How to Start an LLC in 8 Easy Steps

A limited liability company (LLC) is an increasingly popular business structure for startups in the US, offering liability protection for ownership and greater flexibility than a corporation, particularly in terms of taxes.

The LLC itself does not pay taxes. As a “pass-through” entity, income passes through the business to the owner or owners, who report it on their personal tax returns.

LLCs are simple to form and maintain. Each state has its own requirements and forms that must be completed in order to create an LLC. You can form an LLC by yourself or you can use professional online LLC formation service.

Here are the steps you need to take to form an LLC. 

1. Select a State Where You’ll Form an LLC

The first step is to choose the state in which you’ll form your LLC. Some states have more advantageous laws for LLCs, so in certain situations it’s beneficial to choose one of those states instead of your home state.

Delaware, Nevada, and Wyoming are examples of states that have favorable LLC regulations.

However, if you’re primarily doing business in your home state but you form your LLC in another state, you’ll still have to register as a foreign LLC in your home state. This means that you’ll have to follow the regulations, pay annual fees, and pay any required taxes in both the state where you formed your LLC and your home state.

Because of this, in most situations, your home state where you do business is the best state to form your LLC. It’s best to check with your tax advisor and attorney to determine what state is best for your business.

To find out the requirements for forming an LLC in your state, choose your state from the list below. You will find all the specifics and information you need and other resources you need to form an LLC in your state.

2. Choose a Name for Your LLC

Your business name is your business identity, so choose one that encapsulates your objectives, services, and mission in just a few words. You probably want a name that’s short and easy to remember, since much of your business, and your initial business, in particular, will come from word-of-mouth referrals.

Here are some ideas for brainstorming your business name:

• Short, unique, and catchy names tend to stand out
• Names that are easy to say and spell tend to do better 
• Name should be relevant to your product or service offerings
• Ask around — family, friends, colleagues, social media — for suggestions
• Including keywords related to your business, such as “meats” for a butcher, boosts SEO
• Name should allow for expansion, for ex: “Jim’s Bakery” over “Jim’s Cookies”
• Avoid location-based names that might hinder future expansion
• Use online tools like the Step by Step Business Name Generator. Just type in a few keywords and hit “generate” and you’ll have dozens of suggestions at your fingertips.

Once you have a few potential names, check your state’s website to confirm they are available to register. You should also confirm that the name you want to register conforms to your state’s regulations on business names. 

It’s also a good idea to check for nationally trademarked names, to ward off any potential problems later if your business expands, and check the availability of related domain names using our Domain Name Search tool. Using “.com” or “.org” sharply increases credibility, so it’s best to focus on these. 

Consider these additional suggestions when choosing a name for your LLC.

Once you’ve found a name that clears these hurdles, go ahead and reserve the name on your state’s website. 

3. Choose a Registered (Statutory) Agent

In most states, your LLC needs to have a registered agent, or agent for service of process. A registered agent is a person or business authorized to accept legal, tax, and financial documents on behalf of your business, and to communicate with the state on relevant matters. 

The purpose of a registered agent is to ensure compliance with state laws and make sure official documents are handled in a timely manner. Having one person or entity to handle important documents ensures nothing is missed, helping avoid potential potholes.

In most states, you can be your own registered agent for your LLC, or it can be another member of the LLC. An individual who is not a member of your LLC or a professional agency can also serve as the registered agent for your LLC. 

In most states, the requirements to be a registered agent are:

• Must be 18 years or older
• Have a physical address in the state 
• Be personally available during normal business hours 
• If the agent is a business entity, it’s registered to operate in the state

Many LLCs choose a member who is highly involved in the business to be the registered agent, although a registered agent service saves you time and ensures compliance.

Advantages of a Registered Agent Service

A registered agent service is a professional service that will handle official correspondence and documents for your business. Registered agents ensure that all official correspondence is handled on time and keep copies of documents for you. They also keep track of deadlines and send reminders of things you need to file, such as tax forms and annual reports.

A registered agent service will help keep you in compliance with the law and save you time by keeping track of key documents and filing deadlines. This also frees you up to focus on growing your business. The agency will also offer support if problems or questions come up.

Using an agency enables you to have flexible hours. If you’re your own registered agent, you must be personally available from 8 AM to 5 PM at your registered agent address. If you use an agency, they are available during those hours so that you don’t have to be.

4. Determine Your Management Structure

An LLC offers its owner or owners considerable flexibility in terms of management. You can choose your management and operational structure. 

LLC owners are known as members. In a member-managed LLC, the members run the business. In a manager-managed LLC, non-members are hired to oversee and run the business. 

In a member-managed LLC, members are involved in day-to-day operations. Most LLCs are member-managed because the majority are small businesses that cannot afford to hire a management team. 

