How to Form an LLC

Because limited liability companies (LLCs) are governed by state laws, where to form an LLC depends on where you want to start your business. An LLC is a business entity that is similar to a partnership but provides its owners, called members, with personal liability protection from business obligations and debts. 

To form an LLC, you must submit articles of organization to the Secretary of State where you plan to establish your business. This brief form asks you to list the business name, names of members, and their contact information. The filing fee for articles of organization ranges from $30 to $200 depending on the state. Some states have additional requirements for new LLCs. You can find these on the Secretary of State website for the state in question. 

While few states require a new LLC to file an operating agreement, you should create one that details the ownership percentages, rights, responsibilities, and roles of each member. Having this paperwork in place can prevent legal challenges and disputes. You may want to hire an attorney to review your operating agreement and ensure your interests are protected. Documenting one annual meeting each year, even if it's not required, also helps establish your LLC as a separate legal entity.

Research the annual LLC fees in the state where you plan to run your business, High fees may negate the financial advantage of creating an LLC. For example, fees in California can exceed $11,000 per year as they are based on a percentage of annual business profit. A major benefit is the ability to report business profits and losses on your individual tax return, a structure known as pass-through taxation. This allows you to avoid double taxation, in which profits are taxed at both the business and individual levels. 

Where to Create Your LLC

Some states offer more financial advantages for LLCs than others, so you should do your research before filing your articles of organization. Most business owners choose to establish in their home state, but it's not necessary to do so if it would be more beneficial to you to create the LLC in a different state. Many prefer the convenience of forming a company where they have a physical location and conduct most of their business. 

Keep in mind that you must register your LLC and pay taxes in every state where you do business. If your business is primarily local, it makes sense to form your LLC in your home state. Doing so could also save you money on annual fees. You can also avoid the cost of hiring a registered agent to represent your interests in a different state. If you lease office space or have employees, forming an LLC in your own state is likely the best choice. 

If you do not have a brick and mortar location in your home state, it may be more financially advantageous to create your LLC in a different state. Some states have better tax laws or a more beneficial corporate infrastructure than others. When making this determination, consider these questions:

  • Where do you live?
  • If you have employees, where do they live?
  • Where do you pay state taxes?
  • Where is your property located, if you own property?
  • Where do you work?
  • Where is the physical location of your business?
  • Where do the other LLC members (if any) reside?

It's important to understand the difference between tax evasion and tax avoidance. While tax evasion is the illegal act of neglecting to pay your taxes, tax avoidance refers to legally minimizing your tax burden--such as forming your LLC in a state considered a tax haven.

Creating a Delaware LLC

Delaware is the most popular place to form a company because of the unique advantages it offers. Despite its small size, more than 60 percent of Fortune 500 companies and more than 50 percent of publicly traded companies are established in Delaware.

One of the reasons Delaware is such a business-friendly state is that it does not tax income, which can mean substantial savings. It also offers low initial filing fees and franchise taxes.

If you need help with deciding where to form your limited liability company, you can post your job on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. 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.