How to Start an LLC: Step-By-Step Guide
Need to know how to start an LLC? The good news is that there are only five simple steps to starting one.10 min read
Learning how to start LLCs can be intimidating because there are multiple steps involved. However, this is the first step in your business journey, and you should feel excited. With UpCounsel’s short and easy-to-read guide, you will be equipped with all the necessary information on how to start an LLC.
Starting an LLC
Starting an LLC (limited liability company) is a major professional step. To explain, an LLC is a business entity defined as its own legal organization. There are two types of LLCs: single-member LLCs (owned by one person) and multi-member LLCs (owned by multiple people).
Business owners choose to make their entity an LLC because it is the easiest way to ensure personal liability protection while operating their business. The benefits of forming your business as an LLC inc include reduced paperwork, prevention of your business getting taxed more than once, more credibility added to your business, and protection from lawsuits.
Need to know how to start LLCs? The good news is that there are only five simple steps to starting LLC:
- Select a state
- Determine your LLC’s name
- Register an agent
- File the articles of organization
- Craft an operating agreement
If it’s pertinent, you should also consider cost by looking at the cheapest ways to start an LLC.
Select a State
When you learn how to start LLCs, the first important piece of information is that you must register it with a state. Consider the following options:
- If you primarily live and conduct business in one state, then it may be the best option also to register your LLC in that state.
- If you register your LLC in a different state than you conduct your primary business activities, then you may be obligated to register it as a foreign LLC.
- If you are not physically present in the state where your LLC is registered, you may have to pay for a registered agent to accept legal documents on your behalf.
Please note: Even if your LLC is registered in a different state than your business, you may still have to pay taxes where your physical business is located.
Determine Your LLC’s Name
When choosing the name of your LLC, first check to see if the company name is available. Then, consider the following:
- Make it legal. There are state-specific requirements for choosing a name for your LLC. For example, you may need an LLC label, such as “limited liability company”, “limited liability”, or “LLC”. Furthermore, verify that you are not using any restricted or prohibited words.
- Make it brandable. Branding is a key component of gaining clients today. Perform market research on what name would be most attractive for your audience. This will keep your business top of mind in the heads of potential clients.
- Make it original. There is a lot of competition. In order to stand out to your potential clients, it is best practice to choose an original name that will stand out among your competitors.
- Make it domain name ready. Choose a name that fits nicely into a domain. For example, shorter domains are more memorable and easy to use than longer ones.
- Make it fit for social media. Similar to being domain ready, choose an LLC name that can be made into a username for social media. Social media is a key component for businesses, and you don’t want to miss out on this potentially profitable way to connect to your potential clients.
Performing a Business Name Search Online
Perform a free business name search online by typing in the name you would like to use for your LLC in a web browser. You can also search the federal trademark database of the United States Patent and Trademark Office (USPTO) to determine if your name has already been registered at the federal level. State-specific search tools are also available.
Alternatively, you can also pay for a service to complete a formal business name search online.
Registering a Trademark
A trademark can include words or a logo that’s considered distinctive and distinguishes your products or services from competitors. You’ll want to conduct a trademark search before deciding on elements of your company to avoid overlapping with another business in the same industry.
When searching for trademarked names, you’ll note that industries are organized by a certain code, from 1 to 45. If you’re unsure what industry your business would be considered to be operating in, it helps to look up major competitors and check which industries they’ve registered their trademarks in.
Furthermore, once you have determined that there is no trademark on the name you would like to use for your LLC, you can trademark your LLC’s name at a state and federal level.
Registering a DBA Name for Your LLC
You must submit an application through a state, county, or local entity in order to register a DBA.
Register an Agent for Your LLC
The person that you appoint to be the official receiver and sender of the paperwork is your registered agent.
Without a registered agent, you will not be able to form your LLC. When you form a domestic LLC, you can be the registered agent. Otherwise, the registered agent you choose must be someone who lives in the state where you are forming the LLC.
