How to Start an LLC in 7 Simple Steps (2022)

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Before registering a new company, you must determine the type of legal business structure you want to register.

Your legal business structure affects everything, from how you file your taxes, to your personal liability, to whether you need to comply with any special additional requirements at the local, state, or national level.

A limited liability company (LLC) is one of the most popular business structures in the United States among people starting a business and repeat business owners and entrepreneurs.

An LLC permits owners, partners, or shareholders to limit personal liability but still includes tax and flexibility benefits associated with a partnership.

LLCs can be formed in all 50 states. You don’t have to live in a state, conduct business, or be a U.S. citizen to form an LLC in a specific state.

What are the benefits of forming an LLC?

An LLC is known as a ‘pass-through’ entity because the profits of an LLC flow directly to the members.

This type of business structure is quickly becoming the most common form of incorporation. LLCs have a relatively flexible structure that provides many benefits of a partnership or sole proprietorship, with some of the protections provided by C corps and S corps. They do not require many formal processes other types of corporations require.

However, LLCs are unable to offer stock to the public, have some ongoing annual filing requirements, and are still required to keep internal paperwork.

Importantly, people who ignore the requirements of operating an LLC can lose their personal liability protection in a process called piercing the corporate veil. If this happens, business owners can retroactively be held liable to pay corporate debts with personal funds.

LLCs have the following advantages:

  • Liability protection
  • Easier process for setup
  • Easier to maintain
  • Flexibility on taxes and management

LLCs have the following disadvantages:

  • Self-employment taxes (unless an S corp election is made, as described below)
  • Difficulty attracting investors for funding
  • Added formation costs and franchise tax in some states

The exact requirements for starting an LLC vary by state. But here’s a step-by-step guide to help you get started.

1. Decide on a business name for your LLC

Most people consider how their customers and prospective customers will react when they see or hear their new LLC’s name. And while it’s essential to choose the right business name for branding purposes, you also must ensure that the LLC name meets state requirements.

For example, you can’t choose a business name already used by another business in your state.

Additionally, most states prohibit LLC names that include certain words that imply you’re in a specific type of industry, such as “bank.” And, you’ll need to have “LLC” or “Liability Company” in your LLC’s name so that people know your company is an LLC.

For the specific requirements in your state or in the state where you intend to register your LLC, check with the Secretary of State. You can also search existing registrations to ensure that the business name you intend to register isn’t already taken in your state.

Generally, most states require the following:

  • LLC name must be unique
  • must include the phrase “Limited Liability Company,” “LLC,” or “Ltd.” (or an acceptable variation)
  • cannot include words or phrases that could make people think you’re a government agency (“IRS,” “FBI,” “Police”)
  • cannot include certain words like “Hospital” or “Bank” unless you’re chartered or authorized to operate a business in that industry.
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Don’t overthink this process. Remember that you can always change the name of your LLC at a later date. You don’t need to operate your business using your registered legal name. You can create your LLC using one name but run the company using a fictitious trade name by filing a “doing business as” (DBA) certificate. DBAs are also commonly called “assumed name,” “fictitious business name,” or “trade name.” Here’s a terrific resource that explains what a DBA is, DBA state requirements, and how to file a DBA for your business in all 50 states and U.S. territories.

Example:

You form an LLC for your cleaning business and name it Residential Cleaning Masters LLC. After a while, you start getting commercial jobs and expand your business to offer residential and commercial cleaning services.

Your original name – Residential Cleaning Masters LLC – no longer makes sense because you’re doing residential and commercial work. And it might confuse potential commercial customers.

You can rename your LLC or file a DBA (as described above) and operate under the assumed name “Cleaning Masters.”

Get a matching domain name

Once you pick a name for your LLC, register a matching domain, even if you don’t plan to create a business website immediately.

A matching domain name will give you a personalized email address with your company’s name and start you on a path to build a strong brand identity for your new business.

So, once you pick an LLC name and register a DBA and domain, you’ll have the following identity, using our example above:

LLC Name: Residential Cleaning Masters LLC
DBA: Cleaning Masters
Domain: cleaningmasters.com
Email: yourname@cleaningmasters.com

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2. Designate a registered agent

Every state requires LLCs to have a registered agent.

You don’t need to pay someone to be your registered agent. Anyone at least 18 years old can be a registered agent, and you can name yourself, a friend, or an employee as your registered agent.

But, the registered agent must be available at a physical address within your state during regular business hours. As a result, it’s more common for people to designate an attorney, accountant, or company that specializes in providing registered agent services. Typically, you’ll pay $100 to $250 per year for registered agent services, depending on your registration state.

