How to Start an LLC

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How to Start an LLC

Updated on January 17, 2022

How to Start an LLC

Step By Step

A limited liability company (LLC) is an increasingly popular business structure for startups, 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. An LLC is created by filing paperwork with your state, and nominal fees are involved.

An LLC offers its owner or owners, who are called members, considerable flexibility in terms of management. You can choose your management and operational structure and decide how you want to be taxed. Your LLC can have a single member or multiple members, all of whom have personal liability protection, meaning your personal assets are not at risk if you cannot pay business debts or are involved in a lawsuit.

Starting an LLC is a fairly simple process, as detailed in this step-by-step guide.

Step 1: Choose Your State

USA states map

The first step is to choose the state in which you plan to do business. PLLC processes and requirements vary by state, so visit your state’s website for details. Generally, you can form your PLLC with an online application. If you plan to have physical locations in more than one state, you will need to register a foreign PLLC in the states where you will do business other than your home state.

Step 2: Choose Your LLC Name

"Secure your business name" written in notebook

Your business name is extremely important. It should reflect the brand you plan to build, tell customers what you do, and be memorable. Once you’ve chosen a name, you’ll need to make sure that it’s not already taken.

You can do a search on your state’s website, and on other state websites if you are doing business in more than one state. You should also check the US Patent and Trademark Office to make sure the name hasn’t been trademarked.

Then do a domain name search to make sure that you will be able to use your name for your website. This will also tell you if someone else is using your business name in another state. You can do a domain search through web hosting sites such as GoDaddy.

Finally, just search the web to make sure that no one is using your name or something similar anywhere. If you find, for example, a company in another country that is large or growing and uses that name, you may want to choose something else. If that company expands to the United States, it could cause confusion and affect your brand.  Similarly, if you expand your company globally, it will impede you building your brand in countries where the other company operates.

There are some rules you need to follow when naming your LLC. You must use “LLC” or “limited liability corporation” in your business name. Also, your name cannot be something that could be confused with a government agency, or make you appear as though someone in your company has a particular license if no one does.

Step 3 – Choose a Registered (Statutory) Agent

Two hands on business document

A registered agent is the person or company that sends and receives legal documents on behalf of your PLLC. The registered agent can be a member of the PLLC, or you can choose a third party such as an attorney, or a company that offers registered agent services.

Most states require you to have a registered agent. The agent must be a resident of the state where you do business, or a corporation authorized to do business in your state.

Step 4 – Determine Your Management Structure

Business management structure

There are two types of management structures:

  • A Member-Managed PLLC is managed by the members of the PLLC. This is usually chosen by smaller PLLCs with few members who will be involved in various management roles.
  • A Manager-Managed PLLC is managed by people who are not members of the PLLC and are employees of the business. This structure is often used when an PLLC is larger and has multiple members.

Step 5 – File Articles of Organization

LLC wooden blocks

The articles of organization is the form that you will fill out to form your LLC. 

The articles of organization is the form you fill out to create your PLLC. These forms vary by state but can generally be filed online. You’ll need to fill out the PLLC name, the name and address of the registered agent, the names of the PLLC owners, and in some states, the way the PLLC will be managed. Fees are generally around $100.

The licensing board for the state must review and approve the Articles of Organization before they can be filed.

Step 6 – Create an Operating Agreement

LLC operating agreement

An operating agreement is not usually required but is highly recommended. The operating agreement should clearly define the following:

  • The percentage of each member’s interests in the PLLC
  • 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

It’s a good idea to have an attorney’s help when creating your operating agreement so that you can be sure you’re covering all bases to protect all members and avoid future issues.

Step 7 – Apply for Business Licenses

License application

It’s important to make sure you’re in compliance with all laws at the local, state, and federal levels. It’s likely, depending on your location and type of business, that you’ll need business licenses and permits.

Do some research to determine which licenses you need. At the very least you’ll need a sales tax permit to sell products and collect sales tax.

Step 8 – Obtain an EIN

EIN on clipboard

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

An EIN is required if your PLLC has more than one member, if you plan to hire employees, or if you choose to have your PLLC taxed as a corporation. 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, and once your information on the application has been validated, the EIN is assigned immediately.

Next Steps

Open a Business Bank Account

Before you launch your LLC you’ll need somewhere to put the money you make, 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. Opening a business bank account is quite simple, and similar to opening a personal one. Most major banks offer business account options, just inquire at your preferred bank to learn about rates and features.

Banks vary in terms of offerings, so it’s a good idea to consider your options to choose the best plan that works for you. Once you choose your bank, you’ll need to bring your EIN, articles of incorporation, and any other legal documentation that proves your business is registered.

Obtain Business Insurance

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

Here are some of the different 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 any of the above insurance types.

File Annual Reports

Your state may require you to file annual reports for your LLC which may involve a fee. Check your state for requirements.

Conclusion

Forming an LLC for your business has many benefits, most importantly the protection of your personal assets. It is not difficult to do and is well worth the effort and fees involved. 

Consulting with an attorney is highly recommended, particularly if you have multiple members. The attorney can advise you on the process, and ways to avoid future disputes or conflicts.