appropriate fees, maintaining relevant state licenses, and keeping the business in good standing by adhering to state law and regulations. It is essential for LLC owners to stay informed about their state-specific requirements and stay up to date with any changes in regulations.
Foreign LLCs And Related Considerations
A foreign LLC refers to a company that conducts business in states other than its home state, where the LLC was formed. It is necessary for these companies to register as foreign LLCs to meet regulatory and tax requirements in the states they operate in. Registration typically requires providing information from the Articles of Organization and obtaining a copy of the official LLC document from the home state.
Delaware And Other Popular States
Many businesses choose to form their LLCs in states like Delaware due to their favourable business environment and legal structures. While registering in such states might offer advantages, it is crucial to also comply with regulations in all the states the company operates in.
- Delaware: Offers strong protections for management and investors, a well-regarded legal system focused on business disputes, and corporate-friendly tax laws.
- Nevada: Popular for its favourable tax structure, minimal regulations, and strong privacy protection for business owners.
- Wyoming: Has a low-cost registration system and provides strong asset protection for members of an LLC.
When registering a foreign LLC in a state other than its home state, it is important to consider the specific state laws governing foreign entities and comply with such regulations accordingly.
Additional Support And Resources
Starting an LLC involves various aspects, including legal, financial, and operational issues. To help you navigate these complexities, it is essential to seek guidance from professionals in different fields.
This section discusses some resources you may turn to, such as legal services, accountants, and financial advisors.
When starting an LLC, it is crucial to ensure that your business adheres to all legal requirements. Services such as LegalZoom can assist you in setting up the necessary legal structures for your business, including filing the Articles of Organization, drafting an Operating Agreement, and managing compliance requirements.
In addition to online services, consulting with a qualified attorney or lawyer with experience in business law can help you navigate more complex legal matters. Some of the areas where legal counsel may be beneficial include:
- Intellectual property protection
- Contract drafting and review
- Employment law compliance
- Dispute resolution
Managing your LLC’s finances is a critical aspect of running a successful business. Working with a professional accountant can help you in various ways, including:
- Financial planning and forecasting
- Bookkeeping and record-keeping
- Payroll management
- Tax preparation and filing
- Ensuring compliance with financial reporting requirements
Beyond managing day-to-day finances, it is essential to strategically plan for your LLC’s financial growth. A financial advisor can assist you in making informed decisions regarding investments, financing, and overall financial management. Some areas where financial advisors can provide valuable support include:
- Identifying funding opportunities
- Helping with cash flow management
- Evaluating risk management strategies
- Providing guidance on mergers and acquisitions
In conclusion, seeking support and resources from legal services, accountants, and financial advisors can significantly contribute to your LLC’s success. These professionals will help ensure that your business operates in compliance with applicable laws and regulations, maintains accurate financial records, and stays on track to achieve its financial goals.
Recommendation: Start an LLC formation with Incfile
FAQs: How To Start An LLC
What Is An LLC?
An LLC, or Limited Liability Company, is a business structure that combines the limited liability protection of a corporation with the flexible management and tax benefits of a partnership.
Why Should I Consider Starting An LLC?
Starting an LLC can protect your personal assets, offer flexibility in management and taxation, and provide credibility and professionalism to your business.
How Do I Choose A Name For My LLC?
Choose a unique name that complies with your state’s naming requirements, including the use of “LLC” or its equivalent. Conduct a name availability search before finalizing your choice.
What Are The Steps Involved In Starting An LLC?
Generally, the steps involve choosing a name, filing articles of organization with the state, creating an operating agreement, obtaining necessary permits and licenses, and fulfilling any additional state requirements.
Can I Start An LLC On My Own, Or Do I Need Legal Assistance?
You can start an LLC on your own by following the state-specific guidelines. While legal assistance is not required, consulting an attorney can ensure compliance with laws and regulations.
What Are The Requirements For Forming An LLC?
Requirements vary by state but typically include choosing a unique name, filing formation documents, designating a registered agent, and paying the necessary fees.
How Much Does It Cost To Start An LLC?
The cost varies by state but generally includes filing fees, annual report fees, and other mandatory charges. Costs can range from $50 to a few hundred dollars or more.
Do I Need To Have A Physical Office Address For My LLC?
Most states require an LLC to have a registered agent with a physical address for receiving legal and official documents. It doesn’t necessarily have to be your business’s primary location.
Are There Any Specific Tax Requirements For An LLC?
LLCs have flexibility in how they are taxed. They can be taxed as a sole proprietorship, partnership, S corporation, or C corporation, depending on the elections made with the IRS.
What Are The Advantages Of Operating As An LLC?
Advantages include limited liability protection, pass-through taxation, flexibility in management and ownership, and ease of formation and maintenance.
Are There Any Disadvantages Or Limitations Of Forming An LLC?
Disadvantages may include additional paperwork and compliance requirements compared to a sole proprietorship or partnership, as well as potential self-employment taxes.
Can I Convert My Existing Business Into An LLC?
Yes, it is generally possible to convert a sole proprietorship, partnership, or corporation into an LLC. The process and requirements vary by state.
Do I Need To Have A Business Plan For My LLC?
While not required by law, having a business plan can help you outline your goals, strategies, and financial projections. It is a valuable tool for guiding your LLC’s growth.
Are There Any Ongoing Compliance Requirements For An LLC?
LLCs are typically required to file annual reports, pay taxes, and maintain proper records. Compliance requirements may vary by state.
How Long Does It Take To Form An LLC?
The time it takes to form an LLC varies by state. It can range from a few days to a few weeks, depending on the processing time of the state’s filing office.
Can I Start An LLC As A Non-U.S. Resident Or Foreigner?
In most states, non-U.S. residents or foreigners can start an LLC. However, additional requirements, such as having a U.S.-based registered agent, may apply.
What Are The Differences Between An LLC And Other Business Structures?
Unlike sole proprietorships and partnerships, an LLC provides limited liability protection, meaning owners’ personal assets are generally protected from business debts and liabilities. Compared to corporations, LLCs offer more flexible management, simplified taxation, and fewer formalities.
Can I Have Partners Or Co-Owners In An LLC?
Yes, an LLC can have multiple owners, known as members. Members can be individuals, other LLCs, corporations, or even foreign entities, depending on state laws.
Can I Operate Multiple Businesses Under A Single LLC?
In many cases, yes. It is possible to operate multiple businesses under a single LLC by filing for additional DBAs (Doing Business As) or trade names. However, it is important to consult state regulations and consider legal and liability implications.
What Resources Or Services Can Help Me With The LLC Formation Process?
There are various online platforms, legal service providers, and business formation companies that can assist you with the LLC formation process. These services typically offer guidance, document preparation, and filing assistance to simplify the process.
Disclaimer: The information provided in this blog post titled “How To Start An LLC: A Simple Guide For Business Formation” is intended for general informational purposes only and should not be considered legal, financial, or professional advice.
The process of starting an LLC may vary depending on the jurisdiction and specific circumstances of your business. Therefore, it is strongly recommended that you consult with a qualified professional, such as an attorney or accountant, to obtain advice tailored to your individual situation.
The author and publisher of this blog post make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability of the information contained herein.
Any reliance you place on the information provided in this blog post is strictly at your own risk. The author and publisher will not be liable for any losses, damages, or injuries arising from the use of or reliance on the information provided.
Always conduct thorough research and seek professional advice before making any business decisions or taking any legal or financial actions.