Many LLC owners prefer to have a member-managed structure because they want to be in control of decision-making and directly involved in operations. Unlike corporations, most LLCs do not have boards of directors to oversee the management. This means that whoever manages the company is in control of all decisions. 

In a manager-managed LLC, non-members are hired as managers. Some members still may be managers alongside the non-member managers, or none of the members can be managers. In this structure, any members who are not managers are passive investors and have no role in the operations of the company. 

This structure works when some or all of the owners want passive ownership, or if there are a large number of members – too many to all effectively manage the LLC. Another reason to choose a manager-managed structure is when members simply don’t have management skills. Having a great business idea and the capital to start a company does not necessarily mean that someone can run a company. In such cases, hiring professional managers can give the company a better chance of success.

5. File Articles of Organization with Your State

To make your LLC official, you’ll need to file articles of organization with the state. In some states, it’s called a certificate of organization or a certificate of formation. This is the legal document that officially creates your LLC as a legal entity in your state. The articles of organization include information about your LLC, such as its address, owners, and sometimes the management structure. 

To file articles of organization, go to the website of your state and fill out the form. The fee will range from $40 to $500 and you should receive confirmation in most states within two weeks or less.  

6. Create an Operating Agreement

An operating agreement is not required in most states but is highly recommended. It is not filed with the state, but instead kept in your LLC’s records and used to resolve disputes, even in court. 

An LLC operating agreement is an important legal document that details who owns the business and provides essential information pertaining to member duties. An LLC operating agreement establishes the financial relationship between members and the basics of the working relationships between those members and the managers who oversee daily operations. 

It’s advisable to hire an attorney to ensure your operating agreement is thorough and legally binding. 

The operating agreement should clearly define:

• The percentage of each member’s interests in the LLC
• How profits and losses will be allocated to each member
• Each member’s rights and responsibilities
• The management structure and management roles of members
• The voting rights of each member
• Rules for meetings and voting
• What happens when a member sells their interest, becomes disabled, or dies

If the LLC has a board of directors, the operating agreement will also include the role and responsibilities of the board members and how they are compensated. 

An LLC operating agreement provides legal and financial recourse for a number of situations. If conflicts arise between LLC owners pertaining to any of the above issues, the operating agreement will provide clarity and guidance. 

Though certain states have default rules on the books that address some of the potential challenges that might arise between LLC members, the LLC operating agreement has the potential to override such presumptions. 

7. Apply for Business Licenses

In most states, forming an LLC doesn’t require a business license, but you’ll need to follow state procedures, as you may need local, state, or federal permits depending on your type of business. Fees for these vary, but most costs are minimal.

Federal regulations, licenses, and permits associated with starting your business include doing business as (DBA), health licenses and permits from the Occupational Safety and Health Administration (OSHA), trademarks, copyrights, patents, and other intellectual properties, as well as industry-specific permits. 

You may also need state-level and local county or city-based licenses. The license requirements and how to obtain them vary, so check the websites of your state, city, and county governments to learn more. 

You could also check this SBA guide for your state’s requirements, but we recommend using MyCorporation’s Business License Compliance Package. They will research the exact forms you need for your business and state and provide them to ensure you’re fully compliant.

This is not a step to be taken lightly, as failing to comply with legal requirements can result in hefty penalties. If you feel overwhelmed by this step or don’t know how to begin, it might be a good idea to hire a professional to help you check all the legal boxes.

The most common permits and licenses include: 

1. Business operating licenses may be required by the city and the state to allow you to operate. 
2. Industry-specific licenses may be required, depending on your type of business. Businesses involved in construction, childcare, plumbing, electrical, food and liquor, insurance, finance, landscaping, and architecture all require licensing, for example. In some highly regulated industries, you may require licensing from a federal agency, such as the FDA or Department of Transportation.
3. Zoning permits are issued by municipalities to ensure you’re operating in an area in which you’re allowed to operate. 
4. Building permits verify that the building you’re operating in is up to code. Home occupation permits, which some areas require, allow you to operate a business from your home.
5. DBA permits allow you to do business under a name that is different from your legally registered business name.
6. Sales tax permits allow you to sell products and collect sales tax. 
7. An employer identification number (EIN) is required if you plan to have employees, no matter what your business entity type. 
8. Health licenses and permits are required for certain businesses based on industry, and you will be required to maintain health and safety standards. Environmental permits are also required for certain industries in some locations.
9. Fire permits certify that your business is up to fire safety codes. Depending on your location, this may be required for all businesses, while in other areas it’s required only if you work with flammable materials.
10. Sign permits may be required for your location or other signage if there are rules about sign size and location.

