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Your choice of business structure has long-reaching repercussions.
It’s why many businesses are structured as limited liability companies (LLCs) that offer several key advantages—liability protection, tax advantages, and management flexibility—over other business entities.
But the question is, how to start an LLC successfully?
To help you set yourself up for success and avoid missteps, we’ve created this guide that will cover why LLCs are worth the investment, the cost of starting an LLC, and a step-by-step process of actually starting an LLC.
Why Starting an LLC Is Worth It
First and foremost, LLCs limit your personal liability. LLCs are separate legal entities in the eyes of the law, which makes them responsible for their own debts and obligations. You may lose the money you invest in the company, but your personal assets like your home and bank account cannot be used—ever—to collect on the company’s debts.
Next, LLCs get the best of both worlds when it comes to taxes.
LLCs don’t have their own federal tax classification. As such, they can adopt the tax status of a sole proprietorship, partnership, S-Corp, or C-Corp.
As the IRS automatically classifies LLCs as either partnerships or sole proprietorship, depending on whether they have one or more owners, LLCs can take advantage of “pass-through taxation” in which the company doesn’t have to pay any LLC taxes or corporate taxes.
Instead, its income and expenses are passed through to the owners’ personal tax returns, with the owner paying personal income tax on any profits earned. For context, C-Corps are taxed twice on distributions to shareholders: one at the corporate level and then again at the individual level.
Less paperwork is another significant advantage.
Agencies owners don’t have to hold annual meetings and are usually not required to keep extensive records. In fact, in certain states, LLCs don’t have to file annual reports either. With less stringent paperwork and compliance requirements, LLCs are easier to form and to remain in good legal standing with the law.
There is also a lot of flexibility in terms of ownership, management, and profit distribution.
LLCs don’t have any restrictions on the number and type of owners they can have. They have more choices when it comes to running their business and decision-making, plus they don’t have to follow a formal structure.
The Investment Needed to Start an LLC
Starting (and running) an LLC costs money. However, the amount of money you pay varies from state to state where the LLC is formed. The fact whether you choose to do the work yourself or hire a lawyer also matters.
For starters, you’ll have to file a document called Articles of Organization (also known as Certificate of Formation or Certificate of Organization, depending on your operating state) with your Secretary of State. This generally costs $50-$100, but in Alaska, it’s $250. Then you’ll have to pay around $50-$100 again to obtain your business license.
In addition, all LLCs must also pay ongoing LLC fees, which can vary from $0-$4500 based on your state.
Note: If you choose to reserve your LLC name and file a DBA (“Doing Business As“), you’ll have to pay additional expenses amounting to $10-$50 and $10-$200, respectively.
After the LLC formation costs, you also have to consider the ongoing running costs.
Depending on your state, you might have to pay annual LLC taxes and annual report fees. Annual LLC taxes is a tax all LLC owners must pay regardless of how much the LLC earns, which varies from one state to another. For instance, California LLCs have to pay a minimum of $800 per year, whereas in other states the minimum tax is between $100 and $400.
On the other hand, annual report fees can come up to $20-$100 and are filed every one or two years with the Secretary of State to keep the LLC’s contact information up-to-date.
U.S. states also require LLCs to appoint a registered agent. Although one can be their own registered agent, hiring a third-party registered agent service is more feasible. The annual fees of these companies are usually between $40 and $300, depending on the service you use.
As a licensed LLC, you may also have to pay license renewal fees, which come up to $20-$100, to keep your business license up to date.
7 Steps to Start an LLC
Now that we covered why you should start and energy and the involved costs, let’s take a look at how to start an LLC in the United States.
Step 1: Choose a State to Conduct Your Business
The first step in your LLC journey is to select the state in which you’ll run your LLC.
The most obvious option to start your LLC is in the state where you currently live. You’ll need to make arrangements for a physical presence (a storefront or office) in other states if you want to register as a foreign LLC in other states.