A registered agent’s job is simple: they receive official or legal documents sent to the LLC and send these documents to the appropriate person at the LLC. Typically, they scan your documents and send you electronic versions via email or online portal.

But while the job sounds simple, it’s rarely a good idea to appoint yourself as your LLC’s registered agent.

Registered agent information is public and can be accessed online. So, if privacy is essential, don’t appoint yourself as your LLC’s registered agent.

And, because registered agents must be available during regular business hours, you be unable to close the office and take a vacation or leave (unless someone is available to receive service of official documents).

3. Prepare and file the LLC Articles of Organization form

When registering an LLC, you’ll need to fill out a specific form provided by your state’s Secretary of State office. Each state has its particular requirements and procedures, but generally, the form will require you to provide the following information:

  • business name
  • address of your principal place of business
  • the purpose for which the LLC was formed
  • how the LLC will be managed (e,g, one manager or board of managers)
  • the name and address of the registered agent
  • duration of your LLC and if you want it to end at a specific time

Several states require that you publish a notice in a local newspaper indicating that you intend to register an LLC.

For the specific requirements in your state or in the state where you intend to register your LLC, check with the Secretary of State. Many states call this form the Articles of Organization, but others call it the certificate of formation or organization.

All states charge a filing fee to file the LLC Articles of Organization, but those fees vary from state to state.

When your LLC formation documents are approved, you’ll get a certificate from the Secretary of State or another office in your state to indicate your LLC is formally registered. You’ll need this certificate to set up a business bank account, get a tax I.D., get a business loan, and for other purposes.

Don’t rush to register your LLC in business-friendly states

Several states – Delaware, Nevada, and Wyoming – have laws that favor businesses. Delaware doesn’t tax out-of-state income, while Nevada and Wyoming don’t tax any business income.

So it’s tempting to register an LLC in one of those states when forming the LLC. And many business owners do that. After all, it seems like a massive win if you can run an LLC and avoid paying state income tax.

But while this seems like a no-brainer, it’s not as clear-cut as it initially appears.

If you register your LLC in one of those states, you could end up paying more in taxes if you operate your LLC in your home state. That’s because you’ll pay two annual filing fees and two registered agent fees, and you’ll still have to pay taxes on your income from the LLC because, as noted above, LLCs are typically taxed as a partnership, so all revenue passes through to its members.

Your home state doesn’t care where you registered your LLC. If you receive income from the LLC, they’ll tax that income.

For most people, registering an LLC in our home state is cheaper, faster, and more convenient. But you should discuss this issue with an accountant or lawyer to consider your specific needs and requirements.

4. Create an operating agreement

An LLC operating agreement is a legal agreement that describes how your LLC will be operated. It’s a roadmap for the governance of your LLC.

Most states don’t require LLCs to have an operating agreement. State laws contain general default rules for how LLCs must operate.

But even if your state doesn’t require an operating agreement, you should have one if you have partners or co-owners in the LLC.

The operating agreement differs from your business plan. A business plan is a business planning tool that outlines operational business goals, strategies to achieve those goals, and financial projections. Some content from the business plan might appear in your operating agreement. But the operating agreement contains many more vital details, including but not limited to:

  • the rights and duties of LLC members
  • what a non-member manager has the right to do
  • how the LLC will be managed (one manager or board of managers) and how to hire or fire managers
  • what the LLC is legally able to do
  • how new members can join the LLC
  • how an exiting LLC member can leave the LLC
  • how and when profits are paid to members.
  • how and under what circumstances should the LLC end
  • how to change the operating agreement

By expressly defining the relationship between you, other LLC members, and the LLC, the operating agreement helps you to shield yourself from personal liability in case the LLC runs into trouble. And an operating agreement lets you control how conflicts will be resolved. Without an LLC operating agreement, you’re subject to the default laws of the state where you registered your LLC.

Most states don’t require that the operating agreement be filed with the state. It’s a private document intended to help the owners and members of the LLC to define their rights and obligations to minimize disagreements and conflict.

5. Obtain an EIN

After establishing the LLC, you may need to get an employer identification number (EIN) from the IRS.

This is not required if you’re a sole owner and don’t have employees. But you might want to get an EIN anyway to keep your personal and business taxes separate, to be sure that you can quickly hire when the time comes to expand your business and to open a bank account. The IRS has a helpful checklist to help you decide whether you will need an EIN to run your business. If you do need an EIN, you can register online for free.

Additionally, in each state where the LLC will be doing business, you must apply for a tax identification number and register with the state’s department of labor.

