How to Start an LLC: A Step-By-Step Guide
Do you run a small business? Learn how to start an LLC, or limited liability company, which protects owners from being personally responsible for business debts and liabilities. This overview explains the basic steps for starting an LLC in most states.
Why Should You Learn How to Start an LLC?
An LLC offers the protection of a corporation without the stringent formalities. The benefits include:
Personal Asset Protection
Asset protection is a frequent reason people learn how to start an LLC. You can think of the LLC as a firewall between your personal property and that of your business. For example, if the LLC owes a debt or damages to another party, that party can’t come after your personal bank account for payment. They must pursue the LLC.
Here’s how it works. A client visits your office but slips and falls on an icy patch in your doorway. They win damages of $10,000 to pay their medical bills.
If your business is a sole proprietorship, they can attach any of your property, even if it isn’t used for the business. That could include putting a lien on your house or garnishing your bank accounts. But if you create an LLC, the client can only pursue your business assets for the $10,000 awarded in damages.
Taxation
Taxes are a common catalyst for business owners looking into how to start an LLC. You have two options for taxing LLCs: Pass-through taxation or corporate. With pass-through taxation, you file your individual tax return and account for the LLC’s profit and losses on a Schedule C form. This option is often easier if you converted your business from a sole proprietorship to an LLC and don’t want to change your tax status.
However, you may find it is less expensive to choose corporate taxation. Rather than passing through taxation on your personal income tax return, the LLC files a separate corporate tax return. As your company grows, it may benefit from corporate tax rates and lower your personal tax burden.
Credibility
Sole proprietorships are legitimate businesses, but many small businesses find the “LLC” at the end of their names lends greater credibility. The public is more likely to treat an LLC like an established business they can trust. Also, registering an LLC gives you an exclusive right to your business name, which can help you stand out.
How to Form an LLC
Learning how to start an LLC may seem intimidating, but the process is easy once you know the basics. Here are the steps to starting an LLC:
Step 1: Find Your State Requirements
Knowing your state’s requirements will help you gather information and register your business more quickly. State requirements vary slightly, and you’ll want to make sure your business has what it needs to form your LLC.
First, choose the state where you plan to register your LLC. You may have some options! Most business owners will choose the state where their physical business is maintained. However, it may be possible to form your LLC in a nearby state that offers better tax advantages or lower filing fees.
The primary rule is that you must be “conducting business” in the state where you register your LLC, meaning your business:
- Maintains a physical presence in the state
- Holds in-person meetings with customers in the state
- Produces significant revenue in the state
- Hires employees in the state
Once you choose a state in which to register your business, you can usually find LLC requirements on the secretary of state’s website.
Step 2: Prepare Your Information
Most states provide an online option for registering businesses, including LLCs. Before you create an account or download paper forms, you’ll want to have this information ready:
- Proposed business name
- Business purpose, e.g., law practice, car repairs, consulting, etc.
- Business street address
- Name and address of your registered agent
- Management duties, e.g., whether you hire non-member managers or delegate management to owner-managers
- How long you’ll run the LLC, assuming it isn’t perpetual
- Operation provisions (unless you file a separate online agreement)
Step 3: Do a Business Name Search
Checking business names is often overlooked when people are first learning how to start an LLC. You may think your business name is unique, but you won’t know for sure until you perform a name search. If the name of your business is too similar to another business’s name, you risk lawsuits or customers confusing you with the other entity.
Fortunately, the name search is often on the same system as LLC registration; California’s bizfile online system provides a good example. You just need to type in your business name, and it will show matching or similar names.
However, this process requires some nuance. If you don’t find a match using your full business name, that doesn’t mean you’re off the hook. You will likely see similar business names if you search by name elements.
For example, you want to start a gaming gear business called “Sacramento Kings of Gaming, LLC.” If you search “Kings” on the California corporate name search, you find entities associated with the basketball team.
In this case, you may want to make a slight change. “Sacramento Gaming Monarchs, LLC” conveys the same idea and likely distinguishes you from the Sacramento Kings, so no one confuses you with the NBA.
Step 4: Designate a Registered Agent
A registered agent is a person or company designated to receive legal notices on your behalf. They must do business or live in the state where you register your LLC. Generally, registered agents need to be over the age of 18 and available to accept legal documents on your behalf.
You can be your LLC’s registered agent, but you can also choose your attorney, friend, or relative. However, when you designate yourself or choose these individuals, it’s not guaranteed they’ll be available to accept documents. Work and travel schedules can get in the way of registered agent duties, and you risk missing time sensitive legal notices.
So, it’s often a good idea to hire a registered agent. Every state has registered agent service companies that are always available to accept documents. You can find registered agents through your local chamber of commerce or their national website.
Step 5: Decide on Your Management Structure
Unless you form a single-member LLC, you must define your management structure before creating your LLC. You have two options when it comes to managing your LLC:
- Member-managed
- Manager-managed
Member-managed LLCs are managed by members, meaning members share in profit and loss but also have business operation duties. For example, one of your members may be a financial guru, so you designate them to manage bank accounts, investments, and capital. Meanwhile, your legal guru can handle contracts and vendor agreements. You can define these duties in your operating agreement (more below).
