You might not know, but forming an LLC is a lot easier than you think. In this article, we’re going to show you how easy it is to start one.
Regardless of what type of business you plan on starting, LLC or otherwise, in the United States, there are two different types of company structures: sole proprietorship and corporation. You’ll want to make sure that the company structure fits with your goals and the home state laws before deciding on which business structure best suits your needs.
So what is a Limited Liability Company? An LLC is the best of both worlds; it provides the benefits of a sole proprietorship and the protection of a corporation.
Let’s cover how to set up an LLC now: the process won’t take more than 15 minutes.
How to Start an LLC in 7 Steps
Here are the seven steps you need to take to start an LLC in America.
Step 1: Choose a Name for Your LLC
When choosing business names for your LLCs, you’ll need to consider the following:
- The name must be “acceptable,” which means that you can’t get sued for infringement when someone else uses the same name. The name must not be similar to another existing entity or unregistered trademark in the U.S (if applicable).
- The name of the LLC is required to register with the state in which you plan on doing business. The name must be unique and separate from other LLCs in your state. The chosen name must not be invalid, which means that you cannot use; a trademark (if applicable), a company name that is already registered, or any other type of company name that is considered a conflict with the law.
Step 2: Reserve a Name (optional)
You’ll need to reserve a name for your LLC before filing your Articles of Organization (Form LLC-100) with the state. This will let you use your chosen name for the LLC’s purposes.
Reservation Name – this is the name that will be printed on the official documents. The reservation name will also be displayed in the state’s business entity database—Reserve a Name for 365 days. You can reserve your name for 365 days with absolutely no obligation to form an LLC. If you have already booked a name but decide not to create an LLC, you can cancel it within five business days of reserving it. File a Reservation Form (Form SS-4).
Step 3: Choose a Registered Agent
Once you decide on a name, you’ll need to file Articles of Organization (Form LLC-100) with your state’s Secretary of State. You will also have to decide who will be liable for your LLC’s server. This is the person who is registered with the state as the “registered agent.”
The registered agent is responsible for receiving legal and tax documents on behalf of your LLC. The registered agent also performs other tasks, such as handling services for lawsuits or legal notices.
Many people choose to be registered agents themselves. If you decide to be the registered agent, you’ll need a separate mailing address for your business.
If you do not choose to be the registered agent, you will need to choose someone else in the state who has agreed to accept these responsibilities. Most states allow an individual LLC member or manager or LLC Manager (if different from members) to act as its registered agent.
Step 4: Prepare an LLC Operating Agreement
The operating agreement is a document that outlines how your LLC will be operated. If you have created an LLC, you need to prepare an operating agreement.
Once your Articles of Organization (Form LLC-100) are filed with the state, you can begin the process of preparing your operating agreement and other documents.
Operating agreements are as varied as the owners who create them. There are many different options out there for you to choose from.
Tips to prepare an LLC operating agreement
Here are some tips to help you when creating an LLC operating agreement:
- Choose an operating agreement that works best for you. If you choose a plan that sounds intimidating or complicated, chances are it’s not going to be very effective. Some people prefer the check box model, where the entire document is written in checkboxes. Others prefer a lot of paragraphs and bullet points. The choice is yours.
- Make sure your operating agreement outlines your responsibilities and rights to form an LLC. This way, you’ll be able to make the right decisions when you’re contributing to your LLC later on.
Step 5: File Organizational Paperwork With the State
Now the fun part: filing your paperwork with the state.
A short time after you reserve a business name for your limited liability company (LLC), you will receive an email from your state’s business entity database. It will tell you your reservation number and other important information. You can then begin to file documents related to your LLC by submitting these forms: Organizational Package (Form SS-4). Articles of Organization (Form LLC-100). Appointment of Registered Agent (Form SS-4). Appointment of Registered Agent Address Change (Form SS-4).
After you have filed your paperwork, you may be required to publish a notice in a local publication. You can usually handle this by yourself—it just requires sending a copy of your articles and fees to the publication.
Your LLC automatically becomes active on the date it was formed. If you want, you can have your LLC go into action before then by filing Articles of Organization (Form LLC-100) with the state before that date.
Step 6: Obtain a Certificate from the State
Once your Articles of Organization (Form LLC-100) are filed with the state, your LLC will be registered.
Within 90 days of becoming eligible to do so, you can apply for a certificate from the state. The certificate you receive will be the first official document issued by the state that shows your business’s information and purpose. It is a legal document that proves that your LLC has been created, and it’s important for any potential shareholders to have
Step 7: Register to Do Business in the Other States (optional)
In most cases, your LLC doesn’t need to file for registration in other states. However, if you plan on doing business outside of the state it was registered in, you will want to register with the other state(s). You can register by completing a form called “Application for Authority to Transact Business” (or something similar) and submitting it to the authority responsible.
