Deciding on a business structure is a very key step for an entrepreneur who is starting a business. Even though there are several business entities [1], a limited liability company (LLC) has become very popular among small business owners due to its simplicity and flexibility. 

Even though LLC formation is simple and requires little paperwork, it can still be a challenge to a new business owner. With that said, there are things every entrepreneur must research and understand before they get started in order to increase their chances of succeeding in forming an LLC in every state. 

First, make sure you are well conversant with all key terms prior to starting an LLC. Secondly, you should understand the LLC structure and its implication. Lastly, you should understand the rules pertaining to limited liability company (LLC) filing in the state in which you are planning to form your business. 

Once that is done, follow our simple steps on how to start an LLC to form your LLC. But before we jump into the steps, let us find out what an LLC really means and its benefits. 

What is an LLC?

A limited liability company is a type of business entity owned by a single person called a member or a group of owners called members (with no ownership limitations in terms of the number of members required). 

Just like a corporation, its main aim is to protect the company owners from being personally liable for company debts and/or other liabilities. That is to say, an LLC can own assets and bank accounts; sign loans, leases, and other contracts; and can be sued or sign a lawsuit. That means it is legally separate from its owners and members are liable for business obligations or debts. 

However, an LLC comes with one major advantage over a corporation; tax flexibility [2]. It can be treated as a pass-through entity just like a sole proprietorship (in the case of a single-member LLC) or a partnership (multi-member LLC). In both cases, the company profits and losses are passed to each member who then fills the necessary forms and attaches them to their personal tax returns. 

This means LLC owners are taxed once, unlike a corporation which is taxed twice. 

At the same time, you can elect to be taxed as a corporation to avoid being treated as self-employed. But to avoid C-Corp double taxation, you can elect to be taxed as S-Corp. 

Advantages of an LLC 

  • LLC offers personal liability protection, that is, you are personally liable for the company debt or lawsuit unless you committed fraud or other criminal acts.
  • It is treated as a pass-through entity for taxation purposes and therefore taxed once. 
  • LLCs are easy to create and maintain since you deal with few formation documents and therefore little paperwork.  
  • LLCs offer a lot of flexibility in terms of ownership- no limitation on the number of members required to start LLCs. 

How to Start an LLC in 2021

Here is a simple step-by-step guide that will lead you to form your business:

1. Select your state 

It is prudent to file an LLC in a state where your business will have a physical presence. If you will be operating businesses in different states, you will need to file LLCs in each of the states where your businesses have a physical presence. In such a case, consider forming your LLC in business-friendly states[3] such as Delaware, Nevada, and Wyoming among others. 

2. Choose a Name for Your LLC

Some states have some unique rules that govern how you name your LLC. However, here are some general rules [4] that will cut across when choosing a business name: 

  • The business name must include either the abbreviation (LLC, L.L.C. or Ltd) or the phrase “limited liability company” at the end.
  • The name should not be similar to that of any other business already registered in your state of formation.
  • The business name should not include words that may confuse your business with the government agencies, such as insurance, FBI, Treasury among others. 
  • Should not contain restricted words such as university, bank, attorney, since this may require additional paperwork or a licensed individual to be part of the company. 

That means you will have to conduct a thorough name search in order to be sure you have chosen the right name.

2.1. Reserve a Name (optional)

The easiest way to choose a name is to propose three business names listed in the order of preference. From the list, the secretary of state will grant one name to your company. The good news, a business name can be reserved for 60 days before it is made available for registration. 

3. Choose a Registered Agent

Every state requires LLCs to use a registered agent and this should be a resident of the state in which you are doing your business. A registered agent [5] is an individual or a business that sends and receives important legal documents on your behalf. There are online service providers such as ZenBusiness that will offer you the registered agent service at a lower cost than hiring one for yourself. 

4. Determine Your Management Structure

LLCs offer you an opportunity to decide on your company management structure. If members are not willing to be involved in the day-to-day running of the company, they can delegate that power to one member or a section of LLC members to serve as the manager(s). 

