How to Start an LLC: Creating Guide for Entrepreneurs
Starting a business may seem like a daunting task, and while not without its complications, the actual formation process has never been made easier. With so many free guides and affordable providers that offer full formation services, opening an LLC becomes fairly easy entirely online.
That said, the process still requires a careful approach and quite a bit of research on your part. We strive to make this information more accessible. In our guide about how to make an LLC in 2022 we explore the main steps involved in:
- Business formation;
- How limited liability works;
- How to maintain LLCs.
Although this guide shouldn’t be used as your only source, it might serve as a good starting point on your journey to form LLCs and keep them compliant.
How to Get an LLC: Step by Step
Step 1. Choose a State for Starting an LLC
Business formation, including LLCs and corporations, is supported by all 50 states and inhabited US territories like Puerto Rico and Guam. Although the process may differ depending on the state, the starting point for business registration is often very similar at least in terms of filing procedures.
If you are looking for information on how to create an LLC in a specific state, be sure to check out one of our dedicated articles below.
[ul_list ids="9419"]
States Recommended for Registering an LLC
Naturally, some states have more favorable conditions for getting an LLC, from the initial formation to the ongoing maintenance. Some of the best jurisdictions for LLC formation are Alaska, Delaware, Nevada, South Dakota, and Wyoming.
As the birthplace of the LLC business model, Delaware is perhaps the most notoriously lenient state in terms of LLC filing fees and related taxation. Nevada and Wyoming are also popular options among many business owners, specifically those who wish to maintain anonymity (in Wyoming, it can be done by appointing a proxy) and avoid income taxes.
While business owners that already live in these states have an advantage by way of residency—they can form LLCs in their home states—other entrepreneurs have an important choice to make regarding the location of their LLCs.
It’s a fairly common practice to create a business in a state other than that of your residency if that state has low or no tax rates, but whatever you may save up through tax returns is likely to be undermined by high business license fees, registered agent costs, and other expenses.
For this reason, most experts recommend local LLC formations, i.e. registering your entity in your home state unless the LLC in question is a part of a planned expansion.
Creating an LLC in another state, regardless of how beneficial that state’s tax laws might be, is bound to cause you problems. The main issues business owners are likely to encounter in this scenario are:
- Fulfilling double amount of tax duties (in your home state and in the state of setting up LLC);
- Covering the expenses of two or more registered agents;
- Paying annual filing fees in two jurisdictions;
- Increasing the expenses on interstate communications and logistics.
Legally, your tax liability as a business owner is determined by your location. State laws have different regulations on this matter, but the definition of “doing business” is not always clear.
In some states, the government leaves it up to you to decide whether you are in fact doing business in your home state while running an LLC in another, but if you decide wrong, you will be held liable.
In states like California, the legal definition is clearer, firmly stating that your LLC is still doing business in California by way of your residency even if the entity was formed elsewhere.
Example:
For instance, you are doing business informally. You work in California as a sole proprietor—say, you’re selling homemade apparel or accessories online but you didn’t create a formal structure. The store is doing good, and eventually, you think about formalizing it and open an LLC.
So you do some research into tax laws and decide that Alaska is a good fit for your business since they don’t have state sales tax or even state income tax. You form an LLC in Alaska and think your profits won’t be subject to California laws. However, as you are still a resident of California. Technically, you manufacture your products in your home state and distribute them from your home state. As a result, you will be asked to register this entity as a foreign LLC. This means you will need to pay for your LLC in Alaska and for your foreign LLC in California, including annual fees, licenses, and registered agents.
It's a lesser-known fact that nearly 50% of new businesses shutter within the initial half-year of operation, primarily due to intense market competition. To circumvent this prevalent issue in your venture, it's advisable to focus on the concept of Minimum Viable Products (MVPs).
MVPs are developed rapidly and with minimal resource expenditure, serving as a strategic method to evaluate hypotheses and gather crucial insights early in the product development cycle.
Step 2. Name your LLC
Finding an apt name for your business admittedly requires some careful consideration. But this also leads to so many new business owners struggling with this step. Sure it’s good to be thorough, but it won’t do you any good to fixate on this one thing and delay the formation of your LLC.
The best course of action is to pick a name that fits your type of business and industry (provided it’s free and legally compliant) and then move on to the next step. After all, you can be pretty flexible with how you market your LLC’s goods and services.
Every product line and service can be sold under a trade name—a fictitious business name (known as “Doing Business As” or DBA names) registered under your company, so you won’t even have to flash the legal name of your LLC if you don’t wish to.
