The 5 essential steps to start an LLC
- A limited liability company, or an LLC, is a hybrid business structure that merges the limited liability protection of a corporation with the flexibility of a sole proprietorship.
- While each state has a slightly different formation process, most require you to choose an available business name, appoint a registered agent, and file Articles of Organization to form your LLC.
- You can do all the work yourself, but many business owners choose a third-party business incorporation service to save time, ensure accuracy, and reduce paperwork.
Forming a limited liability company (LLC) allows you to register your business with the state and is a first step to obtaining limited liability protection so you can reduce, or eliminate, your personal responsibility for business liabilities and debts.
An LLC is a business structure that combines the protections of a corporation with the flexibility of a sole proprietorship or a partnership. While there are other types of entities you can form, choosing an LLC can be appropriate for many entrepreneurs.
Various state laws govern limited liability companies and there are general procedures that most business owners must follow to form a business entity. In this article, you’ll learn how to start an LLC in five simple steps.
LLC is an abbreviation for limited liability company. It’s a business structure that can help protect the personal assets of its owners and offers flexible tax and management structures. Many small business owners find an LLC to be a nice, sweet spot between a sole proprietorship and a corporation.
Your LLC can have multiple owners, referred to as “members.” Almost any type of business can become an LLC, and you can form an LLC whether you’re a one-person operation or a company with a large team.
Advantages of the LLC business structure
Limited liability protection
An LLC exists separately from its owners and typically shields them from personal liability. If your LLC has to face business debt collection, a lawsuit, or bankruptcy, the court or the creditors can’t come after your personal assets, such as your house, car, or other property, in many cases.
Similarly, forming an LLC can help protect your business assets if you face personal liabilities because many states have limitations on actions creditors can take against LLC owners for their personal debts. Other business structures, like sole proprietorships and general partnerships, don’t offer limited liability protection, so your personal assets may be at greater risk.
LLC owners can choose how they want their business treated for tax purposes. Many entrepreneurs decide to take advantage of pass-through taxation.
Instead of the business paying income taxes, you can report your LLC profits and losses as a part of your personal tax return. As a result, you avoid what is known as “double taxation,” which is when you’re taxed on your LLC profits as a part of a business tax return and then again as a part of your personal income tax. You can also elect to have your LLC taxed as a C Corporation or an S Corporation.
Low startup costs
In most states, creating an LLC comes with minimal filing fees. You can typically expect to pay between $35 and $200 to form your limited liability company, although entity formation fees can go as high as $500 in some states.
Flexibility of management
You can determine how you want your LLC to be structured. LLCs with one owner are referred to as “single-member LLCs.” If your LLC has multiple owners, it’s a “multi-member LLC.”
If you run your LLC operations yourself, your LLC is a “member-managed LLC.” Alternatively, you can appoint a manager to take charge of your business operations, in which case your LLC will be a “manager-managed LLC.”
Low membership restrictions
Virtually anyone can start an LLC. Individuals, corporations, trusts, partnerships, and non-citizens can all be LLC owners in the U.S.
Once you file all the necessary formation documents and officially form your LLC, there is typically very little to do to maintain your LLC status with the state.
Each state has different requirements, but you’ll likely have to file an annual report and stay current with any required business licenses. Most of the time, keeping your LLC in good standing requires minimal paperwork.
Doing business as an LLC gives your business legitimacy and raises your credibility in the eyes of the public.
How to form your LLC
LLCs are easier to form than corporations, but creating an LLC still requires multiple steps.
LLCs are formed on a state level, typically with the Secretary of State, and each state has its own process to follow. However, there are general business formation steps that apply to most states, including:
- Deciding on your LLC name
- Appointing a registered agent
- Filing LLC paperwork
- Maintaining your LLC in compliance
In the following sections, we’ll break down each of the general LLC formation step so you can get your LLC up and running successfully and swiftly.
1. Choose a state to incorporate in
One of the most important decisions you have to make during the LLC formation process is where to form your business entity. State laws govern LLCs, so choosing the right state for your business is crucial.
You can start an LLC in any state, whether you live there or not. However, in most cases, the state where you operate your business is the easiest option.
Most small and mid-sized businesses choose to form their business in their home state because they’re already familiar with the state laws and regulations and government offices are typically easily accessible. If you choose to form your LLC in a different state but do business in your home state, you may have to register a foreign LLC, which typically comes with a higher filing fee.
