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How To Start An LLC
Starting a new business anywhere is tough. It requires experience and know-how to launch, manage, and sustain it over time. With the world advancing, more startups are emerging—some succeed, others don’t.
The success of your startup depends on key factors: choosing the right business structure, location, financial planning, managing your team, allocating resources, and your determination. What you need is a clear guide to navigate the legal and paperwork aspects of starting your business.
You can choose from various business structures, like sole proprietorships or larger C-corporations. In between, there’s the popular Limited Liability Company (LLC), which offers flexibility and simplicity for many entrepreneurs today.
Definition
What Is An LLC?
An LLC, also known as a Limited Liability Company, is a form of business structure that protects its owners from personal responsibilities of taxes, debts, and liabilities. Operating solely in the USA, such a business structure frees the owner from taxation responsibilities.
They need to be distinguished from both a corporation and a partnership based on the fact that an LLC incorporates the features of the two and aids start-ups and small to medium-sized businesses in achieving the benefits of their larger counterparts while following a relatively simpler rulebook.
Advantages
What’s So Special About An LLC?
Incorporating a business as a Limited Liability Company (LLC) offers numerous advantages that can help entrepreneurs protect their personal assets, simplify tax filings, and provide flexibility in management structures.
The following section delves into the key benefits of establishing an LLC, including its independent legal identity, limited liability for owners, pass-through taxation, adaptable management options, and ceaseless existence. These distinct advantages make LLCs an attractive choice for business owners seeking to strike a balance between personal protection and operational flexibility.
Independent legal identity
An LLC holds its position in legal matters such that the LLC has individual rights and responsibilities as well as liabilities that do not involve its owners or members. This implies that whether a lawsuit is filed against an LLC or an LLC files it against someone, the owner is distinct and apart from the legalities, and the lawsuit is filed in the LLC’s name only.
This independence of identity is also implied while dealing with properties, contacts, investing or lending funds, and dealing with other businesses. Those working with the LLC are liable and answerable to the LLC as a whole and not to the owners or members in person.
Limited liability
This benefit of an LLC holds paramount importance for the owners and members. Limited Liability implies that the owners’ or members’ personal assets are exempted from being used by the LLC to fulfill its financial obligations. This also means that in case of an LLC suffering a loss, the member will only have lost what they invested in the first place with no damage to their individual assets.
Pass-through taxation
An LLC is a form of business that deals with pass-through taxation. This form of taxation exempts businesses from paying double taxes like bigger corporations. Instead, all profits and losses are reported on the owner’s tax return which is paid only for their share of the business.
Flexible management structure
Flexibility is one of the most important advantages that an LLC holds over other business entities. An LLC can have a variety of management structures which must be mentioned in the Article of Organization and Operating Agreement.
According to state law, an LLC must be managed by its members. However, managers can also be given control over the LLC by proper documentation, as described in subsequent sections. Such managers may or not be LLC members and can operate on-site or remotely.
Ceaseless existence
This means an LLC can continue to exist even when owners face untimely death or retirement. Therefore, the LLC can only dissolve if any specific event mentioned in the operating agreement takes place.
The members must unanimously decide on the dissolution or any legal action that calls for the dissolution of the LLC. Furthermore, a change in ownership can also occur without risking the LLC’s existence.
Disadvantages
When Is LLC Not Right For Me?
Nothing comes without its drawbacks. The minor drawbacks of forming an LLC should not be ignored, even though they do not in any way outweigh the positives.
Cost
In any state, starting an LLC is usually less cost-friendly than it is to form and maintain a sole proprietorship or general partnership. In addition, one needs a registered agent to form an LLC, which comes with its added cost. Similarly, for incorporating and registering an LLC in almost all states, taxes must be paid to the State and Federal Governments.
Moreover, as an LLC owner, one has to pay state tax on earnings drawn by the LLC based on the income tax rate of the state you base your LLC in. Most states impose various other charges on LLCs, which include annual reports and/or franchise tax fees, while others don’t.
Transferable ownership
In an LLC, the transfer of ownership is complicated in every state. The LLC Articles of Organization specify how LLC firm ownership will be transmitted. Usually, all the members of the LLC must unanimously decide on adding new members, altering the percentages of current members, or changing ownership. This is generally easier with corporations, who hold this benefit over LLCs.
