It is without saying, starting your own business can be an exciting and rewarding venture. One of the most critical decisions you will need to decide is choosing the right legal structure for your company. It is observed, one of the most popular options among startups is forming a limited liability company (LLC). In this guide, we will show you how to start an LLC from scratch. Whether you are an established entrepreneur or a first-time business owner, these step-by-step instructions will help you navigate the company-forming process with ease.
What is an LLC?
An LLC, short for Limited Liability Company, is a legal business structure that combines the limited liability protection of a corporation with the flexibility and tax advantages of a partnership or sole proprietorship.
In simple language, the LLC is a unique company structure that provides the flexibility of a partnership with the asset protection of a corporation.
Read: What Is a Limited Liability Company (LLC)
Benefits of Forming LLC
In an LLC, the owners, known as members, have limited personal liability for the company’s debts and obligations. As a result, personal assets are generally protected from being used to satisfy business debts or legal claims. Furthermore, the member’s liability is limited to the amount they have invested in the company.
The major benefits of forming an LLC are as follows:
- Low startup cost
- Separate legal entity
- Limited Liability
- Perpetual existence
- Flexible management structure
- Free transferability of financial interests
How to Start an LLC
You will need to follow some key steps to form an LLC. Below we have mentioned the steps in detail:
1. Choose a Name for Your LLC
The first step in starting an LLC is selecting a unique and memorable name for your business. Here are some to follow before finalizing a business name:
a) Avoid Conflicts
Make sure that your chosen name isn’t already in use by another business in your state. Conduct a search on the United States Patent & Trademark website or use an online business name database to check for availability.
b) Reflect on Your Brand
Choose a name that aligns with your company’s mission and values. Consider how it will resonate with your target audience.
c) Include “LLC”
Most states require LLCs to include “LLC” or a similar abbreviation in their business name. Check your state’s specific requirements.
2. Determine the Registered Agent
You need a registered agent to form an LLC. In simple language, a registered agent is an individual or entity responsible for receiving legal documents on behalf of your LLC. Here’s what you need to know:
- Eligibility: The registered agent must be a resident of the state where your LLC is formed or a registered business entity authorized to act as a registered agent.
- Responsibilities: The registered agent ensures that you receive important legal and tax documents, such as lawsuits, notices, and official correspondence from the state.
- Professional Registered Agent Services: If you prefer, you can hire a professional registered agent service that specializes in providing this service for a fee.
Read: Best LLC Formation Service Companies
3. File Articles of Organization
The next step is to file the Articles of Organization with the Secretary of State or the appropriate state agency. This document establishes your LLC as a legal entity. Here are the steps you need to follow:
- Gather Required Information: Prepare the necessary information, including your LLC’s name, address, registered agent details, and the names of the LLC’s members or managers.
- Submit the Form: Complete the Articles of Organization form, which is available on the Secretary of State’s website or through your state agency. Pay the required filing fee and submit the form by mail or online.
- Wait for Approval: Once your form is submitted, it will be reviewed by the state agency. If everything is in order, you’ll receive a Certificate of Organization, confirming the formation of your LLC.
You can also check out this free guide ebook to learn more about forming an LLC in your state.
4. Create an Operating Agreement
While not always required by law, creating an operating agreement is highly recommended for LLCs. This document outlines the ownership structure and operating procedures of your company. Here’s what you should include:
- Ownership Structure: Specify the ownership interests of each member, including the percentage of ownership and their rights and responsibilities.
- Distribution of Profits and Losses: Define how profits and losses will be allocated among the members.
- Management Structure: Outline the decision-making process and the roles and responsibilities of the members or managers.
- Amendment and Dissolution: Include provisions for amending the operating agreement and the procedure for dissolving the LLC.
Other Important Steps to Follow after Forming an LLC
5. Obtain Necessary Permits and Licenses
Depending on the nature of your business and your location, you may need to obtain certain permits and licenses to operate legally. Here’s what you should consider:
- Research Requirements: Research the specific permits and licenses needed for your industry and location. Furthermore, check with local and state government agencies or consult with a business attorney to ensure compliance.
- Apply for Permits: It is essential to submit the necessary applications and documentation to the appropriate regulatory agencies. This may include licenses for professional services, health, and safety permits, or zoning permits.
- Renewals and Compliance: Always be aware of renewal requirements and stay updated on any changes in regulations to ensure ongoing compliance with all permits and licenses.
6. Obtain an EIN
An Employer Identification Number (EIN) is a unique nine-digit number assigned by the Internal Revenue Service (IRS) to identify your LLC for tax purposes. Here’s what you need to do:
- Determine Need: Most LLCs are required to obtain an EIN. However, if your LLC is a single-member LLC with no employees, you may be able to use your Social Security number instead.
