How to Start an LLC
LLCs are a smart business structure for a wide variety of businesses. They offer the personal liability protection of corporations, yet are simple to set up, affordable to maintain, and offer pass through taxation.
In this guide you’ll learn how to start an LLC step by step, from choosing your home state to filing your Articles of Organization.
Choose a Home State for Your LLC
While it’s true that you can start an LLC in any state you want, and it’s also true that certain states like Wyoming and Nevada allow for heightened anonymity and lower taxes, it is not true that you can avoid registering in and paying taxes to the state in which you live and do business. In almost all cases, the best decision is to start an LLC in the state where you live and your business is based.
Choose a Company Name for Your LLC
You may already have a company name you’d like to use when you start your LLC. But there are a few important steps you need to take before you submit that name to the secretary of state.
- Make sure you can find an available URL that can approximate that name.
- Make sure the name is available with the state. Most secretaries of state have search functions on their sites that allow you to verify.
- Do not, however, reserve a name with the secretary of state (if available) unless your formation will be significantly delayed. Doing so can really slow your formation.
Be aware that most states require you to include the abbreviation, “LLC”, or the words, “Limited Liability Company”, in the company’s name when you start an LLC.
Choose a Registered Agent for Your LLC
The term, registered agent is a bland name for an extremely important component of your LLC.
When You Start an LLC You’ll Need a Registered Agent
When you start an LLC, you’ll be required to acquire a registered agent. A registered agent is an individual or business that serves as the official point of contact for your LLC. If your LLC gets sued, the lawsuit is delivered to your LLC’s registered agent. If the state needs to send a tax document to your LLC, it’s sent to your registered agent. If someone looks up your company in the state database, they’ll find the contact details for your registered agent.
What You Need to Know About Registered Agents:
- All states require your LLC to appoint a registered agent.
- You can be your own registered agent if you live in the state where you form your registered agent, or you can hire a service.
- Most business owners are their own registered agent if they live in the state where their LLC is formed.
- The downside of being your own registered agent is your contact details get plastered all over the web and you’ll get plenty of spam and junkmail. Plus, it’s easier for would be scammers to figure out what assets you own.
- If you don’t live in the state where you formed your LLC, you’ll have to hire a registered agent service.
Need a Registered Agent for Your LLC?
Try our favorite registered agent, Northwest Registered Agent. If you form your LLC with them ($39), they offer a free first year of registered agent services. Check out our review of them, here.
Advantages of Hiring a Registered Agent
You don’t necessarily need to hire a commercial registered agent, but there are advantages:
Vital Communications If you get sued, a registered agent will accept the service of process (lawsuit) and send you a digital notification. They should provide an online account through which you can access and store a variety of business documents and view everything you need to be aware of, including any upcoming maintenance or annual reports that need to be filed with your state. All this is a nice perk but not necessarily vital.
The term, registered agent is a bland name for an extremely important component of your LLC.
What is a Registered Agent?
A registered agent is an individual or business that serves as the official point of contact for your LLC. If your LLC gets sued, the lawsuit is delivered to your LLC’s registered agent. If the state needs to send a tax document to your LLC, it’s sent to your registered agent. If someone looks up your company in the state database, they’ll find the contact details for your registered agent.
What You Need to Know About Registered Agents:
- All states require your LLC to appoint a registered agent.
- You can be your own registered agent if you live in the state where you form your registered agent, or you can hire a service.
- Most business owners are their own registered agent if they live in the state where their LLC is formed.
- The downside of being your own registered agent is your contact details get plastered all over the web and you’ll get plenty of spam and junkmail. Plus, it’s easier for would be scammers to figure out what assets you own.
- If you don’t live in the state where you formed your LLC, you’ll have to hire a registered agent service.
Need a Registered Agent for Your LLC?
Try our favorite registered agent, Northwest Registered Agent. If you form your LLC with them ($39), they offer a free first year of registered agent services. Check out our review of them, here.