The registered agent for LLC must abide by the following set of legal obligations:
- Registering a physical address. The registered agent’s name and physical address must be registered with the Secretary of State and be located in the same state as the LLC. They are not permitted to use a P.O. Box.
- Who can be a registered agent? Anyone over the age of 18 who can receive mail during regular business hours is eligible to be a registered agent.
- State-specific laws. Make sure to check any state-specific laws.
Why Use a Registered Agent Service?
- Flexibility. If you decide to operate a business that isn’t open during the traditional 9-5 hours throughout the week, you can hire a registered agent to be open during those hours and accept documents on your behalf.
- When you have a registered agent, you will be able to develop an LLC in any state, regardless of whether or not you live in that state. This means that if you live in New York but wish to benefit from the tax laws of a different state, you could pick a registered agent in that other state and set up your LLC.
- If you plan to operate your business in more than one state, you can appoint a registered agent who is in multiple states.
- If your business address is your home address, appointing a registered agent will give you more privacy. Your registered agent’s address is a public record, and that address will be used instead of your address.
- You can use your registered agent’s office address as the official headquarters for your business. If for some reason, your business is ever sued, lawsuits will be served to the registered agent’s office instead of at your place of business where your employees and customers can see.
- Having a registered agent service will also help you stay on time with state filing and in compliance with the law. A registered agent service will also be able to help you find accountants and other legal experts that you might need.
File the Articles of Organization
Follow these steps to file articles of organization for your LLC:
- Get in touch with your state’s secretary of state, who will provide you with the required information on how to file, the cost of filing, and any necessary follow-up steps.
- File your articles of organization by mail or online. Each state may differ in its process.
- Pay the filing fee. There is a state-specific fee for filing your article of organization.
- Receive a certificate of formation. The state will retain an original copy, and provide you with a certificate of formation, along with a copy of your articles of organization.
Note: Some states may require you to publish your certificate of formation.
What Are Articles of Organization?
During the process of forming your LLC, you submit this legal document to the state. The Articles of Organization include information regarding the name and purpose of your LLC as well as the name and address of the registered agent for the LLC.
Requirements for Filing Documents
The following information is required to file articles of organization when forming an LLC:
- LLC’s name and address
- The nature of the LLC’s business
- The name and address of the LLC’s registered agent
- The names and contact information of the members, managers, and directors of the LLC
Craft an LLC Operating Agreement
An Operating Agreement is a document that provides pertinent details on LLC ownership and operating procedures. With this legal agreement, you can specify the financial and operational relationships among the LLC member (owners).
Follow these steps on how to create an LLC Operating Agreement:
- LLC name and address
- Industry of your business
- Description of services
- The purpose and goals of your business
- Member name and address
- Capital contributions
- Membership class
- Percentage of ownership
- Management name and address
- When meetings are held
- The details of each member’s vote
- Rules around unanimous consent
- Business tax classification
- Fiscal year
- Tax audit rules
- How to distribute profits and losses
- Annual report inclusions
Why Form an LLC?
An LLC is just one type of business structure. An LLC can have multiple owners or be owned by a separate business. When your business is in an LLC, you don’t need to have annual meetings, and owners of the LLC can include their profits and losses on their personal tax returns. There are multiple examples of various business structures:
- An S-corporation: The life span of the business can be ongoing, and owners can issue shares of stock, report profit and losses on their personal tax returns, and have limited liability for business debts.
- A C-corporation: A C-corporation can be owned by a separate legal entity and can have more than one owner. Those owners are allowed to offer a share of stocks, split profit and losses, and have limited liability of company debts.
- A general partnership: This structure allows partners of the business to have foreign offers, have multiple owners, and report profit and losses on personal tax returns.
- A sole proprietorship: A sole proprietorship allows owners to have foreign offers and report profit and losses on their tax returns. They do not need to hold annual meetings.
An LLC is a more appealing option for small businesses because LLCs provide limited liability, whereas sole proprietorships do not. And LLCs are far easier to create and operate than corporations. They also can also avoid double taxation.
When learning how to open an LLC, consult with an LLC lawyer to ensure you are not missing any requirements.
Pros of Starting an LLC
Below are the advantages of starting an LLC.
- LLC owners have no responsibility for any lawsuits or debts that affect the LLC, so long as they have not engaged in any fraudulent or illegal activity.
- Any profit the LLC generates goes straight to the owners. From there, the owners report their profits on their personal tax returns.
- LLCs are not subject to double taxation. Because they are taxed only once, it is called “pass-through taxation.”
- Forming an LLC is straightforward, and minimal paperwork is required. No official officer roles, records of company minutes, resolutions, or annual meetings are required of LLCs. If you plan to form an LLC with more than one member, it is strongly encouraged that you create an operating agreement that would protect your members from any legal disputes.
- An LLC is considered to be more formal than a partnership or sole proprietorship and therefore makes the business more credible.
- Forming an LLC also allows you to create a credit history for your business, and this presents opportunities to obtain lines of credit and loans.
Cons of Starting an LLC
When your business is formed as an LLC, you are unable to list it on the stock market. This makes it trickier to secure venture capital and eventually go from an LLC to a corporation (if that was one of your goals).
You just learned the steps to create an LLC and can now begin your own business journey. While the steps to create an LLC may be a little nerve-wracking, you are now that much closer and are now much more prepared to take the first few steps in creating an LLC.
How Much Does It Cost to Form an LLC?
How much it costs to form an LLC will depend on the state you live in. It could cost anywhere from $50 to $500 to form the LLC and an annual fee of $100 to maintain the LLC. If you work with an attorney, your fees increase.
How Are LLCs Taxed?
Unlike C-Corporations and S-Corporations, LLCs are not subject to federal income tax. All profits that come through the LLC go directly to members, who report profits on their personal tax returns. If the LLC has multiple members, it is required to submit form 1065 to the IRS, the document that shows the annual earnings of the LLC.
Although LLCs do not pay federal income tax, there are state taxes that need to be paid. Most states have a “franchise tax” for LLCs. This is a percentage of the LLC’s earnings or a flat rate. LLCs with employees have to register for Unemployment Insurance Tax and Income Withholding Tax. LLCs that sell products and services must have a seller’s permit and abide by sales tax requirements in their state.
What Is an LLC License?
Technically there is no LLC license. Instead, business entities are required to have a state business license, whether that business is a sole proprietorship, corporation, or LLC.
How Long Does It Take to Form an LLC?
For how long it takes to form an LLC, typically, it can be officially formed within three weeks, sometimes less. For an added cost, most states offer expedited LLC formation, sometimes taking only one day to complete.
Does an LLC have a Board of Directions?
No. Though it is a requirement for corporations, LLCs can be operated solely by members or just one owner. In some instances, the Articles of Organization nominates a non-member manager for the LLC.
Does an LLC have Shareholders?
No. LLCs cannot participate in the stock market. Instead of issuing stock, members of the LLC split profits. In your Operating Agreement, you should outline how profits will be split in specific detail.
Can I Form an LLC in Another State?
Business owners who have already formed a domestic LLC and want to expand to other states need to form a foreign LLC. Only form a foreign LLC in another state if you plan to do business in that state.
Do I Need an Operating Agreement?
You are obligated under law to have an operating agreement if you live in one of the following states: New York, Nebraska, Missouri, Maine, Delaware, or California.
Do I Need a Registered Agent?
Yes. You cannot form your LLC without one. Appoint a registered agent before attempting to file your articles of organization. The registered agent that you appoint must have a physical address in the LLC’s state. The company itself cannot be the registered agent, but the owner of the LLC can be the registered agent.
How to Choose the Best Registered Agent Service when Starting an LLC
When looking for a registered service agent, there are some important features you should expect to find:
- The registered agent has an office in the state where you do business.
- They offer compliance management and will remind you of any filing that is due.
- They will manage your documents and allow you to access them on an online account.
- They are readily available to answer all of your questions and assist you when you need LLC help.
- They can offer their services in all 50 states.