How To Start An LLC In 5 Steps (2023 Simplified Guide)
Starting an LLC (Limited Liability Company) is a popular choice for entrepreneurs who want to run a business with limited personal liability.
In an LLC, the business itself is a separate legal entity, and the owners (known as “members”) are generally not personally liable for the company’s debts or legal issues.
This structure can provide both legal protection and tax benefits, making it an attractive option for many small business owners. In this guide, we will walk you through on how to start an LLC in 5 simplified steps.
What Is An LLC?
Before you think of starting an LLC, we hope you understand what an LLC is. LLCs are a popular option for business owners in the United States looking for a legal structure to operate their enterprise. Forming an LLC provides personal asset protection in case of bankruptcy or legal issues.
It also allows for flexible taxation options, with businesses being able to choose to be taxed as a sole proprietorship or corporation depending on their specific needs. It is important to seek guidance from a tax advisor to determine the best taxation option for your LLC.
Advantages And Disadvantages Of Starting An LLC
Before moving fully to tell you how to start an LLC, it is worth noting its advantages and disadvantages. An LLC, or Limited Liability Company, is a business structure that offers several advantages and disadvantages, including:
Limited personal liability: The owners of an LLC, known as members, are generally not personally responsible for the company’s debts or legal liabilities. This means that if the business faces a lawsuit or incurs debt, the member’s personal assets are protected.
Tax flexibility: LLCs can choose to be taxed as either a partnership or corporation, providing some flexibility in how they handle their taxes. LLCs are also not subject to double taxation, meaning that profits are only taxed once at the individual level.
Flexible management structure: LLCs can be managed by members or by a separate manager. This allows for flexibility in how the company is managed, as well as the ability to bring in outside expertise.
Fewer formalities: Compared to other business structures, LLCs typically have fewer formalities, such as required annual meetings and extensive record-keeping requirements.
Higher taxes: While LLCs offer some tax advantages, they may also be subject to higher taxes than other business structures, such as sole proprietorships.
Limited lifespan: An LLC is dissolved upon the death or withdrawal of a member unless otherwise specified in the operating agreement.
Limited fundraising options: LLCs cannot issue stock, which limits their ability to raise capital through investments.
Complex setup: Setting up an LLC can be more complex than other business structures, requiring the drafting of an operating agreement and compliance with state-specific regulations.
It is important to consult with a legal or financial professional to determine if an LLC is the best structure for your specific business needs and goals.
How To Start An LLC
These 5 steps will guide you on how to start an LLC and other non-compulsory tasks to keep your LLC up and active.
1. Choose A Name For Your LLC
The first step in starting an LLC is to choose a name for your business. Your name should be unique and not already in use by another business in your state.
You can check the availability of your desired name by searching your state’s business name database. It is also a good idea to do a trademark search to make sure your name is not already trademarked by another business.
Once you have chosen a name, you may want to consider registering it as a domain name to secure your online presence. You can use a domain registrar like Namecheap to check the availability of your desired domain name.
2. Choose A Registered Agent
A registered agent is a person or company designated to receive legal documents and official correspondence on behalf of your LLC.
This is a requirement in most states. Your registered agent must have a physical address in the state where your LLC is registered and must be available during normal business hours to receive mail and other documents.
You can choose to act as your own registered agent, but many business owners prefer to hire a professional registered agent service to handle this task.
3. File Articles Of Organization
To officially form your LLC, you will need to file Articles of Organization with your state’s Secretary of State. This document includes basic information about your business, such as your business name, registered agent, and the names and addresses of your members.
The exact requirements for filing Articles of Organization vary by state, so it is important to check with your state’s Secretary of State website for specific instructions and forms.
4. Create An Operating Agreement
An operating agreement is a legal document that outlines the rules and regulations of your LLC. It typically includes information about how the LLC will be managed, how profits and losses will be allocated among members, and how the LLC can be dissolved if necessary.
While operating agreements are not always required by law, they are highly recommended for LLCs with multiple members. This document can help prevent disputes among members and ensure that everyone is on the same page when it comes to the operation of the business.