6. Open a business bank account (optional but recommended)

You are not required to have an LLC business bank account. But it would be best to separate business finances from your personal finances.

Remember that your LLC can protect your personal assets if someone sues the LLC or it goes bankrupt. But you have this protection only if you strictly keep your personal and business finances separate. Otherwise, a creditor can sue you and attempt to “pierce the corporate veil.” An LLC is not a corporation, but this legal maneuver is still called “piercing the corporate veil” when asserted against an LLC).

Business bank accounts typically offer other benefits not available in a personal bank account. For example, banks that provide merchant services (allowing you to accept credit card payments) offer purchase protection for your customers and ensure that their personal information is secure.

Finally, a business bank account helps you make large purchases and establishes a credit history for your business.

Here are a few other reasons why you should consider opening a business bank account:

  • It makes business accounting easier. You must keep detailed financial records about your business expenses and income.
  • It makes it easier to get credit for your LLC. Many banks offer a line of credit, allowing you to take out loans on an as-needed basis. You can use such loans if there’s an emergency or you need to buy new equipment or launch a new product or service line.
  • You can prove to the IRS that you’re running a business. Otherwise, the IRS might claim it’s a hobby and not an actual company (limiting your tax deductions).
  • It makes you look more professional. People want to deal with legitimate businesses. y creating a business bank account; you’ll also create an outstanding level of trust with your customers and prospects. Customers can pay with credit cards and write checks to your business instead of directly to you.

For more details about business bank accounts, look at our comprehensive how to start a business guide.

7. Register to do business in other states (optional)

If your LLC does business in more than one state, you may need to register to do business in those states.

Many factors determine whether an LLC is transacting business in a state. Sometimes, this gets confusing. Some of the common factors include whether your LLC:

  • has a physical presence in the state (such as an office or employees)
  • accepts orders in the state
  • markets in the state

Different states have different criteria, so you should speak to an experienced business attorney to determine whether you must register your LLC in multiple states.

You’ll need to submit paperwork similar to the form you filed when you formed your LLC and provide a “certificate of good standing” from the state where you initially registered your LLC. You’ll also need to designate a registered agent in each state where you register your LLC.

In the next section, we’ll compare LLCs with other entity types. You can skip that section and go directly to the frequently asked questions about LLCs section below.

Comparing LLCs with other entity types

There are several business entity options. Each has advantages and disadvantages. Consider the following issues when deciding on what type of entity to register:

  • What are the potential liabilities/risks?
  • What are the anticipated tax benefits from being taxed as a partnership rather than a corporation?
  • Do you intend to have outside investors?
  • Do you expect to sell your company soon?
  • Are you pursuing a risky business where you might be sued?
  • Are you willing and able to keep up with the periodic filing requirements that certain types of entities (corporations) require?

Each business type has asset protection, tax laws, and operational implications. Understanding your business needs and how the various business entity types affect your business will play a key role in your company’s overall success.

LLCs versus C Corporations

C corporation is what most people think of when they hear “corporation.” Most large companies are filed under this structure, as it offers business owners the most asset protection and tax-related options. It is also typically the only choice for owners that would like to be taxed separately from their company, is the legal entity preferred by nearly all investors, and is the most common structure for publicly-traded companies on the stock exchanges.

But, a C corp structure isn’t the best choice for everyone. Filing as a C corp requires a more significant amount of paperwork and formal processes that must be carefully and regularly filed.  Corporations are often also more closely monitored than other types of businesses because they are one of two types of corporations that can issue stock to the public.

C Corporations have the following advantages:

  • Ability to take the company public and issue stock
  • More attractive structure for investors
  • Liability protection
  • A possible lower tax rate

C Corporations have the following disadvantages:

  • Double taxation (company and personal income; more on that below)
  • Extra paperwork
  • Strict regulation

LLCs versus S Corporations

S corp is an election a business can choose to make whether they form an LLC or a C corp.  Making your S corp election does not impact the personal liability protections of forming an LLC or corporation. t is usually done for tax advantages, but before you decide to make the S corp election, you need to understand the benefits and some of the limitations it may put on your corporation or LLC.

There are a few differences between businesses that opt for an S corp election and those that form a C corp, or Inc., without the election.

For one, owners of an S corp can claim operational losses as part of their personal income should the business fail to turn a profit.

An S corp can also help business owners avoid what is referred to as the “double taxation” issue impacting C corporations. With C corps, taxes are imposed on the profits at the corporate level. Then, when the profits (after payment of taxes) are passed down to the owners, they also have to pay taxes on their dividends.  Corporations are treated more like partnerships in that all profits or losses are passed through to the owners and aren’t taxed at the corporate level. Thus, the profits are only taxed once.