Example:
You initially launch a business that only focuses on wedding catering, choosing an appropriate name like White Dove Catering, LLC. Eventually, you start expanding to cover other types of events.
Maybe you start doing corporate catering and then decide to take up event planning. In addition to providing food and beverages for weddings, you also do parties, social events, concession catering, and help plan whole events from scratch. Naturally, the original name of your LLC might be a bit confusing for potential clients.
In this case, you may want to register several DBAs for your LLC or a single all-encompassing fictitious name. For instance, you could register a name like Choice Events & Catering. Your LLC will retain its legal name but you can advertise your services under this DBA.
Naming Requirements When Opening an LLC
Most states issue a set of location-specific requirements for what they view as acceptable LLC names. This is an essential part of your LLC formation, and failure to adhere to these rules may lead to the rejection of your LLC application.
Again, each state has its own quirks, but there are a few general rules that tend to apply to all jurisdictions. As such, an LLC name must:
- Be unique/distinct from the names of other active businesses;
- Clearly denote the entity type (LLC, L.L.C, Ltd, Limited Liability Company, etc);
- Avoid words that would imply any relation to a government agency;
- Avoid using protected words (university, bank, trust, hospital, etc).
Get a Matching Domain Name
Although in no way mandatory, this LLC formation step is nevertheless crucial for any business that wishes to survive in today’s highly competitive environment. As soon as your name is cleared as available, you can look into registering it as your domain name. Because how to make an LLC in modern world without the website?
Domain prices vary based on the registrar (GoDaddy, Bluehost, Domain.com) and the type of the domain name. Some gTLDs and ccTLDs are very affordable, ranging from as low as $2, while premium domains can cost up to and over $100.
It won’t hurt to stick with the classics like .com or .org, either of which will cost only about $10-12 upon registration. Keep in mind that some registrars increase the annual fees for renewals. Most registrars will also provide an email address to match your domain name, for instance:
LLC name: White Dove Catering LLC
DBA: Choice Events & Catering
Domain: www.choiceevents.com
Email: [email protected]
The main issue with securing a matching name is their availability with certain TLDs. For all you know, your name can already be taken by someone but not used. It’s common practice to purchase names in bulk and then resell them at triple the original price.
Step 3. Appoint a Registered Agent to Set up LLC
A registered agent is an individual or entity acting as your LLC’s representative. But why does an LLC need to be represented?
To open an LLC and operate legally in any state, a business entity must have a permanent point of contact who can be reached whenever necessary by state agencies and other authority bodies.
When a state needs to send you correspondence or paperwork, they reach out to your LLC’s registered agent who then transfers the documents to you.
Requirements for registered agents may slightly differ depending on the state, but in most locations, an individual candidate must be over 18, be a resident, and have a physical address in the state. This means that you can technically appoint yourself as your registered agent.
How Do I Get an LLC by Myself?
It’s true that acting as your own registered agent reduces maintenance costs, but this method is not something any expert recommends. If you do choose to be your own registered agent, you will have to be present at your registered office at all times during business hours. This means no sick leave, no vacation, and no errands during the day.
If you miss out on a vital delivery or phone call, you will be held liable for the fallout of not responding to service of process or a summons.
What you can do to avoid this is to appoint a relative or friend, provided they can afford to commit to this as their full-time job.
Or you can hire a registered agent service. Most of the time, these services are offered by business formation services as part of LLC packages, sometimes with a free trial. The cost of maintaining a professional registered agent varies between $99 and $230 in annual fees.
Step 4. File your Articles of Organization
This stage of LLC formation is the key moment in the entire registration process. By filing your Articles of Organization with the regulatory agency — in most cases, the secretary of state’s office — you submit the application forms for your LLC. When the state approves them, your LLC is considered officially formed.
Note that the Articles of Organization are not always referred to as such. In some jurisdictions, they are known as the Certificate of Formation or Organization.
It’s important to draft your articles of organization according to your state’s rules of LLC formation. Typically, the LLC’s Articles of Organization include:
- LLC name;
- Business address;
- Registered agent information;
- Names and addresses of key members/organizers;
- Type of management;
- Date of LLC formation;
- Whether the business is perpetual or not;
- Statement of purpose for the limited liability company.
Most states provide forms to complete these articles. They can be submitted by traditional mail or online. The fees are different for every state. Note that the cost might also differ even within the same state depending on the filing method.
If you don’t know much about the correct drafting and filing of these forms, you might want to look into business formation services. A professional agency can oversee this simple filing or handle the entire process as part of their full formation packages. Either option will help ensure there are no errors that could lead to your business application being rejected.