2. Choose your LLC name
Once you’ve figured out which state you’re going to form your LLC in, it’s time to make another important decision and choose your business name.
Each state has specific naming requirements that your LLC has to adhere to. Most states require the following:
- Your LLC name must include “limited liability company,” “limited company,” “l.l.c.”, “l.c.”, “LLC,” or “lc.” You can typically abbreviate the word “limited” as “ltd.” and the word “company” as “co.”
- Your LLC name must be distinguishable from other business names registered in the state. In most cases, you can do a name search on the Secretary of State’s website to check availability. Once you find a business name you like, you may be able to reserve it for a small fee.
- Your business name must be appropriate and can’t contain misleading or offensive words. Many states explicitly mention that your LLC name can’t include words that may create an impression that your business is associated with the government, such as “State Department” or “Treasury.”
The Secretary of State’s website should contain all state-specific naming conventions and requirements. When you work with Block Advisors to form your LLC, we will help ensure your chosen business name meets state requirements.
You can also operate your business under a different name if you file for a DBA (doing business as).
3. Choose a registered agent
Your LLC must have a registered agent to receive important notices and documents on behalf of your business. For example, your registered agent may have to receive a letter from the IRS or a service of process.
You can be your own registered agent, but many entrepreneurs choose to hire a registered agent service for a variety of reasons.
For example, registered agents are required to be present at a physical office address during business hours. Hiring a third-party registered agent increases the freedom of being a business owner because you don’t need to worry about missing time-sensitive notices.
Hiring a registered agent also helps you protect your privacy. Many states require a registered agent’s name and address to be part of public record. And if your LLC is served a legal action such as a lawsuit, your registered agent will receive it on your behalf and save you the stress of being served in front of your employees or customers.
If you choose to form your business with Block Advisors, you will have the opportunity to appoint a third-party registered agent during the ordering process.
4. File your LLC paperwork
Creating an LLC involves filing documents with the Secretary of State. Each state has specific filing requirements, and all states require business owners to file Articles of Organization.
Some states also require an operating agreement, but most states do not. That said, a written operating agreement can be a good idea as it governs the members of the LLC, including managerial and financial responsibilities in the LLC.
When you form your business with Block Advisors, we prepare all required documents based on information you provide and file them according to your selected state’s regulations. All of our packages include Articles of Organization and an Operating Agreement with commonly used provisions.
LLC Articles of Organization
Articles of Organization is a principal LLC formation document that officially establishes your LLC with the Secretary of State. This document is sometimes called “Certificate of Organization” or “Certificate of Formation.”
You have to pay your filing fee when you file Articles of Organization. Filing fees vary by state, typically ranging from $35 to $500.
LLC Operating Agreement
Not all states require you to create an LLC operating agreement. However, even if your state doesn’t require you to have a written operating agreement in place, it’s a good idea to have one in place anyway.
An operating agreement creates standard processes and regulations for your LLC so that you can effectively manage it and resolve disputes among the members. If you don’t have an operating agreement, the state’s default rules apply, which may not always benefit your business.
LLC operating agreements are typically customizable, and you can include various clauses, from rules on admitting new LLC members to voting rights.
5. Maintain your LLC over time
Once you have created your LLC, it’s also essential to keep your LLC in good standing with the state and meet ongoing requirements. While these requirements vary by state, most require small businesses to apply for an employer identification number, pay state taxes, stay up to date on business licenses, and file annual reports.
Employer Identification Number
You can think about your employer identification number, or EIN, as a social security number for your business. It’s a tax identification number that the Internal Revenue Service uses to identify your business for tax purposes. Not all businesses are required to have an EIN. Generally, businesses that sell goods, have employees, are taxed as a corporation or partnership, expect to owe excise tax and/or have a business retirement plan are required to have an EIN.
Not all states require LLCs to have EINs, and some only require them for multi-member LLCs. You’ll typically need an EIN to establish payroll and pay employment taxes. Additionally, some banks prefer businesses have an EIN to open a business bank account.
Some states also require a separate state tax ID number if you plan to hire employees, sell goods, or expect to owe excise sales tax. Be sure to review your state’s requirements to ensure you obtain a state ID, if applicable.