Making the election does put some restrictions on a C corporation. For example, all business owners of S corps must be U.S. citizens, limiting international growth. Moreover, the shareholders are limited in number and type when you make an S corp election. You cannot have more than 100 shareholders, and most incorporated entities cannot be shareholders. F ally, there can only be one class of shares in an S corp.

S Corporations have the following advantages:

  • All the benefits of a C corporation
  • A possible lower tax rate by avoiding double taxation

S Corporations have the following disadvantages:

  • Limited ownership rules
  • Extra paperwork
  • Strict regulation

Many people don’t know that LLCs can also make S corporation elections.

After reading the prior section, you may wonder why an LLC would make that election, given the primary benefit of double-taxation avoidance with a pass-through entity is already the default for an LLC. Yet, an S corp election for an LLC can also provide additional tax benefits to an LLC.

By making an S corp election, the LLCs distributions (the passing of profits after payment of LLC expenses, including payroll) are not treated or taxed as wage income to the owners.

Let’s say, for example, that you own an LLC, and the annual profits are $1M. Without an S corp election, the owner of the LLC would have to pay payroll taxes on the $1M worth of profits. With an S corp election, the LLC owner would pay taxes on the $1M worth of profits. With an S corp election, the LLC owner only pays payroll taxes on a “reasonable” salary that gets paid to the owner. Any distributions after paying a reasonable wage are free of those payroll taxes if done correctly.

The same restrictions described above applicable to corporations also apply to LLCs, so there are some restrictions on an LLC that makes an S corp election. Also, if the owners aren’t paid reasonable salaries, the IRS can invalidate the S corp election requiring the payment of back taxes and penalties.

S Corp Election for LLC Advantages:

  • All the benefits of an LLC
  • A possible lower tax rate by avoiding some payroll taxes for the owners

S Corp Election for LLC Disadvantages:

  • Limited ownership rules
  • Extra paperwork
  • Strict regulation
  • Penalties if not correctly implemented

LLC versus Nonprofit

Nonprofits have a charitable purpose or association and are eligible for tax exemptions. To receive a tax-exempt status with the IRS, most nonprofits must qualify under section 501(c)(3) of the Internal Revenue Code.

Nonprofits are similar to corporations through their structure and process of creation. But if you intend to operate your business for profit, this is not an appropriate business structure.

Nonprofits have the following advantages:

  • Tax Exemptions
  • Personal liability protections

Nonprofits have the following disadvantages:

  • All profits must go to a charitable cause and can’t be distributed to people who started the nonprofit
  • Difficult to raise capital through banks or other typical financings outside of donations
  • Extra paperwork

LLC versus Sole Proprietorship

A sole proprietorship is the default entity type when one owner starts a business.

Unlike LLCs or Corporations, states do not require you to file your business initially or file periodic reports if you want to operate a sole proprietorship. The downside is that the owner is held liable for all losses, legal issues, and/or debt the business accrues. There is little-to-no distinction between the entity and the business owner.

Examples of Sole Proprietors include freelancers, artists, consultants, virtual assistants, and other home-based owners who have not formally registered as an LLC or corporation.

Sole Proprietorships have the following advantages:

  • Easy setup with low fees and little paperwork
  • Flexible management structure

Sole Proprietorships have the following advantages:

  • Personal liability for all debts, legal obligations, and losses of the business
  • More difficult to raise capital
  • No ongoing business life (business ends with the owner)
  • May not have access to certain tax benefits

LLC versus General Partnership

General partnerships allow for two or more business owners, also considered “partners.” A general partnership, like a sole proprietorship, is the default “legal entity” if two or more people join together to conduct business without registering with the state.

Under this structure, a business cannot issue any type of stock, and partners are held personally liable for any taxes or debts. There is no legal separation between individual assets and business assets. Additionally, like a sole proprietorship, the partnership dies when one or more partners exit the partnership. However, provisions can be made as long as two or more partners remain in the business.

General Partnership has the following advantages:

  • Easy setup with low fees and little paperwork
  • Flexible management structure

General Partnership has the following disadvantages:

  • The business ends when one partner exits the partnership
  • The partners share personal liability for all debts, legal obligations, and losses of the business
  • Partners are liable for the actions of other partners
  • Personal assets are at risk

Choosing the best legal structure for your business can feel overwhelming.

Don’t rush into making a decision. Instead, spend some time considering which of these structures is most advantageous for your business and how each structure can help you accomplish your professional goals.

We regularly update this how to start an LLC guide. We most recently updated this guide on August 31, 2022.

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