Advantages of Hiring a Registered Agent
You don’t necessarily need to hire a commercial registered agent, but there are advantages:
Vital Communications If you get sued, a registered agent will accept the service of process (lawsuit) and send you a digital notification. They should provide an online account through which you can access and store a variety of business documents and view everything you need to be aware of, including any upcoming maintenance or annual reports that need to be filed with your state. All this is a nice perk but not necessarily vital.
Privacy This is where we think messaging gets a cloudy. If this is your first business, you’re probably pumped to let the world know you started a business, and you should be. Privacy is likely the last thing you’re concerned about. But you might want to be. Our digital age has brought with it a wild amount of new privacy concerns. When you hire a registered agent, they’ll list their address and contact information wherever they can on public record. We’re not talking about being a sketchy anonymous company, this is simply adding a layer of address security and protection of your personal information on the web.
This is where we think messaging gets a cloudy. If this is your first business, you’re probably pumped to let the world know you started a business, and you should be. Privacy is likely the last thing you’re concerned about. But you might want to be. Our digital age has brought with it a wild amount of new privacy concerns. When you hire a registered agent, they’ll list their address and contact information wherever they can on public record. We’re not talking about being a sketchy anonymous company, this is simply adding a layer of address security and protection of your personal information on the web.
Member or Manager Management
There are two main types of LLC management structures: member-managed and manager-managed.
Member-Managed LLC: In a member-managed LLC, all of the members have the authority to make decisions and manage the day-to-day operations of the business. This means that each member has an equal say in how the LLC is run (thought higher percentages can be assigned within the operating agreement and even higher percentages for specific decisions), and all members are involved in the decision-making process. This structure is ideal for small businesses with a limited number of members who want to have direct control over the business’s operations.
Manager-Managed LLC: In a manager-managed LLC, the members appoint one or more managers to handle the daily operations of the business. The managers are responsible for making decisions and running the LLC, while the members take a more hands-off approach. This structure is ideal for larger LLCs with multiple members who do not have the time or expertise to manage the business themselves.
Key Differences
Decision-Making: In a member-managed LLC, all members have an equal say in decision-making, while in a manager-managed LLC, the managers are responsible for making decisions.
Authority: In a member-managed LLC, all members have authority over the business, while in a manager-managed LLC, the managers have the authority.
Involvement: In a member-managed LLC, all members are involved in the daily operations of the business, while in a manager-managed LLC, the members are not involved in the day-to-day operations.
Liability: Both member-managed and manager-managed LLCs provide personal liability protection for the members. However, in a manager-managed LLC, the members may have less exposure to liability because they are not directly involved in the management of the business.
It’s important to note that the management structure of an LLC is determined by the operating agreement, which is a legal document that outlines how the LLC will be run.
Create an Operating Agreement for Your LLC
While an LLC operating agreement doesn’t officially form your LLC, it does lay out all the rules for how it will function, who is responsible for what, how membership will work, how profits and losses will be split, pretty much everything. Most websites recommend doing this after you officially form your LLC, but it really makes sense to do this beforehand, as once you start the LLC, you already have planned out how it will function.
Getting an LLC Operating Agreement
For an LLC operating agreement, you can hire an attorney to draft one for you, but that’s definitely the most expensive route, and likely they’ll already be working off a template.
What to Include in an Operating Agreement?
You can, of course, draft an operating agreement yourself, and they really don’t need to be fancy. Even something simple written on a napkin could work, but you’ll probably want to at least cover the basics. Try to include the following:
- Where the LLC will be formed
- Registered agent information
- Duration of company
- How the company will continue upon the death or prolonged absence of a member
- LLC purpose
- Member names and addresses
- Outline of new member addition process
- Initial contributions
- Outline of how profits and losses will be distributed
- Outline the management responsibilities of the members or managers
- Powers of managers
- Indemnification outline
- How and where company records will be kept
- Outline how company bookkeeping will work
- Transfer assignment outline
- Dissolution outline
If you take the time to try to address all of the bulleted list in writing and have all members sign the document, you’ve just created an operating agreement.