If you are running a single-member LLC, you might not need to create an operating agreement.
5. Apply For An EIN
An EIN (Employer Identification Number) is a unique nine-digit number that is used to identify your LLC for tax purposes. This number is required if you plan to hire employees or if your LLC is taxed as a corporation.
You can apply for an EIN through the IRS website. The process is free and can be completed online in just a few minutes.
To obtain an EIN, the IRS typically requires either a Social Security Number (SSN) or an Individual Taxpayer Identification Number (ITIN) from the person filing for the EIN.
Without either of these identification numbers, the process of obtaining an EIN can become more complex, and you may need to complete additional paperwork or visit an IRS office in person.
It is worth noting that in certain circumstances, such as if you are applying for an EIN for a non-profit organization or a partnership, you may need to provide additional documentation or identification beyond an SSN or ITIN.
To avoid these hassles and other uncertainties, it is always a good idea to use an LLC service that can help you obtain an EIN easily.
Additional Essential Responsibilities Involved In LLC Formation
Besides knowing how to start an LLC, there are important things to take care of that can help make your new business successful or may be additional rules to follow for running your company.
Obtain Necessary Licenses And Permits
Depending on the nature of your business, you may need to obtain various licenses and permits to operate legally. These requirements vary by state and industry, so it is important to research the specific requirements for your business.
Common types of licenses and permits include:
- Business license
- Professional license (e.g. for doctors, lawyers, or other professionals)
- Sales tax permit
- Health department permit
- Building permit
Open A Business Bank Account
Once you have obtained your EIN, you can open a business bank account for your LLC. This will help you keep your personal and business finances separate, which is important for liability protection and tax purposes.
When choosing a bank, look for one that offers low fees, convenient online banking, and other features that are important to your business. You will likely need to provide your Articles of Organization, EIN, and other documentation when opening your account.
Obtain Business Insurance
While not required by law, obtaining business insurance is highly recommended for LLCs. This can help protect your business in case of unexpected events, such as accidents, natural disasters, or lawsuits.
Common types of business insurance include:
- General liability insurance
- Property insurance
- Professional liability insurance
- Workers’ compensation insurance
- Keep accurate records
As a business owner, it is important to keep accurate records of your LLC’s financial transactions, including income, expenses, and taxes. This will help you stay organized and compliant with tax laws, and can also provide valuable insights into your business’s performance.
Consider using accounting software like FreshBooks to manage your LLC’s finances. You may also want to hire an accountant or bookkeeper to help you stay on top of your finances.
Stay Compliant With State Laws
Once your LLC is up and running, it is important to stay compliant with state laws and regulations. This includes filing annual reports and paying any necessary fees and taxes. You should also keep your operating agreement and other legal documents up to date and in compliance with state laws.
Starting an LLC can be a great way to protect your personal assets and run a successful business. By following the steps outlined in this guide, you can set up your LLC and build your business confidently.
Remember to do your research, stay organized, and stay compliant with state laws and regulations to ensure the long-term success of your business.
Frequently Asked Questions On LLC Formation
Do I Need An LLC For My Business?
The best option for your small business will depend entirely on its specific needs. If you operate as a freelancer or solopreneur, a straightforward sole proprietorship may suffice.
However, forming an LLC can provide several benefits, including individual protection from any legal or financial issues your company may encounter.
In addition, LLCs have more flexibility in terms of tax options. Prior to establishing any type of business entity, it is essential to conduct thorough research and seek guidance from legal and tax professionals.
What Are The Benefits Of Having An LLC?
Here are some benefits of starting an LLC:
Limited Liability: Limited liability protection is provided to members of a limited liability company (LLC), which is the term used to refer to its owners.
This means that they are safeguarded against any personal liability for the actions of the LLC or its members.
Consequently, creditors are prevented from seizing the personal assets such as homes and savings accounts of the owners to settle business debts.
In contrast, the personal assets of sole proprietors and general partners can be targeted to settle any debts owed by the business.
Flexible Membership: The membership of a limited liability company (LLC) is flexible, as it can comprise individuals, partnerships, trusts, or corporations, and there is no upper limit to the number of members.