5. Create an LLC Operating Agreement

An operating agreement is not a mandatory requirement by most states but is very important. An LLC operating agreement is a legal document that contains a list of ownership structures as well as the role of every member of your LLC. An LLC doesn’t require the creation of a board of directors as in the case of a corporation, and therefore, an operating agreement can stand in its place. Without an operating agreement, state law will determine how you operate.  

6. File the LLC With the State

To form an LLC, you must file articles of organization with the secretary of the state. This is the same as filing “certificate of formation” in states like Delaware or “certificate of organization” in states like Pennsylvania. 

You may seek the help of an attorney or an online legal service like Rocket Lawyer to assist you in filing the articles of the organization with the secretary of the state. 

7. Obtain an EIN from the IRS 

Think of an Employer Identification Number (EIN) [6] as a social security number for your LLC. This feature will help you open an LLC bank account and hire employees. It is always free and easy to obtain an EIN through a government agency. 

8. Register to Do Business in the Other States (optional)

Chances are that your LLC will conduct business across state lines. While this is not a mandatory requirement, it is safe to ensure your business is qualified in other states. This is because you will have to register LLCs in every state that you want your business to operate. 

What You Need To Do After Forming An LLC

Take Care of Licensing & Permit Requirements

 Even though you may not need licensing and permit to start an LLC, you may probably need one to operate the LLC as a business. This is true to some types of business such as mining, drilling, alcoholic beverage sales among others that require a permit at the federal level. So if your business needs a licensing and permit for any reason, you will have to look for one. 

Open a Business Bank Account

 Your LLC bank account enables you to simplify tax reporting, allow you to keep track of business expenses, set up credit card payment and deposit payment under your company name. 

Register for State Taxes & Unemployment Insurance

You will need to register for sales or use tax if you are selling physical products. At the same time, you will need to register with the state for unemployment insurance and withholding tax if you have any employees. 

Understand Requirements for Hiring Employees

  • You should make sure you understand hiring rules. The major general requirements include:
  • The employees must be eligible to work in the US.
  • You must notify the state about every new hire.
  • You must withhold employees’ taxes.
  • You should print posters and place them in open places where people can see them.
  • You must pay employees wages as per the state requirements.

Conclusion

Our simple step-by-step guide on how to form an LLC makes it clear that a limited liability company is the most straightforward and easy-to-form business structure. As such, it is the best choice for a new business or a small business owner seeking to protect their personal assets and still enjoy a lot of benefits from taxes.

Frequently Asked Questions

How much does it cost to start an LLC?

The cost of starting a limited liability company will depend on your state where you file your LLC. You will have to pay the state filing fee plus what your service provider will charge. The state fees range between $40 to $500. 

How do I make myself an LLC?

To make yourself an LLC, you need to reserve a name, choose a registered agent, file the articles of the organization with the secretary of state, open a business bank account and acquire other documents such as permits and licensing if that will be necessary.

Does an LLC need to make money?

It is not mandatory that an LLC must make profits in order to be considered an LLC. As long as you follow the rules of your state of formation, you can start your LLC with any type of business. 

Can you start an LLC for free?

Forming an LLC will require a state filing fee and you cannot start an LLC for free in any state. Even more, you will have to pay an online service or an attorney that will take you through the process, unless you undertake it by yourself.

What is the cheapest state to form an LLC?

One of the main factors that most business owners look for when considering a state to start an LLC is their filing fee. Colorado, Hawai, Iowa, Oklahoma, Arkansas, and Mississippi all boast the lowest LLC filing at around $50. 

Can I move an LLC from one state to another?

The best move is to keep your old LLC and file it in the new state where you want to relocate as a foreign LLC. The good news, in most states, you will follow the same procedure you used while registering your first LLC. 

How do LLC owners get paid?

LLC owners don’t get paid a salary or wages. Instead, you pay yourselves by taking money out of the profits as needed in the case of a single member. For multiple owners, the profits generated each year are distributed to each member.

Can LLC name be your name?

LLCs can use personal names in a variety of ways: you can use initials, first name, last name, or personal name that is only part of the business (e.g. Jane’s Bar & Grill Ltd). You can also use your personal name as a DBA when you form LLC under different names.


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