You should register with any state that has laws that apply to your business activity. By registering, you’ll be officially registered with that state—and you’ll have the ability to do business in it.
What is the average cost to set up an LLC?
LLCs are cost-effective for many small business owners due to the flexibility and minimal requirements for LLC formation. This is particularly true if you don’t have much money set aside or if your chosen location isn’t yet tax-friendly for a corporation.
The cost of forming an LLC can vary depending on the state and what kind of business you plan to form.
Expenses may include:
- Entry Filing Fee-$100-$500
- State Filing Fee-$700-$2500
- Registered Agent Fee-$200-$500
When all is said and done, the cost to set up an LLC can vary greatly, but the initial fees for doing so are usually no more than $100. This is a small expense that you should not put off.
What are the advantages and disadvantages of an LLC?
LLC has advantages and disadvantages form of business. The advantages of an LLC are the flexibility, low start-up costs, and additional tax benefits that you may receive as a business owner.
The disadvantages are its complexity and the possibility that your LLC will not be recognized in some states.
You should choose an entity type that suits your needs, not based on what is safe or easy to achieve.
Pros and cons
LLC has the following pros and cons:
- Easy organization and management structure
- Minimal legal requirements for operation
- A Limited Liability Company provides its owners with limited liability protection, meaning that the business owners are not personally liable for any debts or financial obligations incurred by the company.
- Owners of an LLC can choose to be taxed as a corporation, partnership, or sole proprietor.
- LLCs are easy to change and adapt to the changing needs of business owners.
- Tax Savings: The profits earned by an LLC are not subject to corporate tax rates; instead, owners are taxed personally through their individual income tax returns. These taxes vary from state to state but generally range from 10-40%. This can save money on taxes compared to having all earnings taxed at the corporate rate.
- LLCs can file their taxes on a Schedule C, the same as any sole proprietor or partnership.
- Complexity: Managing an LLC is more complex than other forms of business and requires more knowledge of legal procedures.
- The tax benefits of LLC ownership may not apply to you. Owners of an LLC are still subject to the same state and local taxes as sole proprietors, partnerships, and corporations.
- Some states do not recognize or allow an LLC to register; therefore, you must register your business as a sole proprietor, partnership, limited liability corporation, or corporation to avoid legal consequences.
- The formation and registration fees for an LLC can be costly.
- An LLC does not have the same protections from creditors as corporations.
- LLCs may not be recognized in some states. For example, in some states, a limited liability company must have an assumed or fictional name. There are also some states that do not recognize limited liability companies.
- Filing fees for LLCs are usually higher than other forms of business.
- LLCs may be less well respected in the legal world. Some people believe that an LLC is not as useful as a partnership or corporation and should instead register under the state’s corporate laws.
What to do after starting an LLC
Once you have formed your LLC, you’ll have many opportunities that are open to you. With the help of your operating agreement and other documents, you can take advantage of these opportunities.
- Conduct any needed company business for the next however many years it takes (depending on your LLC’s needs). If there is a need for more funds than your LLC has in escrow, then you will need to go through the process of filing a financing statement.
- You can also apply for a tax identification number with the IRS at this time. This number will be your Federal Tax ID Number.
- Remember that your LLC is a separate business entity, just like your corporation or partnership. To learn more about how LLCs work, head over to Nolo.com for helpful info. If you need personal legal assistance, you can get it via email at Nolo’s Ask an Attorney service.
- Determine who (or what) will represent you in dealings with your employees and customers.
- If you want to do business or hold an event, then you can apply for a special event permit.
- Incorporate your LLC with a state agency that falls under the umbrella of the secretary of state
- Don’t forget that your LLC is not your sole legal entity! If you own other businesses, you will need to incorporate them into your LLC.
- If you haven’t yet filed with the state to form an LLC, then start by reading these other articles:
Acquire the necessary permits.
Of course, you will need to apply for a business license and pay your taxes.
You will also need to register with the local government by filling out a form called an “Application for Occupancy” or similar. This form allows you to determine when your business will be open for business based on applicable laws (such as certain hours of operation).
Following permits are the most common:
- Applying for a business license
In some states, a basic business license is required if you are going to operate a store or individual location. This can be different from the same type of license if you are planning on operating from multiple locations.
It’s important to note that not all states have the same types of requirements for obtaining business licenses. So, be sure to research your state’s requirements before deciding which business license is right for your needs and intentions.
