Starting a new business is one of the best accomplishments in your life, but the time you spend worrying about personal liability or filing the right legal paperwork is time spent away from making your business great.
That’s why learning how to start an LLC is a smart move.
Not only do LLC’s shield your personal assets from any business liabilities, but they’re fast and easy to set up.
In just 7 steps and zero lawyers required, we’ll show you how to start an LLC today.
What is an LLC?
LLC stands for “Limited Liability Company.” As one of four major legal business entities, LLCs are the most versatile business structure because they offer business owners three major benefits.
- Personal finance protection from business liabilities including taxes, debts, and lawsuits
- Minimum paper-work to form and maintain
- Organization and management flexibility
So who is an LLC for?
The flexibility of LLC’s mean that any type of business can fit under an LLC, but that doesn’t mean it’ll be worth it for you. Most freelancers (graphic designers, copywriters, consultants) who work out of a laptop and local coffee shop will find it useless.
That’s because if you’re not going to take full advantage of the personal-finance protection benefits, then an LLC is a waste of time and money. To figure out if this is the case for you, ask yourself two questions:
- Will I need to accrue any debt for the business?
- Do I have a lot of business assets?
A no to both of these is a “no” for an LLC.
Of course, you can also look at the other three business structures (sole proprietorship, partnership, and corporations), but each of these requires you to make some sort of compromise.
Sole proprietorships and partnerships are cheap and easy to set up — but these structures leave your personal assets on the line in case you owe money or are sued (you could lose your house or car).
On the other end of the spectrum, corporations can provide you with a lot of liability coverage and some capital benefits (thanks to shareholders), but they are incredibly complicated and expensive to run.
This is why LLC’s are the best-of-all-worlds option for the right business owner and why they are the best place to start for many people.
The main disadvantage to LLC’s
If there’s one major drawback, it’s because of Uncle Sam.
LLC’s have a higher self-employment tax and a higher profit tax than other structures.
This means you’ll feel a bit more of a sting during tax time. Don’t let that persuade you otherwise. If you’re taking advantage of the personal liability protection, flexibility, and simplicity then you’ll more than make up for this tax cost in the long run.
How to Start an LLC in 7 Steps:
- Pick your state of operation
- Name the LLC
- Choose a Registered Agent
- File articles of organization with the state
- Choose a management structure
- Create an operating agreement
- Get an EIN
1. Pick your state of operation
This is easy. It’s the state you wish the business to be registered in. Logically, this should be the state you already live in. Technically, you can register an LLC in another state. Doing so creates a “foreign LLC.”
A foreign LLC adds a whole new set of complications and fees. If you don’t have a good reason to pick another state, then don’t.
2. Name the LLC
An LLC requires you to include some form of “LLC” in the business name. It can be the full phrase “limited liability company,” or an abbreviation.
Beyond this, there are just three restrictions.
- Your name has to be unique
- You can’t associate your business name with any government agency (e.g. IRS, FBI, DOT, etc.)
- Including words like “accountant,” “attorney,” “dentist,” “bank” and other similar titles requires official licenses first. Simply put, if you’re not a dentist, don’t say you are.
3. Choose a registered agent
A registered agent is someone who sends and receives legal documents for your business and acts as an official representative. It can be you, your grandma, your best friend, whatever. As long as the agent resides in the state your LLC is active in, you’re set.
This is a legal requirement. The government will need to contact your agent about taxes, annual reports, or other things, so it’s in your best interest to get an attentive one.
4. File articles of organization with the state
While “articles of organization” sounds like lofty legal jargon, it’s not. It’s just the form you file with your Secretary of State that says “Hey, I want to form an LLC.”
Typically one or two pages long, it requires some basic info like your business name, business address, registered agent, and the number of members/managers onboard. Print it out, fill it out, pay the fee, and send it off to your Department of State’s office.
5. Choose a management structure
A managing structure defines who you want to run the day-to-day. Do you want the owners/members of the LLC to manage the day-to-day tasks? Or do you want to hire someone else?
Small businesses lean towards member-managed (owners control things), while larger businesses may want someone else to take control of the day-to-day while they themselves focus on higher-level objectives.
Pick whatever works best for your company.
6. Create an operating agreement
This is not necessarily a legal requirement, but it is crucial.
An operating agreement is a contract that outlines how power and profit are distributed throughout your business.
Not spending the time on one could be chaos. It could lead to financial disputes, internal power struggles, and anything else that would make for an HBO drama series.
Don’t know where to start? Don’t worry. There’s plenty of free operating agreement templates available online, plus we can walk you through some of the best business practices to help you get started.
7. Get an EIN
EIN stands for Employer Identification Number and is provided by the IRS for free. You need one to properly file your LLC’s taxes and hire employees.
Services do exist that advertise “low” fees for getting an EIN for you.
They’re all a waste of money akin to extended car warranties or scented trash bags. The application takes five minutes and can be entirely done online at the IRS website.
The cost of an LLC
Getting an LLC is cheap. There are really only two costs to be aware of.
- Initial filing of articles of organization
- Annual report fees
For the articles of organization, some states like Arizona charge only $50 to file, while filing in a state like Massachusetts will cost $500!
Plus the annual fee isn’t bad either. Some states like Mississippi don’t even have one, while others only require it once every few years. While it’ll typically cost less than $100, Massachusetts once again ruins everything by charging $500.
No matter what the cost is for you, NEVER forget to pay it.
Missing its deadline will lead to your LLC being administratively dissolved thus preventing you from conducting business (this is bad). Pay the fee on-time and you’re golden.
What if you’re switching to an LLC?
For those with an existing business beforehand, you’ve got homework.
You’re going to need to ensure that everything business-related is correctly transferred over and correctly represents your LLC. This includes:
- Business accounts
- Credit cards
- Ownership documents
- Employee and client contracts
- Logos and graphics
- and any others you may have
This can be as simple as updating your bank account name and address to include “LLC,” but it can get complicated if, say, your contracts need to be redone to reflect a new organization structure.
Yes, forming an LLC will make your business official — but your work ethic and focus are what will make it successful.
You need to work on making your product or service the best it can be so that you can get clients and produce work that will blow them away.
Sure, having a sweet logo, a pretty website, and a sexy business card is great, but don’t let it consume the time you should be spending finding customers and selling your products/services.
The work comes first, everything else is fluff.
That means you’re going to need rock-solid tactics, a focused strategy, and the confidence to make the right business decisions. We’ve put together Earnable — a detailed business playbook that can help start your dreams and carry you through to success.
So while learning how to start an LLC is a great place to begin, it’s nothing without the effort you put in.