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A step-by-step guide to starting an LLC.
Select a state to operate in.
Decide whether to operate in your home state.
It is simplest to incorporate in one's home state and, in most cases, you should form a domestic LLC in your home state. This way, you will only pay one filing fee and a yearly maintenance fee.
Choose whether to locate your LLC in a foreign state.
Some business owners look to states with more "business-friendly" laws to incorporate in, while still operating their business in their home state. For example, you may base and operate your business in Michigan, but register your LLC in Nevada.
The downside of this approach is that you will then need to register a foreign LLC in your home state, meaning that you will be paying filing fees and maintenance fees in two separate states.
You will also need to register a foreign LLC if you operate your business in more than one state.
Each state differs in terms of fees and taxes and offers its own advantages and drawbacks.
Colorado, Hawaii, and Iowa have the lowest formation fees, while Connecticut has the highest.
California's annual franchise tax is based on income and Delaware's on the number of shares and par value.
Nevada has no franchise tax at all.
Name your LLC.
Brainstorm a name for your LLC.
The name must end with "Limited Liability Company," "Limited Company," "LLC," "L.L.C.," or "Ltd. Liability Co.," and the name must not violate any trademarks. Some words such as "Bank," "Insurance," "Corporation," or "City" are also prohibited by some states.
Read our guide on how to name an LLC or try using NameSnack to generate interesting name ideas for free.
Do a trademark search.
Different states have different naming rules for LLCs but usually, the name cannot be the same as another LLC's. Approach your state's LLC office or registry to find out whether your proposed name is available for your use. You can, in most cases, reserve your LLC name for a short period of time.
Have a look at our guide on how to do a trademark search.
There is no need to register the name because it is automatically registered when you file your articles of organization.
Choose a registered agent.
Choose whether to act as your own registered agent.
The registered agent must be a resident of the state in which the LLC is to be formed, so you can act as your own registered agent if filing for a domestic LLC.
Decide whether to use a registered agent service.
A registered agent is a person or business officially chosen by the company to receive and send papers such as state filings and legal action documents on its behalf. There are companies that offer registered agent services.
File the articles of organization.
Check your state's requirements.
Articles of organization are legal documents you need to fill in and file, along with a fee, with the Secretary of State. Different states have different requirements, fees, and processes for filing articles of organization. Visit your state's Secretary of State website for more specific information.
LLC formation filing fees can cost between $50.00 and $500.00, depending on the state.
Annual fees for an LLC can cost between $15.00 and $800.00 depending on the state; however, this includes the franchise tax that is mandatory in some states.
Forming an LLC can take anything from a couple of working days to 3 weeks, depending on the state in which the LLC is being formed. For an extra fee, most states offer an expedited formation process.
Include the basic information on your LLC.
Basic information required on articles of organization include:
- The name of the LLC.
- The address of the LLC.
- The members of the LLC (some states require addresses, too).
- The registered agent.
- The starting date of the LLC.
- Whether it will be member-managed or manager-managed.
- Business activities.
Create an operating agreement.
Check if an operating agreement is required in your state.
An operating agreement shows who owns and manages the LLC, how profits are shared, and how future problems will be resolved. However, it is not required by most states.
The states that require an operating agreement include: California, Delaware, Maine, Missouri, and New York.
If your state does require an operating agreement, you will not need to register it with your state's Secretary of State. However, you will need to keep it with your business records.
Draft your operating agreement, if necessary.
An operating agreement is useful as it guides business decisions and clearly states the rules, regulations, and provisions by which the business will be governed.
Your operating agreement should include decisions made by the LLC members regarding the distribution of profits and losses, member ownership percentages, member voting rights and responsibilities, details on holding meetings, members and managers' powers and responsibilities, and rules for transferring interests.
The operating agreement should be signed by all the members of the LLC at the same time and the document should then be notarized.
You can find examples of LLC operating agreements here: LawDepot, LegalZoom, Rocket Lawyer, and FindLegalForms.
Pros and Cons of Starting an LLC:
- Personal asset protection.
- Pass-through taxation.
- Simple.
- Flexible.
- Increased credibility.
- Access to business loans.
- Owners pay tax on distributive shares.
- Investors don't like K-1 forms processes.
- Need to keep careful personal records.
- If even one member leaves, the entire LLC closes.
- Business banking fees and monthly expenses.
Types of LLCs:
Type of LLC | Description |
|---|---|
Domestic LLC | For companies operating in the state where the LLC is formed. |
Foreign LLC | For companies with operations in more than one state. A foreign LLC will have to be formed for each entity outside the original LLC's state. |
Member-managed LLC | Management responsibilities are divided between individual members. |
Manager-managed LLC | The members opt for a nonmember to take on all of the management responsibilities. |
Single-member LLC | An LLC with one owner. |
Multiple-member LLC | An LLC with more than one owner. |
Series LLC | A type of LLC that protects the "parent" company and all of its "subsidiary" companies against liabilities. The individual companies in the Series LLC are protected from each other's liabilities as well. This type of LLC only exists in some states. |
Restricted LLC | A restricted LLC prohibits certain business distributions among members for the first ten years after formation. It exists in Nevada only. |
L3C | A mix of LLC, nonprofit organization, and social enterprise, an L3C is for for-profit companies with clear philanthropic and social goals. |
Anonymous LLC | A type of LLC that does not make the details of the members available to the public. |
LLCs and Tax:
An LLC is a "pass-through entity," which means the business itself is not taxed. Instead, members of the LLC report profits and losses on their individual tax returns and pay income tax on their share of the profits. The LLC does not pay federal income tax but is compelled to pay annual taxes in some states.
Single-member LLCs are treated by the IRS as sole proprietorships. The LLC does not pay income tax and does not need to file a return. The member, however, reports all profits and losses on Schedule C and submits it with a 1040 tax return. The member must pay income tax on all profits, even if the money stays in the business.
Multi-member LLCs are treated by the IRS as partnerships. Individual members of the LLC each pay taxes on their share of the profits, their distributive share, regardless of whether the profits were paid out to them or not. They must report profits and losses on their personal income tax returns with Schedule E attached. While the LLC does not pay its own income tax, it must file Form 1065 and provide each member with a Schedule K-1.
LLC members are considered by the IRS to be self-employed. This means that they aren't subject to tax withholding but are responsible for estimating the amount of tax they'll owe for the year and making quarterly payments to the IRS in April, June, September, and January.
LLC State Level Taxes:
Type | Description |
|---|---|
Franchise Tax | A flat rate paid annually, or a percentage of annual earnings. |
Unemployment & Income Withholding Tax | Only if the LLC has employees. If elected for, it is a federal income tax withheld from unemployment benefits at a flat rate of 10%. |
Sales Tax | If the company sells taxable goods and services, it must be registered for a seller's permit and collect sales tax on behalf of the state. |