Are LLC Operating Agreements Required?
Most states do not require that you create an operating agreement. You do not file the operating agreement with any government agency. However, you’d be risking a lot to start an LLC with other people and not have an operating agreement signed by all the members. If a legal dispute arises between members, the operating agreement will be relied upon in court. Even if the language isn’t fancy, it’ll serve essentially as a contract between members that they agree to the rules of the LLC. The operating agreement is the rules.
File Articles of Organization for Your LLC
The LLC Articles of Organization is the document filed with the state that formally creates your LLC. Each state will have its own requirements. Some states even call the document a certificate of formation. But no matter what it’s called, you’ll need to file this document in the state where you want to form the LLC.
Fortunately, you’ll be able to form your LLC online in almost every state. Just visit your local secretary of state’s website and find their business services section and go from there. The other commonality is that you’ll need to pay a filing fee. Depending on the state, this fee ranges from $10 to $800, but most are around the $100 range.
What Do I Need to Include in the Articles of Organization?
Generally, you’ll need to include the following in your LLC Articles of Organization:
- LLC Name
- LLC Registered Agent and Registered Office Address
- Principle Address
- Mailing Address
- Name and Address of Members or Managers
- Purpose of LLC
- Name and Address of Organizer (person filing the articles–this person does not need to be an owner)
Obtain an EIN (Employer Identification Number) for Your LLC
The Employer Identification Number (EIN) is essentially your LLC’s social security number. This is the number that you’ll use when filing taxes, opening a bank account, hiring employees. It’s important.
Fortunately, you can get an EIN online for free on the IRS website if you have a Social Security Number. Simply follow the prompts on the IRS website after you’ve formed your LLC, and you’ll have one in about 15 minutes. That said, most LLC formation services can obtain an EIN for you, and many include this service in their formation packages.
The process of obtaining an EIN is only slightly more complicated if you are a non-US resident without an SSN. In this case, you can still get an EIN for free, but you must file Form SS-4 by fax or mail. It’s a little more of a hassle, but non-US citizens can still get the EIN. You can also hire most LLC formation services to do this for you for an additional fee.
One final note about obtaining the EIN. Wait until your LLC has been approved by the state before doing so. If you try to get an EIN before your LLC is approved and the LLC is denied, you’re going to be in for a lot of headaches and confusion with the federal government. Just be patient, wait for your filing to come back from the state, then get your EIN.
Open a Bank Account in Your LLC’s Name
Opening a bank account in the name of your LLC is the final step in starting an LLC. It may seem like it’s unimportant, but in reality, it’s absolutely crucial.
Opening a bank account in your LLC’s name is what will fully separate business assets from personal assets. This is extremely important because if your LLC gets sued and all its assets are in your personal bank account, a court may rule that their is no difference between you and your assets, which will allow a creditor to take everything from you. The solution to avoiding that is to keep a strict separation of personal and business assets. A business bank account is your primary piece of separation.
To open an LLC business bank account, you’ll need all of the following:
- A copy of your LLC articles of organization
- A copy of your LLC operating agreement
- Your LLC’s EIN
Additionally, each bank may have its own requirements. We highly recommend calling your bank to understand its requirements before arriving in person. Most banks don’t open a lot of business checking accounts, so person in charge may be unfamiliar with its own requirements. Calling ahead will save you time and hassle.
Comply with All Necessary State & Municipal Business Licenses
Not all states have general business licenses, but depending on the state you may be required to obtain various permits and licenses to operate your LLC. We recommend first checking out your local secretary of state’s website for specifics. The US Small Business Administration also has a wide array of free resources.
Even if your state does not require any business license registrations, be aware that your local municipality may. They may even have their own sales tax rate. Before making your first sale, we highly recommend visiting your city or town’s website and figuring out if there are any additional requirements for your LLC.