LLC Formation
How To Start An LLC
Some states follow a slightly different method of successfully starting and establishing an LLC, but they all share the same basic step-to-step guide.
Choose a name for your LLC
To start an LLC, you must choose a name for your business structure that fulfills the naming requirements of the state you base your business. As per State’s naming rules, two businesses are not allowed to have the same name even if they are based in different cities. Any state’s naming requirements can be viewed inline on the Secretary of State’s website.
The most important of these include the following:
- Including the words “Limited Liability Company” or the abbreviated form “LLC” or “L.L.C” in your LLC name.
- Choosing an LLC name that is unique and distinguishable from other businesses’ names in your state. Names may be checked for availability at the Secretary of State’s business name database.
- “DBA” (short for doing business as) is an assumed name that the business uses in their business dealings. It differs from the LLC’S official legal name registered in the Articles of Organization.
- Such an assumed or trade name can be used in some states instead of the official LLC name. It must be registered with the Secretary of State by filing an Application for Registration of Trade Name.
- In case of second thoughts or doubts in finalizing the official name, if one is faced with the worries of their name being taken by someone else, they can temporarily reserve their name by submitting a proper form to the state authority.
Hire a Registered Agent
Most states require an LLC owner to hire a registered agent. This person or business is responsible for receiving and managing legal and official documents on behalf of the LLC. Furthermore, the said individual or business entity must be a resident of the state or any business entity authorized to do business in the state.
They must also have a physical street address where they should be present on-site during regular business hours to receive any official documents. Some states allow individuals above 18 to be hired as registered agents, while others allow LLCs to hire agents via registered agent services.
Prepare and file a Certificate of Organization
The next step to create an LLC is filing a Certificate of Organization with the Secretary of State. However, some states have a separate department that deals with such business filings. A Certificate of organization, also known as the Article of Organization, is a document that contains basic information about your LLC and its members and managers and helps officially establish it. It must include the following:
- LLC’s name and address.
- The name of the LLC’s registered agent with their address.
- A reason why the LLC was formed.
- Professional services offered by the LLC (if any).
- Names and addresses of members, managers, and professional employees associated with the LLC.
- The person forming the LLC is required to sign the Certificate. (in some states, the registered agent is also required to sign it).
The certificate is either filed by standard mail or uploading a signed pdf online. A fee is charged for filing, which varies in each state.
Create an Operating Agreement
An operating agreement is a document that outlines the various roles played by the LLC’s members and employees. It forms the basic operating structure of your business and helps define the business’s purpose. Some states do not require an Operating Agreement. However, it is an important document for the smooth running of your business and helps in various legal matters in the future.
Obtain a Certificate from the State
A certificate formally establishing the existence of the LLC will be sent to the LLC owner once the formation paperwork is completed, either by mail or online. The LLC can obtain licenses, a business bank account, and an EIN with the help of this certificate.
Acquire an EIN
The Internal Revenue Service (IRS) will provide the LLC with a nine-digit EIN (Employer Identification Number). The LLC can register commercial bank accounts, handle various taxes, and hire staff with the aid of an EIN. Filling out an online application on the IRS website will get you an EIN.
Conduct business in other states (optional)
This is an optional step if you wish to operate the business in several states. For this, you must register your LLC in all the different states and appoint a registered agent in each state. Similar paperwork is needed for every different state you wish to incorporate your LLC into.
File annual reports
Different states have different reporting rules. The LLC owner is required to file a report annually with a filing fee. The charges vary in different states. To learn about the specific requirements of forming an LLC in your chosen state, choose your state from the list below:
Types of LLC
Which Type Of LLC Is Ideal For Me?
An LLC, or Limited Liability Company, is a flexible business structure that can be tailored to meet the needs of various types of businesses. While there isn’t a rigid classification system for LLCs, they can be categorized based on factors like management structure, taxation, and the number of members. Here are some common ways to distinguish between different types of LLCs:
- Single-member LLC: A single-member LLC is an LLC owned by one person. The owner is referred to as a member, and they have full control over the business. Single-member LLCs are typically treated as disregarded entities for tax purposes, meaning the owner reports the LLC’s income and expenses on their personal tax return (Schedule C of Form 1040).