In contrast, S corporations are subject to more stringent regulations governing their shareholder base.
They are limited in the type of shareholders they can have, and there is a maximum limit on the number of shareholders allowed under Subchapter S of the Internal Revenue Code.
Management Structure: In a limited liability company (LLC), the management structure can either be member-managed or manager-managed.
If the LLC is member-managed, the owners have the responsibility of overseeing the daily business operations.
On the other hand, in a manager-managed LLC, the responsibility for business management lies with appointed managers, resembling the structure of a corporation where the board of directors and officers are in charge of the company’s management.
In a corporation, the board of directors manages the business rather than the shareholders.
Pass-Through Taxation: Usually, limited liability companies (LLCs) do not pay taxes at the business entity level.
Instead, any income or loss incurred by the business is “passed through” to the owners and reported on their personal income tax returns. Any tax that is owed is paid by the individual owners.
Enhanced Credibility: Forming an LLC can enhance the credibility of a new business, more so than operating as a sole proprietorship or partnership.
Few Compliance Requirements: LLCs are subject to fewer state-mandated compliance requirements and ongoing formalities compared to sole proprietorships, general partnerships, and corporations (regardless of whether they are taxed as S corporations or C corporations), due to their limited compliance obligations.
Should I Start An LLC Before Making Money?
Starting an LLC (Limited Liability Company) before making money depends on your business goals, plans, and circumstances.
An LLC is a type of legal structure that provides limited liability protection to its owners, meaning that the owner’s personal assets are protected from business liabilities. It also offers flexibility in terms of management and taxation.
If you are planning to start a business that involves significant financial risk, liability, or exposure to potential lawsuits, then forming an LLC before making money may be a good idea. This is because it can protect your personal assets if something goes wrong with the business.
However, if your business involves low financial risk or you are not expecting to generate a significant income initially, it may be unnecessary to form an LLC before making money.
It is important to note that forming an LLC involves some legal and administrative steps, which can be time-consuming and costly. You may also need to pay fees to form and maintain an LLC. Therefore, you should carefully evaluate your business needs and consult with a lawyer or accountant before making a decision.
Is it risky To Have An LLC?
Like any business structure, forming an LLC (Limited Liability Company) comes with both advantages and disadvantages, and there are some risks to consider. Here are some potential risks of having an LLC:
Personal Liability: Although an LLC provides limited liability protection to its owners, it is not an absolute shield. If the owner personally guarantees a business loan or acts in a way that exposes them to personal liability, they may be held personally responsible for any damages or debts.
Tax Implications: Depending on the structure of your LLC and how it is taxed, you may face additional tax obligations and compliance requirements. It is important to consult with a tax professional to ensure that you understand your tax obligations and avoid any penalties.
Maintenance Requirements: LLCs require ongoing maintenance, including filing annual reports, keeping records, and holding regular meetings. Failure to comply with these requirements can result in penalties or even the loss of your limited liability protection.
Potential Legal Disputes: Like any business, an LLC may face legal disputes, including disputes with customers, vendors, or employees. While an LLC can offer some protection from personal liability, legal disputes can still be time-consuming and costly.
Is It Possible To Set Up An LLC For Free?
Although the cost of registering an LLC may vary by state, it is not possible to set up an LLC for free. While some companies offer “free LLC formation“, they are simply providing assistance with the paperwork at no charge. However, there will still be a filing fee required by the state, which the business owner is responsible for paying.
What Happens If My LLC Does Not Make Money?
If your LLC does not make any money, there are a few possible outcomes depending on your specific circumstances:
1. You may not owe any taxes: If your LLC has no income or expenses for the tax year, then you may not owe any taxes to the government.
2. You may still need to file taxes: Even if your LLC doesn’t make any money, you may still need to file a tax return to report your zero income.
3. Your LLC may still be liable for fees and taxes: Some states require LLCs to pay an annual fee regardless of whether or not they made any money. Additionally, if you have any outstanding debts or obligations, such as business loans or unpaid taxes, you may still be liable for those even if your LLC doesn’t have any income.
