A limited liability company (LLC) is a business structure that provides the best advantages of limited liability protection and flexible tax choices. Read our step-by-step guide below to learn how you can start your very own LLC today.
Step 1 – Choose your own state
First and foremost, you will have to choose the State you are planning to open up your business or are currently residing in. This is because every State has their own set of rules for you to set up your own LLC companies.
For most new business owners, your best option is to form an LLC in the State where you (currently) live and plan to do business in. If your business will have a physical presence (like a brick and mortar store and similar) in different states, you’ll have to register as a foreign LLC in those respective States.
There are a lot of guides online that are specific to States and how you should establish your LLC companies. It should not vary too much but there are certainly differences in each.
Step 2 – Name Your LLC
This is the next most common step you should take when you establish your LLC Company. Choosing a business name is your next important step in forming an LLC. You’ll need to complete a business name search on the internet to make sure that your LLC name is unique and does not clash with another similar business name. Furthermore, you will also need to meet your state’s naming guidelines too. These are some well-known state LLC naming rules and regulations:
- Your company’s name must include the phrase “limited liability company”. Or it has to include one of its included abbreviations (LLC or L.L.C.).
- Your company name cannot include words that can confuse your LLC with a government agency (for example: FBI, Treasury, State Department, and similar).
- Restricted words (such as Bank, Attorney, University) may need additional paperwork and a licensed person such as a doctor or lawyer, to be part of your business establishment team.
Step 3 – Choose a Registered Agent
A registered agent is a person or business representative that sends and receives legal papers on behalf of your LLC Company. These documents usually come with official correspondence such as legal summons and state filing notices.
Most states may need every business to choose a registered agent when establishing an LLC. Your registered agent has to be a resident of the state that you are doing business in. Or it may include a corporation authorized to conduct business in that state.
Step 4 – File LLC Articles of Organization
To formally establish an LLC, you’ll need to file your development documents with the state’s business division. This is usually the Secretary of State. In some of the states, their Articles of Organization are identified as the Certificate of Formation or the Certificate of Organization.
You can complete the information on the formation documents on your own. Usually, you may file it online or by mail. You may also hire an LLC formation service to file for you too. The average state filing fees usually cost approximately US$100 to start an LLC.
At this stage, it is a very good time for you to decide whether your LLC will be managed by a member or a manager. Before you get about opting for a management structure, please do plenty of reading online to help you better understand this topic.
Step 5 – Create LLC Operating Agreements
An LLC operating agreement is a legal document that summarizes the ownership structure and member roles of an LLC. Though most states don’t officially need you to have an operating agreement, it’s still a great idea to make one when forming an LLC. There are 6 main sections of an operating agreement you should know:
- Management and Voting
- Capital Contributions
- Membership Changes
Again, we will advise you to look out and do as much reading when you wish to form an LLC. Arm yourself with as much information about forming an LLC as you possibly can.
Step 6 – Get an EIN
An Employer Identification Number (EIN) is also known as a Federal Employer Identification Number (FEIN). Sometimes, it may also be known as Federal Tax Identification Number (FTIN). This is like a Social Security number (SSN) for your LLC. You will need an EIN to hire employees or open a business bank account. You can definitely get your EIN for free on the IRS website, via fax, or by mail.
After Forming An LLC Business
After you have formed your LLC Business, here are more information you should know after forming one.
a. Separate personal assets from your business
LLCs provides limited liability protection. Using devoted business banking and credit accounts is pretty much important to protecting your business’ corporate veil.
When your personal and business accounts are mixed together, your personal assets (for instance, your home, car, and other valuables) are at risk just in case your LLC is sued. We strongly suggest you to open a business bank account immediately right after starting your business.
b. Register your LLC for state taxes
Depending on the nature and location of your LLC, you may be needed to register for several forms of state tax:
- If you are selling a physical item, you will typically need to register your company for sales and use tax.
- If you have employees, you will need to register for unemployment insurance tax and employees withholding tax.
On top of that, most states need your LLCs to file a yearly report. It usually involves updating your registered agent address and paying your yearly fee or franchise tax.
c. Understand your LLC’s tax options
LLCs are taxed as pass-through entities. Pass-through taxation generally means that all of the business’s profit passes through to the LLC member’s individual tax returns.
The LLC member will then pay self-employment taxes and income tax on their share of the business’s income. This comes after any tax deductible expenses are taken out. This is the original way to tax an LLC.
LLCs can also choose to be taxed as S corporations (S corps) or C corporations (C corps). The S corporation tax status permits LLC members to be taxed as staffs of the business. This can help reduce tax burden in some situations. How you pay yourself as an owner can also affect your federal taxes.
d. Set up business accounting
Having a business accountant will help you in taking advantage of the tax benefits of an LLC. It can also help save you and your business a whole lot of money in taxes each year. Hiring for your company a business accountant as soon as you start your business will make sure that you have the best advice from the very beginning.
e. Get business insurance
In most states, all businesses with staffs (including LLCs and corporations) are needed to get workers compensation insurance. General liability insurance isn’t usually a legal requirement. However, it’s strongly recommended. This policy protects your business assets from any potential and unnecessary lawsuits. Without it, a legal claim can force your company out of business and profit.
The bottom line is that forming an LLC is pretty straightforward. It isn’t as complicated as some people made it out to be.
You might also like our article on Types of Corporations: Advantages and Disadvantages
We also strongly recommend people to do a lot of research and reading on this matter before setting up their own LLC businesses. The process will be worth it.