How to Start an LLC

There are many reasons you might choose to start a new business as a limited liability company (LLC) instead of as a sole proprietorship. Starting an LLC allows you to keep your business legally separate from you, the owner. That means that you're much less likely to ever be held responsible for your business's debts and liabilities in a lawsuit.

When you start an LLC, you'll want to ensure it's protected by the right policy before you do anything else. An independent insurance agent can help you get your new LLC set up with all the business insurance it needs. But for starters, here's a closer look at how to start an LLC.

What Is an LLC?

A limited liability company is a state creation and a business entity, not a tax entity. “LLC” describes how your business is structured and who's liable for its losses. An LLC offers similar benefits to operating a business through a corporation but with more flexibility. When you form an LLC, you create an entity that's entirely separate from you. The biggest draws are pass-through tax status and asset protection.

Protecting Your Assets As an LLC

LLCs are popular business structures, not only for actually operating companies but also for holding assets. Because an LLC is an entity in its own right, its debts and assets are separate from yours. If someone sues you and wins, only the LLC’s assets are up for grabs, and vice versa. That means that an angry client can’t take your personal property, and third parties from your personal life can’t take your business property. 

However, this coverage isn't absolute. You can lose the liability protection of the LLC if the lawsuit was a direct result of the personal actions or gross negligence of the owner.

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The Benefits of Starting an LLC

There are many benefits to starting an LLC. Though it’s not a tax entity, an LLC has tax ramifications, and they’re generally beneficial. An LLC is a "pass-through" entity, meaning the business doesn’t pay taxes on its income. Business income “passes through” the LLC and lands on the owner’s individual income tax return. Filing requirements are also minimal.

The advantage is that all earnings after tax belong to the owner, and there is no possibility of double taxation. In the corporate structure, business income is taxed twice: once at the business level, and once at the individual level when it’s distributed as earnings. The downside to a limited liability company is the regulations. Most people miss that opening an LLC will pretty much always result in some additional tax compliance requirements.

5 Easy Steps to Start an LLC

What do you need to start an LLC? Well, knowing an LLC's tax requirements isn't the only thing to prepare before you can officially start your business. Use this guide of easy steps for the best way to start an LLC, so you don't miss any key parts of the process.

Step 1. Pick a State 

You can form your LLC in a state other than the one in which you live and work if you don’t have a physical location. This could be worth looking into since LLC regulations are all over the map, and some states charge annual maintenance fees and LLC-specific taxes that can wreck your bottom line. Businesses in certain states are required to pay their annual flat fee to start and an additional yearly tax if they generate more than a certain amount of income. 

Understand that you can't avoid taxation in your home state just by starting an LLC in a lower-tax state. Unless you’re planning to move, registering in a different state only means you will now have to file taxes in two states rather than one. All of your company's earnings will still be taxable in your home state.

Step 2. Pick a Name 

Naming your LLC isn’t as important as naming your business. You can name your LLC one thing and then operate under any “trade name” you want. You can associate more than one trade name with a single LLC.

Specific naming regulations vary by state, but you typically just need to pick a name that:

• Includes “limited liability company” or some version of “LLC”
• Does not include words that make you seem like a government agency (like “Treasury” or “Federal Bureau of Investigation")
• Is not yet taken by a business in your industry (you'll do a name search through your state's Department of State website)

Your state may also have additional requirements for specific words. For example, if you want to use the words “attorney” or “doctor” in the name, you might need to show there is at least one LLC member who is a certified attorney or physician.

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Step 3. Fill out Paperwork

Then, put that name on the articles of organization. Some states call it a certificate of organization or certificate of formation. It’s a remarkably simple process for something government-managed, which is part of the draw of an LLC. You’ll find the form on your state’s Department of State website, and it should take you about 10 minutes to fill in. Again, it varies by state, but often you'll provide:

• Your name and contact info 
• Your business’s name and contact info
• The name and contact info of your registered agent (the person responsible for receiving legal and financial documents)
• The name of the person who manages the business

Sign, pay the filing fee, and submit via website or mail. You won’t pay much, typically anywhere from $50 to $500, depending on the state. At this point, you have officially started an LLC, but if you want to benefit from it, you’re not quite done.

Step 4. Write an Operating Agreement

An operating agreement makes your LLC’s organizational structure official. Most states don’t require one, but most experts recommend it. It will also likely take no more than 10 minutes. 

An operating agreement describes:

• Who owns what
• Who decides what
• Who is financially responsible for the company
• How profits are allocated among members
• How and why the LLC would be dissolved

You especially need an operating agreement if you plan to take full advantage of the LLC’s management and earnings flexibility. If it’s not on file with the state, your creativity may not hold up in court.

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Step 5. Get Ready for Business

Your next steps vary by state and industry, but generally, you’ll need to:

• Obtain an employer identification number so your business can file taxes. 
• Figure out your new tax requirements (for instance, you may have to pay quarterly estimated taxes).
• Separate your assets into business and personal accounts (and strictly maintain that division). 
• Obtain any necessary licenses or permits for your line of work (e.g., alcohol, construction, hazardous waste). 

After that, if your state charges a maintenance fee, you'll need to pay it. Most states will pull your LLC status if you don’t. 

How Much Does It Cost to Start an LLC?

How much it costs to start an LLC depends on the state you register it in. You'll have to pay an online filing fee to start your LLC and an annual filing report. Depending on your location, your LLC may also be subject to additional taxes each year if it generates more than a certain amount of income, say $250,000 in a calendar year. Regardless of where you live, starting an LLC is typically highly affordable.

Best State to Start an LLC

Despite the fact that you can often start an LLC in a different state for cheaper filing and annual fees, the best state to start an LLC in really is the one you live in. Your LLC will be known as a "domestic" LLC by your state if it's started in the same state you reside in. If you were to start your LLC in a different state, it'd be known by your state as a "foreign" LLC. 

Starting your business as a domestic LLC can help simplify things and ultimately save you some money, especially if you're actually doing business in your current state. That can prevent you from having to register your LLC in two different states and pay two different filing fees. 

FAQs About Starting an LLC