- It is registering your LLC with the state’s business entity database.
Almost all states require businesses to register with their business entity database before they can do business. Registration ensures that you are in compliance with the laws that apply to your LLC, and it shows your commitment to your state’s business rules.
It’s worth noting that some states allow you to begin operating without registering (they may delay registration until they see how you’re doing). However, when registering, it is important to tell the state which other states you plan on operating in. If you do that, they will make sure that your LLC is in compliance with all of your state’s and the other states’ rules.
- Application for Registration.
When applying for registration, you will often be asked to complete a form called the “Application for Registration.” This form must include basic information such as:
- Additional information
The state may also require additional information about your business. There are certain requirements that apply to every type of business entity. These vary by type of business. For example, an LLC may need to provide information about its members and how they will be taxed.
- Some states are more strict than others when it comes to registering.
For example, if you plan on selling goods or services in another state, you must register that other state’s business entity with the state where you intend to do business. That means your two businesses must be registered together (if both LLCs are registered with the same state).
Once your form is completed, submit it to the correct agency.
Settle on business insurance policies.
If you plan on doing business in multiple states, then you will want to buy insurance for each. This will ensure that if you have an accident or your customers become sick, your business is protected.
You can also consider purchasing extra policies for liability protection. This could mean coverage in case a customer sues your company for damages. It may not be necessary. However, when it comes to providing credible liability protection to your customers and clients, it’s best to err on the side of safety.
Buy your business license and pay the state fees.
In some cases, you will be eligible to receive a business license by paying some fees and completing a form. However, if you find that the state’s requirements are too lax, then you may want to consider paying for professional help with the application process.
If you are eligible to pay fees and complete an application without actually having to complete your state’s licensing agency, then this is entirely up to you.
Double-check the hiring laws.
If you hire employees, then there are certain rules that apply to your business. For example, some states require that you withhold a certain amount of money from all of your employee’s wages or pay unemployment taxes.
In other words, it’s a good idea to have a basic understanding of the laws that apply to the employment area.
Once you are ready for these additional responsibilities, then you will want to learn about hiring employees in your state by speaking with an expert in how to manage and hire top-notch staff.
Research the laws that apply to your type of business.
When it comes to operating a particular type of business, there are certain rules that you must follow. Examples include rules about advertising, what you can sell, who is allowed to be a member, and other regulations that fall under a specific category.
But when it comes to finding out the laws that apply to your type of business, there are two things you should do:
- Find a qualified attorney who specializes in applying for licenses and permits. Equipped with the knowledge about how to provide credible legal guidance, an experienced attorney can help you through this step.
- Obtain state licenses. If you plan on operating a business in multiple states, then it is important to find out if your state’s regulations have been properly registered with some other state’s business licensing agency. Doing so will prevent any complications that may arise from miscommunication regarding your business’s registration status in the future.
Make sure that all of your applications are completed along with the necessary fees.
Open business bank accounts
Once you receive approval from your state, then you will want to open a business bank account. The best way to stay organized and protect your financial assets is to use this new account for all business-related transactions.
You can also search online for additional business tips, reviews, and information about how to start a small business, register a corporation, or open an LLC. Don’t forget about the legalities of running a business.
Business owners must pay taxes on their income each year. For example, there are income and payroll taxes that you must pay if you exceed a certain amount of income.
These taxes are frequently withheld from a company’s employees’ paychecks. If you choose to hire employees, then you should be aware of these legalities.
How LLCs Are Taxed
Some states offer corporate tax benefits, allowing you to eliminate a small amount of taxes on profits. However, the majority of LLCs do not qualify for this benefit.
In these states, LLC owners may be taxed on their profits. For example, some businesses tout the benefits of tax savings and corporate legal privilege. By operating an LLC as a business entity, you can reduce your taxes, but some state governments demand that this type of business is done within a certain way.
Texas to pay:
- Franchise Tax- $800
- EIN (Employer Identification Number)- free; can be done online
- State Tax Fee-$300 annual fees
- City Tax Fee-$200 annual fee
Filing State Taxes: LLC taxes are filed the same way as a sole proprietor or corporation. You will receive a Schedule C that you use to report your business earnings and expenses. You then transfer the net profit or loss to your personal income tax return.
You want to file your federal and state tax returns as separate entities. In other words, you should file your LLC tax return and personal income taxes separately.
So, taking into consideration all the above-mentioned, one should bear in mind that the most important thing when making a decision upon creating the LLC is always to choose the one, which will be beneficial. To put it briefly, the form of business must be chosen depending on your goals and needs.