- Multi-member LLC: A multi-member LLC has two or more members. Members can be individuals, other LLCs, corporations, or even foreign entities. Multi-member LLCs are usually taxed as partnerships, with each member reporting their share of the LLC’s income and expenses on their personal tax return (Schedule K-1 of Form 1065).
- Member-managed LLC: In a member-managed LLC, all members actively participate in managing the day-to-day operations of the business. Each member has the authority to make decisions on behalf of the LLC unless specified otherwise in the operating agreement.
- Manager-managed LLC: In a manager-managed LLC, one or more designated managers (who can be members or non-members) are responsible for running the business, while other members act as passive investors. The operating agreement usually outlines the authority and responsibilities of the manager(s).
- Series LLC: Some states, like Delaware, Texas, and Illinois, allow the formation of a series LLC. A series LLC consists of a master LLC and multiple individual series or cells, each with its own assets, liabilities, and operations. Each series operates independently, offering liability protection between the different series within the same LLC.
- Professional LLC (PLLC): Certain states require licensed professionals, such as doctors, lawyers, or accountants, to form a professional LLC (PLLC) rather than a standard LLC. PLLCs offer the same liability protection and flexibility as regular LLCs but are subject to additional regulations and requirements specific to the profession.
Keep in mind that the characteristics and requirements of these types of LLCs can vary depending on the state where the LLC is formed. It is essential to research your specific state’s rules and regulations when choosing the right type of LLC for your business.
LLC Taxes
What Are Applicable Taxes For LLCs?
LLCs have no taxation class of their own. Instead, they have tax flexibility, enabling the owner to choose how the LLC is taxed. An LLC can be taxed as a sole proprietorship, a partnership, or a corporation.
- A single-member LLC is classified and taxed as a sole proprietorship by the IRS. Income and costs of such an LLC are reported on the member’s personal income tax return on Schedule C. Net profits and losses are then entered by the members on their tax return form in the income section.
- Multi-member LLCs are taxed like partnerships. This means that the income of the LLC passes through to the members and is reported on their tax return forms. Their net profits and losses are reported in Schedule E of their tax return forms.
- Self-employment taxes are implied on the members of LLCs, which are classified under sole-proprietorship and partnership categories. This means that all members are supposed to pay their medical and social security taxes without relying on the employer to pay half of it. This must be filed under Schedule SE on the tax returns to calculate and report self-employment taxes.
- LLCs can also be taxed as a corporation by filing correct documentation with the IRS. Further, they can decide whether to be taxed as a C-corp or an S-corp. An LLC taxed as a C-corp has to file corporate income taxes annually. The shareholders are required to disclose on their tax return forms any wages and dividends that they get. Those taxed as an S-corp follow a similar pattern as that of a partnership.
Business LLCs
LLCs for Various Businesses
Every business is unique, and the needs of your Limited Liability Company (LLC) will vary depending on the industry you’re in. At StartGlobal, we understand this and have curated a set of resources tailored to different types of businesses. Whether you’re starting an LLC for a landscaping service, an accounting firm, a restaurant, or a tech startup, we’ve got you covered.
Landscaping LLC
Starting a landscaping business? Our comprehensive guide will walk you through the process of setting up an LLC for your landscaping company, from choosing a business name and registering it with your state to understanding the specific tax implications and insurance requirements.
Accounting LLC
If you’re an accountant looking to start your own firm, setting up an LLC can provide you with significant advantages. We provide a detailed step-by-step guide on how to start an accounting LLC, including information on necessary licenses and permits, potential tax benefits, and more.
Restaurant LLC
Opening a restaurant is an exciting venture, but it comes with its own set of challenges. Our resources can guide you through the process of forming an LLC for your restaurant, providing advice on everything from selecting a location to understanding the unique tax considerations for food service businesses.
And many more!
We are continually expanding our resources to cover more industries and business types. We’re committed to helping you understand the unique considerations for your industry when starting an LLC.
Costs
How Much Does It Cost To Start An LLC?
One-Time
- Filing fees: range from $50 to $800, depending upon each state. In addition, if you opt for a legal filing service, that also costs up to $50 plus the state fee. Legal filing services help prevent improper documentation and hence are encouraged over self-filing.