Again, check with local government offices in your area for specific requirements based on your location and industry, or visit MyCorporation’s Business License Compliance page.

8. Obtain an EIN

Your Employer Identification Number, or EIN, is like a social security number for your company, allowing the IRS to easily identify your business. It is also known as a Federal Tax Identification Number (FTIN), or sometimes for corporations, it’s called a Tax Identification Number (TIN). 

An EIN is used to identify US businesses and contains information about the state the company is registered in. It also identifies the taxpayers who are required to file tax returns for the business. 

It is used by employers for filing taxes and is generally required for businesses when they open a business bank account. 

Here are the IRS requirements for obtaining an EIN:

The application is free and can be found on the IRS website. The application is form SS-4, and it can be mailed to the IRS or submitted electronically. Once your information on the application has been validated, your EIN is assigned immediately. The EIN will never expire and is never duplicated, even if you go out of business.

Next Steps

1. Opening a Business Bank Account

Before you start making money, you’ll need a place to keep it, and that requires opening a bank account.

Keeping your business finances separate from your personal account makes it easy to file taxes and track your company’s income, so it’s worth doing. Opening a business bank account is quite simple, and similar to opening a personal one. Most major banks offer accounts tailored for businesses — just inquire at your preferred bank to learn about their rates and features.

Banks vary in terms of offerings, so it’s a good idea to examine your options and select the best plan for you. Once you choose your bank, bring in your EIN, articles of organization, and other legal documents and open your new account. 

2. Getting Small Business Insurance

Business insurance is an area that often gets overlooked yet it can be vital to your success as an entrepreneur. Insurance protects you from unexpected events that can have a devastating impact on your business.

Here are some types of insurance to consider:

• General liability: The most comprehensive type of insurance, acting as a catch-all for many business elements that require coverage. If you get just one kind of insurance, this is it. It even protects against bodily injury and property damage.
• Business Property: Provides coverage for your equipment and supplies.
• Equipment Breakdown Insurance: Covers the cost of replacing or repairing equipment that has broken due to mechanical issues.
• Worker’s compensation: Provides compensation to employees injured on the job.
• Property: Covers your physical space, whether it is a cart, storefront, or office.
• Commercial auto: Protection for your company-owned vehicle.
• Professional liability: Protects against claims from a client who says they suffered a loss due to an error or omission in your work.
• Business owner’s policy (BOP): This is an insurance plan that acts as an all-in-one insurance policy, a combination of the above insurance types.

3. Decision on LLC Tax Status

LLCs are unique in terms of taxation as their owners have a choice about how the company will be taxed. By default, an LLC is taxed like a sole proprietorship if it has one member and a partnership if it has more than one member.

In both cases, business income “passes through” to the members, while profits and losses are reported on their individual tax returns. The LLC itself is not taxed, which simplifies the process for members. Also, losses and operating costs of the business can be deducted personally by the members. Taxes are paid at the personal tax rate of the members, although the owners may also have to pay self-employment taxes. 

But LLC owners can instead choose to be taxed as a corporation. To do so, the LLC must file a document, referred to as an election, with the IRS. The LLC must then decide if it wishes to be taxed as an S corporation or a C corporation.

C-Corp status means profits are taxed at the current rate for corporations (21% as of early 2022), which is significantly lower than the typical individual taxpayer rate. But keep in mind, C-Corp shareholders, which includes members, must also pay taxes on their distributions (but not self-employment taxes). Thus, the C-Corp is subject to what is sometimes referred to as double taxation. 

As with sole proprietorship and partnership status, S-Corp taxation considers the LLC a pass-through entity, which means income passes through the company and into the hands of the owners. At this point, taxes are applied at the same rate as those of individual taxpayers.

S-Corps use Form 1120S to file their taxes, which is used to report the income, losses, and dividends of shareholders. S-Corp shareholders do not pay self-employment taxes, which is the primary advantage of S-Corp status compared to sole proprietorship or partnership. 

Generally, S-Corp tax status is beneficial if the company is profitable enough to pay the owners a salary and at least $10,000 in annual distributions so the owners can be taxed as employees and not pay self-employment taxes. It costs more to run an S-Corp than an LLC due to additional bookkeeping and payroll expenses. Thus, the tax benefits should be more than the additional costs for an S-Corp status to make financial sense. 

4. File Annual Reports 

In most states, LLCs need to file an annual or biennial report, also known as a statement of information, to remain in good standing. Fees to file these reports vary by state.

Conclusion

Starting an LLC is a straightforward process, but it does take time and involves several filing fees. To make sure you’re in full compliance with the law, you might want to consult an attorney or hire an online LLC formation service. The last thing you want is for your newly created LLC to run afoul of the law and face fines or other restrictions.