You can also choose a state with business-friendly laws. Be sure to check the extra paperwork and related fees before finalizing anything. Once you choose a state, educate yourself in its laws and rules and regulations to avoid missteps.
Step 2: Pick a Name for Your LLC
Now that you’ve decided where to set up your business, it’s time to pick a name for your LLC.
Each state has specific naming guidelines, but in general, you’ll have to follow the following naming requirements:
- LLC name must be distinguishable from other LLCs, corporations, and partnerships
- LLC name must include the phrase “limited liability company“ or one of its abbreviations (LLC or L.L.C.)
- LLC name cannot include words that could potentially confuse your company with a government agency (Treasury, FBI, State Department, etc.)
Step 3: Appoint a Registered Agent for Your LLC
A registered agent is a person who will act as the point of contact between you and the state.
Your registered agent can either be a person or a business entity who will be responsible for sending and receiving official documents, such as legal documents, document filings, and service of process.
The appointed registered agent should have a physical address in the state where you plan to operate. You can be your own registered agent, but when you weigh the pros against the cons, hiring a third-party registered agent service is a much better option.
For instance, state law requires the registered agent to be present in their office from 9 AM to 5 PM every day. This isn’t an ideal situation for a business owner who will have tons of other, more important tasks on their to-do list.
If you’re looking for a reliable registered agent service, we highly recommend ZenBusiness. It offers highly affordable registered agent services, as well as an à la carte option. What’s more, the service is more than capable of handling all your correspondence with the Secretary of State in addition to managing and communicating all your legal and tax documents.
Step 4: File Your LLC Documents With the State
Next, you have to file the necessary documents to make your LLC legally recognized.
In most states, the LLC formation document is referred to as the Articles of Organization, but some states also call it Certificate of Formation or Certificate of Organization. You have to file this document, along with your state filing fee, to make your LLC official. You can do this either online or by mail.
You’ll need the following information to prepare the LLC formation document:
- Registered agent name and address
- Principal office address and contact information
- Business duration
- Effective date when your business begins to exist
- The executor who will form the LLC and sign the LLC formation document
- Assigned governor
- Nature of the business
- A return address for filing
Step 5: Decide Your Management Structure
LLC owners get to decide the management structure of their company.
You can have your company member-managed, where a small number of LLC members are actively involved in the day-to-day running of the company, or manager-managed, where you (and the other members) will hire one or more managers to handle managerial matters, with little to no involvement from members.
Both are excellent management structures. In the end, you have to select one that best suits your needs.
Step 6: Prepare an LLC Operating Agreement
An LLC operating agreement is a legal document that defines the ownership structure and member roles of your LLC. Although most states don’t require an operating agreement, it’s a recommended practice to avoid misunderstandings down the line.
Here’s are a few pointers you’ll need to create an operating agreement for your LLC:
- The products and services offered by the company
- Every member‘s name and address (and even the managers, if there is one)
- Members’ financial contributions or percentage interest in the company
- Every member’s rights and responsibilities
- Every member’s voting powers
- How profits and losses will be allocated
- Rules for holding meetings and taking votes
- Procedure for admitting new members
- Buyout or buy-sell provisions that outline what happens when a member wants to sell their interest, dies, or becomes disabled
- Dissolution procedure
Step 7: Get Your LLC Certificate From the State
Once your LLC formation documents are filed and approved, your LLC will be issued a certificate—or another similar document—confirming your LLC is now a legally recognized entity.
After receiving the certificate, you can take care of other matters like obtaining an EIN (Employer Identification Number), filing for business licenses, and registering with the Department of Revenue. You can also open your business bank accounts after receiving the LLC certificate.
Now that you know everything about starting an LLC in your state, it’s action time!
Start working on choosing a state of operation and a good business name. While you’re at it, find out the applicable licenses and permits you need before conducting business.
When running your LLC, make sure you separate your personal expenses from business expenses. This will bode you well during tax season—and keep the IRS happy!
Here are a few more Crazy Egg articles to help you absolutely nail being an LLC owner: