What does it cost to start an LLC? Know the different types of expenses involved in forming a limited liability company.

What Is an LLC?

An LLC is a limited liability company with a legal identity of its own. The company is considered as a separate entity from its members. The liability of the company is limited only to the extent of its own business funds and assets. The members are not responsible for debts and liabilities of the company.

An LLC also offers operational flexibility of sole ownership and partnership businesses. The IRS treats it as a pass-through entity, meaning that the LLC profits and losses are clubbed with the personal income and losses of its members for the purpose of federal taxes; there is no separate taxation at the company level.

Just like the owners of a partnership business are called partners, the owners of an LLC are called members. An LLC can have one or more members.

You can either manage the LLC yourself or appoint a manager to oversee its operations. The manager can be someone from within the members or even from outside the LLC. The LLC operating agreement should specify whether the LLC is member-managed or manager-managed.

Unlike a corporation, an LLC does not have a board of directors. However, the members can hold business meetings to make important business decisions. All members can put forward their views and opinions to arrive at a decision.

The Cost Involved in Forming an LLC

The LLC formation cost includes:

  • Fees for business name registration
  • Document filing fees
  • Service fees
  • State-specific expenses

Registration Fees

The very first step in forming an LLC is to choose a suitable business name different from that of existing businesses in your state. Most of the states allow you to conduct a name search on their online database of business entities.

If the LLC name you applied for is approved, it will be registered for exclusive use by your company, and no other business entity can have that name in future. Some states require you to register your LLC name before filing Articles of Organization, while others allow doing this at the time of submitting your formation documents. In either case, you will incur a registration fee, which varies from state to state.

If your proposed name is rejected, you will have to apply for another name, and this may require you to pay additional fees.

Filing Fees

To create an LLC, you must file the Articles of Organization with your state, usually with the office of the Secretary of State. For this, you will be required to pay the state filing fees, varying between $50 and $800, depending upon the state in which you are forming your LLC.

Service Fees

In addition to seeking professional guidance, you may also have to retain a business lawyer to prepare and file formation documents for you. So, also take into account the fees you'd be paying for availing services of a lawyer and other experts.

State-Specific Expenses

  • Notice of formation: Some states ask you to publish a notice in a local newspaper regarding the LLC formation. Depending upon the requirements of your state, you may have to publish such notice every week for a period of six months. This can be quite expensive in some places. For instance, the publication fee in New York was as high as $1,250 in 2010.
  • Registered agent: If your company is located outside the state of formation, you will also incur expenses in appointing a state-registered agent. Registered agents usually charge an annual fee of about $100.
  • Franchise tax: Some states impose a franchise tax on LLCs. This is a yearly fee and varies widely between states. For instance, the franchise fee in Delaware is $80 a year, whereas in California, it starts at $800.
  • Name reservation: The state of Alabama requires you to reserve your company's name before you file the formation papers. The name reservation fee ranges between $10 and $28. Reserving your LLC name is optional in other states. However, you may still want to go for it to avoid losing your chosen name until the time you file your Articles of Organization.

In addition to the formation costs, forming an LLC also entails ongoing operational costs like annual fees, reporting fees, and business license fees. Consult your state's office or a local business lawyer to know about the applicable formation and recurring fees in your state.

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