4. You may need to reconsider your business strategy: If your LLC consistently fails to make any money, you may need to evaluate your business strategy and consider making changes to improve your chances of generating income.
It is important to consult with a tax professional or an attorney to ensure that you are complying with all legal and tax obligations for your LLC, regardless of whether or not it makes any money.
Should You Use Your Real Name As An LLC?
Using your real name as the name of your LLC is a valid option and can have some benefits. This type of LLC is commonly referred to as a “single-member LLC” or “SMLLC”.
One benefit of using your real name as your LLC name is that it can help establish your personal brand and identity. If you already have a strong reputation in your industry or field, using your name as your LLC name can help build on that reputation and make it easier for people to find and recognize your business.
However, there are also potential drawbacks to using your real name as your LLC name. For example, it may not be very memorable or distinctive, which could make it harder to stand out from competitors. Additionally, using your name may not be ideal if you plan on bringing on partners or eventually selling the business, as it may not be as transferrable or appealing to others.
Ultimately, the decision to use your real name as your LLC name will depend on your personal preferences and business goals. It’s a good idea to consult with a legal or business advisor to help you make an informed decision based on your specific circumstances.
Should I Name Myself CEO Of My LLC?
If you are the owner and operator of the LLC, you may choose to name yourself the CEO. However, keep in mind that LLCs do not require a CEO position, and it may not be necessary for the structure and operation of your business.
It is also important to consider the implications of taking on the title of CEO, as it may come with certain legal and financial responsibilities. For example, if you are named as the CEO, you may be personally liable for any legal issues or debts incurred by the LLC. Furthermore, you may need to fulfil certain fiduciary duties to the company and its members.
Ultimately, the decision to name yourself as the CEO of your LLC depends on your specific business goals and circumstances. It may be helpful to consult with a licensed attorney or accountant who can provide personalized advice based on your situation.
Why Do LLCs fail?
LCs (Limited Liability Companies) can fail for a variety of reasons, including:
Lack of capital: One of the main reasons why LLCs fail is due to a lack of capital or insufficient funds to operate the business. Without enough capital, the LLC may struggle to pay its bills or expand its operations.
Poor management: Poor management is another common reason for LLC failure. If the owners or managers of an LLC do not have the necessary skills or experience to run the business effectively, it can lead to problems such as ineffective decision-making, inadequate financial management, or a failure to adapt to changes in the market.
Legal issues: Legal issues such as lawsuits or regulatory violations can also cause an LLC to fail. Failure to comply with local, state, or federal laws and regulations can result in fines or legal action, which can be costly and damaging to the business.
Market competition: In some cases, an LLC may struggle to compete with larger or more established businesses in the same market. This can make it difficult for the LLC to attract customers or generate enough revenue to stay afloat.
How Long Does It Take To Get An LLC Approved?
The amount of time it takes to get an LLC approved can vary depending on the state where the LLC is being formed. In some states, the approval process can take just a few days, while in others, it may take several weeks.
In general, the process of forming an LLC involves submitting formation documents to the state’s Secretary of State office or a similar agency. These documents typically include the articles of organization and any required fees.
After the documents are submitted, the state agency will review them to ensure that they comply with state laws and regulations. If there are any issues with the documents, the state may request additional information or corrections before approving the LLC.
Once the LLC is approved, the state will issue a certificate of organization or similar document, which confirms that the LLC is officially recognized as a legal entity.
Do I Have To Pay LLC Fees Every Year?
Yes, in most states, LLCs are required to pay annual fees to maintain their good standing with the state. These fees are typically referred to as “annual reports” or “annual filings.” Although LLCs in Missouri are not obligated to file annual reports.
The specific amount of the annual fee can vary depending on the state where the LLC is registered. In some states, the fee may be a flat rate, while in others, it may be based on the LLC’s revenue or number of members.
In addition to annual fees, some states may also require LLCs to file periodic reports or other documents to update the state on the LLC’s business activities and ownership structure.
It’s important to keep up with these requirements to ensure that your LLC remains in good standing with the state and avoids any potential penalties or legal issues. You should consult with a local attorney or accountant for guidance on the specific requirements for your LLC in your state.