- Operating Agreement: Legal service providers are professionals hired to create and maintain your LLC’s operating agreement while sparing you to deal with the details of cost divisions among members and other monetary distributions that correctly need to be specified in the document. Such services charge fees ranging from $50 to $200. On the contrary, you can create your LLC’s operating agreement for free.
- Publication: Some states, such as Nebraska and New York, require all LLCs to publish a notice of the formation of a new business entity. This notification is run for a specific number of days in one or more local newspapers. The publication cost varies in different states as well as for different newspapers.
- Business Permits And Licences: Like any other business structure, an LLC might need federal, state, and local permits and/or licenses. These licenses may require varying fees depending on your location and the type of business and services you offer.
Annually
- Registered Agent Fee: Hiring a registered agent to deal with your legalities comes with its own added cost. Many packages are available to hire a registered agent for an LLC, with their wages depending upon their expertise. In addition, many states allow you to be your own registered agent, but hiring another individual or business entity is advised.
- Annual Report Fee: Most states require LLCs to file an annual report with the Secretary of State, which comes with its own filing fee depending upon the State you are in.
Comparisons
Is LLC The Best Entity For Me?
Maybe, LLC isn’t the right entity for you. Maybe it is a C-Corp. Only way to find out is to directly compare them all.
LLC vs Corporation (C-Corp)
Sole proprietorships and Limited Liability Companies (LLCs) are two of the most common business entities for individuals and small businesses. Learn what differentiates the two today.
LLC vs S-Corp
Not sure what business structure to choose? Learn about the key differences between LLC and S-Corp today.
LLC vs Sole Proprietorship
The primary difference is that an LLC provides limited liability protection for its owners, while a sole proprietorship does not.
FAQ
Frequently Asked Questions About Forming An LLC
Here are the most commonly asked questions about forming an LLC business:
An LLC combines features of sole proprietorships, partnerships, and corporations. Like a sole proprietorship or partnership, an LLC offers pass-through taxation, which means that the profits and losses are passed directly to the owners (members), who report them on their personal tax returns. However, an LLC provides limited liability protection like a corporation, shielding the members’ personal assets from the company’s debts and liabilities. Unlike a corporation, an LLC doesn’t require a board of directors or formal meeting minutes, which makes its management structure more flexible and less bureaucratic.
Yes, an LLC can hire employees. As an employer, the LLC must withhold federal and state income taxes, Social Security, and Medicare taxes from employees’ wages. The LLC must also pay the employer’s share of Social Security and Medicare taxes and may be required to pay federal and state unemployment taxes. To hire employees, the LLC needs an Employer Identification Number (EIN) from the IRS and must comply with all applicable labor laws and regulations.
Yes, an LLC can have members from outside the United States. Non-U.S. residents or foreign entities can be members of an LLC, but there may be additional tax and reporting requirements, such as filing a Form 5472 with the IRS to report information about the foreign-owned LLC. It’s essential to consult with a tax professional to ensure compliance with all applicable U.S. tax laws and regulations for foreign-owned LLCs.
Yes, an LLC can own property and assets, such as real estate, vehicles, equipment, and intellectual property. These assets are owned by the LLC and not by the individual members. Owning assets through an LLC can provide liability protection, as the assets are separate from the members’ personal assets.
Yes, you can convert an existing business to an LLC. The process depends on your current business structure and state requirements. For a sole proprietorship, you’ll typically form a new LLC and transfer the assets and liabilities of the sole proprietorship to the LLC. For a corporation, the process is more complex and may involve a statutory conversion or a merger, depending on state laws. Consult with a legal professional to determine the best approach for converting your existing business to an LLC.
Helpful Business Resources
S Corporations
There are 3 broad types of LLC: Single Member LLC, Multi Member LLC and LLC elected to be treated as a corporation.
Read in detail: How To Start An LLCSmall Business Taxes
This protection from debts and liabilities of the LLC is what keeps the members’ personal assets safe, in case the LLC gets sued..
Read in detail: How To Start An LLCOperating Agreement
There are 3 broad types of LLC: Single Member LLC, Multi Member LLC and LLC elected to be treated as a corporation.
Read in detail: How To Start An LLCAgent for Services
This protection from debts and liabilities of the LLC is what keeps the members’ personal assets safe, in case the LLC gets sued..
Read in detail: How To Start An LLC