Online business formation services are also faster and less expensive than attorney agencies or professional accountants that have traditionally performed this job. Below is a quick comparison of several popular business providers.
Package prices featured in the table may differ from the ones advertised by the agencies as their lowest offers. We do not adhere to their internal package classifications. To create a better comparative picture, we select factual service prices as they relate to our business formation service classification.
| Business formation service | Basic formation | Full formation | Registered agent |
|---|---|---|---|
| ZenBusiness | $39 | $39 | $99 |
| Northwest Registered Agent | $225 | $225 | $125 |
| LegalZoom | $178 | $477 | $299 |
| Incfile | $149 | $149 | $119 |
| Rocket Lawyer | $140 | $290 | $149.95 |
Basic formation: These packages usually cover formation essentials such as filing registration forms (this includes your articles), LLC name checks, and Operating Agreement templates.
Full formation: Although some of these providers will tell you only their most expensive packages provide full formation, in most cases, you will be able to get it with a mid-tier plan. However, this package should absolutely include the registered agent service.
Registered agent: With most of these providers, you can get this service as a free trial add-on with their packages. The prices cited above refer to the subsequent annual fees or the cost of the service if it’s purchased separately.
Step 5. Create an Operating Agreement for Establishing an LLC
The operating agreement might not be the hard requirement in some states, but it’s nevertheless highly recommended you create one regardless.
As one of the vital elements in establishing the foundation of your business, the operating agreement acts as an internal regulatory document.
The main purpose of the operating agreement is to formalize the structure of your LLC, outline the responsibilities of all members, shares, financial distribution plans, and more.
An average operating agreement tends to cover:
- Capital contributions;
- Percentage interests;
- Membership duties;
- Distribution of profits;
- Management structure;
- Procedure for admitting new members;
- Transfer of interest;
- Dissolution.
In addition to being a sort of a rulebook for the LLC, the operating agreement serves as further proof of your business’ designation. By definition, the LLC keeps business and personal assets completely separate.
If an LLC is sued, its business assets become liable, but thanks to the limited liability the entity grants its owners, any personal assets of the company members cannot be legally seized. Your operating agreement cements your limited liability status.
Step 6. Get an EIN Creating an LLC
An Employer Identification Number, or EIN, is a unique nine-digit code assigned to business entities by the IRS. The purpose of this number is similar to SSN, except here, it’s used for tracking the financial activities of businesses rather than monitoring your individual responsibilities.
Technically, it’s possible to finalize the obtaining an LLC without it. However, an LLC must unequivocally obtain it if:
- The limited liability company pays state taxes based on its revenue;
- It has permanent employees;
- It needs its own bank account (separate from those of the LLCs owners).
The IRS issues this number free of charge. You can apply online, by mail, or by fax. You will also likely see business formation services charging extra for this feature. We strongly recommend against choosing a full formation package solely for its inclusion of the EIN service—you can do this filing for free in your own time.
Owners of single-member LLCs may use their SSNs instead of filing for an EIN. That said, even sole business owners are likely to benefit from acquiring an EIN—primarily to reinforce the limited liability of your business and avoid instances of identity theft.
The six steps described above are usually all it takes to form LLCs, though it’s more of a general rule. In some states, you might need to complete a few extra requirements.
For instance, in Arizona, Georgia, Pennsylvania, Nebraska, and New York, business owners are required to run an ad in local periodicals before they can start operating. The first two states impose this rule only on corporations.
Tasks after Getting an LLC
Unfortunately, registering your business is only half the deed done. As an owner, you have a responsibility to make sure the business is compliant and to continue its maintenance. In the next section, we will discuss the key steps that go into maintaining a business.
Task 1: Open a Business Bank account
As with quite a few of the stages, separate bank accounts are not required to form LLCs but are nevertheless highly recommended.
To reiterate the previous point we made in favor of operating agreements, separating your personal finances from the transactions made under your business name is crucial if you want to maintain your limited liability privileges.
If you use your personal bank account for all your business dealings, you will lose the protection of the corporate veil, and all of your assets can fall prey to creditors in the event of litigation.
The corporate veil initially only applied to the corporate shareholders. When the limited liability company business model was introduced, its main point of attraction was the adoption of the corporate limited liability concept. This means that personal finances and other securities that belong to the LLC members are protected from any lawsuit brought against the business entity itself.
So you see why it can be dangerous to mix your personal finances with your business activities. Creditors will have little trouble piercing the corporate veil if you haven’t taken the necessary precautions. That said, owners have other motivations for opening a separate business bank account. More on that below.