- Apply for an EIN: You can apply for an EIN online through the IRS website. The process is quick and straightforward, and you’ll receive your EIN immediately upon completion.
- Useful for Banking and Hiring: It must be noted here that an EIN is necessary for opening a business bank account, hiring employees, and filing federal and state taxes.
7. Comply with Ongoing Requirements
It is without saying, once your LLC is formed, there are ongoing requirements and responsibilities to maintain its legal status. Here are some key considerations:
- Annual Reports: As a matter of fact, many states require LLCs to file annual reports or statements to provide updated information about the business. It is mandatory to submit these reports on time to avoid penalties.
- Record Keeping: You need to maintain accurate and organized records of your LLC’s financial transactions, contracts, and important legal documents.
- Tax Obligations: Understand and fulfill your tax obligations, including federal, state, and local taxes. Consult with a tax professional to ensure compliance with tax laws and regulations.
FAQs on How to Start an LLC
What are the types of LLCs?
There are different types of LLC structures that you can choose from based on your specific needs and circumstances. Find below, some of the common types of LLCs:
a) Single-Member LLC
As the name suggests, a single-member LLC has only one owner. This structure is best suited for entrepreneurs who want to have limited liability protection for their businesses while maintaining a simple and flexible management structure.
b) Multi-Member LLC
A multi-member LLC is owned by two or more individuals or entities. This type of LLC is ideal for businesses with multiple owners who want to share the responsibilities, profits, and losses of the company. It provides limited liability protection to all members.
c) Manager-Managed LLC
In a manager-managed LLC, the day-to-day operations and decision-making are entrusted to one or more designated managers. They may or may not be members of the LLC. This structure is preferred when there are passive investors or when the owners want to separate the management function from ownership.
d) Member-Managed LLC
In a member-managed LLC, all members actively participate in the decision-making and management of the company. This structure is suitable for small businesses where all members want to have a say in the company’s operations.
e) Series LLC
A series LLC is a unique type of LLC that allows for the creation of separate series or compartments within the company. Each series can have its own assets, liabilities, and members, providing a level of segregation and protection between the different series. This structure is particularly useful for real estate investors or businesses with multiple lines of business.
It’s important to note that the availability of certain types of LLCs may vary from state to state. Therefore, it’s essential to consult with a legal professional or business advisor to determine the most suitable LLC structure for your specific situation and comply with the laws and regulations of your state.
How Much Does an LLC Cost?
The costs of forming an LLC depend from state to state. The state filing fees can range from $40 to $500. For example, the LLC formation filing fee in Kentucky is as low as $40, whereas the same will cost you $500 in Massachusetts. Also, keep in mind, that this cost does not include fees like registering a business name and processing fees of the registered agent.
How long does it take to start an LLC?
Starting an LLC can vary in time depending on the state and the efficiency of your document preparation. Generally, it can take anywhere from a few days to a few weeks to complete the entire process.
Can I start an LLC by myself?
Yes, you can start an LLC as a single member. However, some states require more than one member, so it is essential to check your state’s specific requirements.
Do I need an attorney to start an LLC?
It is not mandatory to hire an attorney to start an LLC. However, it is advised to consult with a business attorney who can provide valuable guidance and ensure that you meet all legal requirements.
Q4: Can an LLC have employees?
Yes, an LLC can have employees. Hiring employees requires obtaining an EIN, complying with employment laws, and fulfilling payroll tax obligations.
Q5: Can I change my LLC’s name after it’s formed?
In most states, you can change your LLC’s name by filing the necessary paperwork with the Secretary of State or the appropriate state agency. However, there may be fees associated with the name change process.
Q6: Can I convert my existing business into an LLC?
Yes, in many cases, you can convert your sole proprietorship, partnership, or corporation into an LLC. Do consult with a business attorney or tax professional to understand the process and implications.
Starting an LLC is a significant step towards building your own business. By following the steps outlined in this guide, you can successfully carry out the process of starting an LLC. However, do not forget to choose a unique name, file the necessary documents, create an operating agreement, and comply with all legal requirements.
In summary, starting an LLC involves careful planning, research, and adherence to legal procedures. By following this comprehensive guide, you can confidently embark on your entrepreneurial journey and establish your own successful business.
About the Author: 99businessideas.com led by Rupak Chakrabarty is committed to helping beginners, entrepreneurs, and small business owners in starting, managing, and growing their business. Our aim is to educate the entrepreneur on the various stages of entrepreneurship.