Key Takeaways

  • An LLC guide provides step-by-step instructions for forming and maintaining a limited liability company.
  • LLCs combine liability protection with flexible taxation and management structures.
  • Naming rules require uniqueness and compliance with state restrictions.
  • Articles of Organization establish the LLC’s existence; an Operating Agreement governs internal rules.
  • LLCs must often pay state fees, annual reports, and sometimes publication costs.
  • Choosing the right state, registered agent, and licenses impacts compliance and long-term success.
  • LLCs offer advantages like liability protection and tax flexibility, but drawbacks include fees and compliance obligations.

Guide to Forming an LLC

An LLC guide is a step-by-step set of instructions for forming an LLC, or limited liability company, which can be very useful when setting up this type of business. An LLC is a business type that merges the limited liability protections that corporations enjoy with the tax benefits of partnerships or sole proprietorships.

LLCs also enjoy more flexibility in how they may be set up and run, lacking the rigid structure and operating requirements of corporations. If you wish to form an LLC, the specific details of doing so will vary by state, but the basic steps will be the same. The basic steps are:

  1. Choose a name.
  2. Draw up articles of organization.
  3. Choose a registered agent.
  4. File articles of organization with the secretary of state.
  5. Pay filing fees.
  6. Meet publication requirements.
  7. Apply for an EIN.
  8. Get permits and licenses.
  9. Form an operating agreement.

What Is an LLC?

A Limited Liability Company (LLC) is a hybrid business structure that offers the liability protection of a corporation with the tax flexibility of a partnership or sole proprietorship. Owners, called members, are generally not personally responsible for the company’s debts and obligations. LLCs are popular for small businesses because they are easier to set up than corporations, require fewer ongoing formalities, and allow profits and losses to “pass through” to members’ personal tax returns.

Choose a Name

You can select this through the LLC name search feature of your Secretary of State’s website. When doing so, you must adhere to certain rules regarding your choice of name. These may vary by state, but generally, they will include not having a name duplicate to another LLC name, having a name with some variation of “LLC” in it, and having a name that does not include forbidden or restricted words unless allowed (for instance, “Secret Service,” “Corporation,” or “Bank”).

Pick a State for Formation

You can form your LLC in any state, not just the one where you live. Many business owners choose their home state for simplicity. Others consider states like Delaware, Nevada, or Wyoming because of favorable filing fees, tax structures, or privacy protections. However, forming outside your home state typically means you must also register as a “foreign LLC” where you operate, increasing costs and paperwork.

Draw Up Your Articles of Organization

These are documents that set out basic information pertaining to the company, such as its address, name, and the names of its members. In these documents, you should also specify if you are going to have a member-managed LLC or a manager-managed LLC. If you do not specify, member management is the standard default.

Decide on Management Structure

LLCs may be member-managed (owners handle daily operations) or manager-managed (appointed manager or outside party runs the business). The choice affects voting rights, authority over contracts, and operational decision-making. Specifying this in your Articles of Organization and Operating Agreement helps prevent disputes later.

Choose a Registered Agent

A registered agent is a person or entity who accepts and serves legal papers on your company’s behalf. Having a registered agent is required in most states, and such a person or entity must have a physical address in the state you are registering your LLC in. A registered agent may be a member of your LLC or an outside agent.

File Articles of Organization With The Secretary of State

These are sometimes also called a Certificate of Formation or a Certificate of Organization, but in either case, formation documents must be filed with the state. Some states let you file these online.

Pay Your Filing Fee

While sole proprietorships and partnerships can be created without having to pay a fee, such is not the case with LLCs. Filing fees for LLCs will generally be around $100, with Kentucky having lowest fee at $40 and Massachusetts having the highest fee at $520. Additionally, California charges a minimum annual fee of $800 each year, and some other states also have additional annual taxes and fees.

Understand Ongoing LLC Costs

Beyond the initial filing fee, most states require annual or biennial reports, which may cost between $50 and $300. States like California impose an $800 annual franchise tax, while others, such as Texas, charge a franchise tax based on revenue. Budgeting for these recurring costs ensures your LLC remains in good standing.

Meet Publication Requirements

Some states have publication requirements for LLCs. These require you to announce in your local newspaper that you have formed an LLC, and you must do so several times around your LLC's formation time. You must then submit an affidavit of publication to the LLC filing office. The cost for this will generally be around $200.

Foreign Qualification Rules

If your LLC does business in states other than where it was formed, you must file for foreign qualification in those states. This usually involves filing a Certificate of Authority, paying fees, and appointing a registered agent there. Operating without foreign qualification can result in fines and legal limitations.

Apply for an EIN

An EIN is an employer identification number. It is like a Social Security number for your business, and it is needed to hire employees, make business transactions, and open a business bank account. To obtain an EIN, you must submit Form SS-4 to the IRS. There is no fee to obtain an EIN.

Open a Business Bank Account

Separating business and personal finances is critical for maintaining liability protection. Most banks will require your EIN, Articles of Organization, and possibly your Operating Agreement to open a business account. Having a dedicated account simplifies tax preparation and supports your LLC’s legal standing.

Get Permits or Licenses

Depending on your business, these may not be required, but you should always check with federal, state, and local authorities to see if they are, as it is solely your responsibility to do so. Permit and license fees may be several hundred dollars, and some of these fees may be annual fees, depending on your situation. Selling cigarettes, alcohol, and firearms are all examples of business activities that require licenses.

Form an Operating Agreement

Although forming an Operating Agreement is not a requirement, it is recommended. An Operating Agreement will usually set out such internal company details as what authority members have, how profits will be distributed, who the registered agent is, and how record keeping will be handled, along with many other details. The benefits of an Operating Agreement include helping to protect your LLC’s structure if it's challenged in court, preventing you from having to adopt your state’s default operating rules and avoiding internal disputes about the proper procedure for running the company.

Advantages and Disadvantages of an LLC

Advantages:

  • Limited liability for owners
  • Pass-through taxation by default
  • Flexible profit distribution
  • Fewer corporate formalities

Disadvantages:

  • Self-employment taxes can be higher than corporate taxes
  • Some states impose hefty annual fees or franchise taxes
  • LLCs may have limited life spans in certain jurisdictions
  • Venture capital firms often prefer corporations over LLCs

Frequently Asked Questions

  1. What documents are required to start an LLC?
    Most states require Articles of Organization. You may also need an Operating Agreement, EIN, and state or local licenses.
  2. Can I form an LLC in a different state?
    Yes, but if you operate in another state, you’ll need foreign qualification and may pay extra fees.
  3. How much does it cost to form an LLC?
    Costs vary by state—typically $50–$500 for filing, plus possible annual fees or franchise taxes.
  4. Do I need a lawyer to form an LLC?
    Not necessarily, but legal help can ensure compliance with state requirements and proper drafting of an Operating Agreement.
  5. What taxes does an LLC pay?
    By default, LLCs are pass-through entities. However, you can elect corporate taxation if it’s more beneficial.

These are the main issues you will have to take care of when forming your LLC. If you need further help understanding the details of this LLC guide, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5-percent of lawyers. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law, and average 14 years of legal experience, including work with, or on behalf of companies like Google, Menlo Ventures, and Airbnb.