Accept credit card transactions
If you created an e-commerce business, you will likely need a merchant bank account to process online payments. The same goes for physical POS transactions.
Easy Bookkeeping
It’s easy to get lost in your finances when it’s time to file your tax returns with the IRS. If you use only your personal bank account for all your transactions, including your business finances, calculating your returns can get unnecessarily complicated. But if you start with a separate business bank account from the get-go, you won’t need to track every transaction by hand and risk late filing.
Prove you’re running an LLC
Sole owners or people who generally run a small business may be tempted to keep it simple. It’s not uncommon for them to use their personal bank accounts when doing business. However, depending on the revenue your enterprise generates, it can be easily classified by the IRS as a hobby unless there is substantial proof that you do, in fact, run an actual business.
Having a commercial bank account is enough to reinforce your status as a small business owner. This way, when it’s time for the IRS to audit your finances, they won’t be able to restrict business tax write-offs. More on that on the IRS website.
Establish business credit
When a business has its own bank account, it can help you establish a credit history and maintain a solid rating from the very beginning. This is especially relevant for small businesses that might need reliable sources for raising funds for future investments.
Be professional Making an LLC
It’s no secret that clients are less inclined to trust a business if it’s presented more like a hobby. Even if you do run a small business, if you work from home and don’t have employees, it’s all the more reason to present a more professional image and show that you are committed to maintaining a reliable practice.
Task 2: Hire a Rockstar Accountant
If you have a small business, paying high service fees for accounting help might seem excessive. But regardless of the size of your company, keeping your books organized is essential, even if you’re a sole owner. An experienced CPA will not only increase your efficiency but also help you with maintaining a compliant business.
A professional accountant can:
- Establish a payroll;
- Standardize payments;
- Create a business plan;
- Keep track of state licenses;
- Register for state taxes;
- Manage contractors’ fees;
- Send compliance notifications.
Many small business owners believe that doing their own accounts means they will only need to keep records of transactions. But the duties of a CPA extend far beyond that. They can effortlessly navigate the legal system of your state when it comes to financial responsibilities, manage taxes, oversee business compliance, and generally consult you whenever you need something clarified.
To complete any of the following tasks, we recommend you seek the assistance of a certified accountant.
Task 3: Apply for LLC Licenses and Permits
When you manage any type of entity, a huge part of your regular business maintenance concerns LLC licenses and permits. These regulations are imposed on federal, state, and municipal levels. The fees for acquiring and renewing licenses are determined by your LLC’s location (where you are legally operating), as well as its industry.
Most small businesses are unlikely to require any federal licensing. Some of the industries that do need federal licensing include:
- Broadcasting;
- Transportation;
- Manufacture of drugs, food, beverages;
- Selling tobacco, alcohol, firearms;
- Investment advisors;
- Mining, drilling, nuclear energy;
- Fishing, hunting, farming, agriculture.
Then there’s the matter of state and city licensing. Each jurisdiction has the right to impose its own regulations—as many as they please—which often leads to considerable expenses on the part of small business owners. You can find a list of required licenses for your business on your state website or by contacting your local rep. We advise hiring a CPA to handle all license-related matters.
Task 4: Get Business Insurance
Business insurance is a federal requirement applied to businesses with permanent employees to pay unemployment and disability insurance.
In most cases, even small businesses and limited liability companies without a payroll may need various types of insurance meant to protect against lawsuit expenses, property damage, and other financial losses.
As it stands, even if you don’t have workers, you need a guarantee that your business will be able to recuperate in the event of third-party lawsuits with claims such as:
- Property damage;
- Intellectual property infringement;
- Defamation, libel;
- Bodily, personal, or advertising injury.
Task 5: Register an LLC for State Taxes
Everyone who wishes to remain compliant after they form LLCs must register for federal and state taxes. The types of local taxes vary based on your state. Some states don’t impose sales or franchise taxes, but it doesn’t mean that municipalities within that state do the same.
Sales tax
Any business that sells products (whether you’re working a storefront or online) has a duty of collecting and remitting sales taxes on every purchase if they reach the established economic nexus. The sales tax nexus is determined by the specifics and size of your business, as well as your revenue threshold.
Franchise tax
Despite its name, the franchise tax doesn’t have anything to do with business expansion. Indeed, this tax is imposed on every commercial entity for the privilege to do business. The threshold for this tax varies by state.
Employment taxes
This is a collective name for the social security, unemployment, and medicare withholding taxes. The IRS FICA tax rate is set at 12.4% (social security) and 2.9% (Medicare). The UI rate is calculated based on the payroll and applied to businesses on both state and federal levels.