All Block Advisors Business Formation packages include EIN application preparation to help you easily check another thing off your list.
State tax requirements
Depending on your location, you may have certain state tax obligations. Most states follow the classification your LLC elected for federal tax purposes. If your LLC is taxed as a sole proprietorship on a federal level, your state will likely treat your LLC as a sole proprietorship, too.
Regardless of how your LLC is taxed, you may still be responsible for withholding and paying, taxes owed to your state and local authorities.
Depending on the nature of your business, some states, counties, and/or municipalities require LLCs to obtain business licenses to operate. After you’re done forming an LLC, make sure that you’re complying with all business license requirements.
Most states require LLCs to file annual reports with the Secretary of State and pay a filing fee to maintain compliance and stay in good standing. Annual report due dates vary by state, so make sure you know when yours is due.
When you form your business with Block Advisors Business Formation, you can easily file annual reports online through our account management portal.
If you want to conduct business in another state, you may be required to register your LLC as a foreign LLC. Multiple factors determine whether you need a foreign qualification, such as whether you have a physical office or employees in the state.
To get your foreign qualification, you’ll typically need to register for a Certificate of Authority, apply for a Certificate of Good Standing, and pay applicable filing fees. However, requirements and processes vary by state.
Forming an LLC is one of the most important events in any entrepreneur’s journey. It involves multiple steps, and busy business owners might not have the time or expertise to confidently and successfully navigate all the required paperwork by themselves.
This is why many entrepreneurs choose an LLC formation service. With Block Advisors Business Formation, getting started takes just 10 minutes.
Navigating your options
Whatever route you choose, to create an LLC, stay a sole proprietor, or select another entity type, it’s important to consider the needs of your business and your personal situation. Laws vary from state to state. This article is intended to be informative, but it is not legal advice or a substitute for legal advice. A business attorney can review your specific circumstances and guide your decisions to confirm that you are doing what’s right for you. Likewise, the Secretary of State’s office in most states offers resources for small business owners, including online information that may help owners to decide the best options – and possible requirements – for their specific circumstances.
We, at H&R Block and Block Advisors, look forward to continuing to support you throughout your business journey. We are committed to helping your business thrive and our Small Business Certified Tax Advisors are available year-round, virtually and in person, to help you keep more money in your pocket.
What are the pros and cons of an LLC?
An LLC offers limited liability protection, pass-through taxation, and a flexible management structure. However, an LLC has annual fees and more paperwork requirements than a sole proprietorship. Additionally, an LLC’s limited liability protection has restrictions and may not apply if, for example, you don’t clearly separate business transactions from personal transactions or if you engage in fraud that causes losses to others. These are just some of the pros and cons of an LLC; read the whole article for more information.
What are the differences between an LLC and a corporation?
An LLC is a more flexible business structure than a corporation, yet it’s still a limited liability entity that can, in many cases, protect your personal assets from certain business debts and liabilities. Corporations have significantly more restrictions regarding ownership structure, management, and taxes. These are just some of the differences between and LLC and a corporation.
How much does it cost to form an LLC?
The cost of starting an LLC varies by state. Government filing fees typically range from $35 to $500. You may also need to cover additional costs if you want to reserve your LLC name or need to apply for business licenses. When you form your business with Block Advisors, our packages begin at $149 plus state filing fees.
What are the steps to creating an LLC?
LLC formation steps vary depending on your incorporation state. In most states, you’ll need to choose an available business name, appoint a registered agent, and file Articles of Organization.
How is an LLC taxed?
As an LLC owner, your LLC will be taxed as a sole proprietorship (for single-member LLCs), a partnership (for multi-member LLCs), or you can elect to be taxed as an S Corporation, or a C Corporation. Read more about LLC taxation and your options.
How do I elect to have my LLC taxed as a C Corp?
To have your LLC taxed as a C Corp, you will need to complete and submit IRS Form 8832. After you submit the form, be sure to operate your business as a C Corp and follow all federal, state, and local requirements.
How do I elect to have my LLC taxed as an S Corp?
To have your LLC taxed as an S Corp, you will need to complete and submit IRS Form 2553. After you submit the form, be sure to operate your business as a S Corp and follow all federal, state, and local requirements. Additionally, be sure to pay yourself a reasonable salary and pay yourself regular payroll to take advantage of potential tax savings.
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