Manager-managed LLCs have outside managers who are not members of the LLC. They are essentially employees who handle the day-to-day operations of the business. Meanwhile, you and other members will likely focus on making the business work. For example, attorney members of a law firm LLC focus on practicing law while the managers handle hiring, vendors, employee benefits and other transactions that keep the business running.
Step 6: File Articles of Organization
The articles of organization is an official document that creates an LLC. Some states may call them articles of incorporation or a certificate of formation.
You’ll find the correct forms and instructions for forming a new LLC on the secretary of state website for your state. The quickest way to create and file articles of organization is through the website’s online business registration process. You may also be able to download and mail in the paper forms.
Articles of organization require the following:
- Your business name that includes “LLC” or “limited liability company”
- Names of members and managers (it can be just you)
- Short business description (keep it simple; “chiropractic practice” or “dog training” are acceptable)
Your state may have forms for specific types of LLCs, and you need to ensure you complete the right one. For example, some states allow for an LLC type called a “professional limited liability company” or PLLC. A PLLC is a designation for professional practice LLCs like medical clinics or law firms.
Check for separate forms if your state requires your business to file for a PLLC rather than an LLC. Otherwise, the state could delay your business designation.
Step 7: Draft an Operating Agreement
Some states require you to file an operating agreement with your LLC formation documents. This agreement addresses how your LLC conducts business, and its terms may include the following:
- Profit and loss distribution between members
- Documentation of any member contributions, e.g., cash, collateral, real estate, etc.
- Members and managers with banking access
- What happens if a member or manager passes away, retires, or sells their interest
- Which members have managerial responsibilities
- Voting procedures, including what to do in a deadlock
- Rules for meeting times, manager selection and record storage and maintenance
- Procedures for allowing new members to buy into the LLC
- Dissolution procedures in the event the LLC goes out of business gets bought out, or if members agree to dissolve the business
Even if your state doesn’t require it, best practices call for an operating agreement to spell out all the details of how your business is managed. And, if you have other members, you’ll want to be sure that everyone agrees on procedures to resolve disagreements ahead of time.
Step 8: Pay Filing Fees
All these steps for how to start an LLC won’t matter unless you pay your filing fee! The cost to set up an LLC can range between $40 to $500. You can usually pay these fees online with a credit card or an electronic bank withdrawal.
If you want to expedite your formation document, you may need to pay an additional fee of $50 to $1,000. The amount depends on your state and how quickly you want your LLC documents to be processed.
Maintaining Your LLC
While you only need to form your LLC once, you’ll still need to maintain it throughout its existence. Maintaining your LLC involves tax and regulatory requirements and staying current with your state’s corporation division so you can continue doing business.
Tax and Regulatory Requirements
Before you start doing business as your new company, be sure to:
- Confirm license status for PLLCs. Professional LLCs require that members have current professional licenses; for example, law firm members must be currently licensed attorneys
- Get a business license. Your LLC may require a local or state business license, so be sure to check before you open your doors
- Apply for an Employee Identification Number (EIN). Any LLC with more than one member needs an EIN; you can apply for one online
- Register with your state’s revenue department. If your LLC deals in the sale of goods, you’ll need to register online with your state’s tax, revenue or finance department.
Corporation Division Updates
Keeping your LLC up-to-date isn’t as involved as maintaining a corporation, but you will need to do a few things to ensure business records are current. Expect to:
- File an annual report (usually done online)
- Change or confirm continued service by your registered agent
- Update your LLC’s mailing and physical addresses when necessary
- File amended articles of organization, when necessary
Most LLCs become deactivated because members miss the deadline for the annual report. The easiest way to avoid this pitfall is to assign annual reports to one member or hire a registered agent who will file them for you.
Where to Start? LLC FAQs
Can I serve as my LLC's registered agent?
Yes. However, registered agents must be available to accept legal correspondence and notices at all times. That is frequently not the case with most business owners. Fortunately, you can easily find a registered agent by hiring a registered agent service and ensuring availability to accept legal documents.
Why should I choose an LLC over a corporation?
Corporations require more formalities, including a board of directors, shareholders, and complex bylaws. You must also hold more meetings, including initial and annual shareholder meetings. LLCs offer all the protection of a corporation without the extra work, making an LLC a more manageable structure for small and medium-sized businesses.
Can I name my LLC anything I want?
Yes. The only requirements for your LLC’s name are that it doesn’t closely resemble other business names and you work in “LLC” or “limited liability company” into it. Most companies place “LLC” at the end of the name, e.g., Pepsi Cola Decatur, LLC.
That said, state laws may restrict or prohibit business names that are offensive, discriminatory, or misleading. In addition, consider following these best naming practices:
- Avoid government agency names, e.g., FBI, Treasury, Department, etc.
- Never use “bank,” “insurance,” “trust,” or other highly-regulated specialty services (unless this is your business; an insurance agency can still use “insurance” in its name)
Should I hire an attorney to create an LLC?
There are low-cost online services available to help you start an LLC. However, if you find the process daunting, there is no harm in hiring an attorney to draft documents or review them before you file.
How to Form an LLC — Easily!
Now that you know how to start an LLC, you can rest assured that help is available to form your new business. Our guide on the best LLC service will help you to get started on your LLC.
Legal Disclaimer: This article contains general legal information but does not constitute professional legal advice for your particular situation and should not be interpreted as creating an attorney-client relationship. If you have legal questions, you should seek the advice of an attorney licensed in your jurisdiction.