Forming a limited liability company (LLC) is one of the most important steps when starting a new business. An LLC offers your business liability protection as well as a multitude of other benefits. This guide teaches you everything you need to know on how to start an LLC and what to expect during the process.
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How to Start an LLC in 7 Steps
- Step 1: Choose a State to start your LLC
- Step 2: Name the LLC
- Step 3: Nominate a Registered Agent
- Step 4: File LLC Formation Documents
- Step 5: Create an Operating Agreement
- Step 6: Apply for an EIN
- Step 7: Receive a Certificate from the State
Step 1: Choose a State to Start an LLC
The first step is to choose the state you want to register your business in. You should choose the state where you live or where you plan to conduct your business. Different states have different regulations and rules regarding how to start an LLC. For example, each state has different taxation, costs, fees, and other policies.
Although you can find each state’s LLC rules and regulations online, you can also use an LLC formation service like ZenBusiness to get started quickly. Services such as ZenBusiness and Inc Authority will hold your hand from steps A to Z as you form your LLC.
What’s the Best State to Start an LLC?
Delaware is the most popular state to form an LLC because it carries a strong reputation for being business-friendly and offers a quick filing process with increased protection. However, we recommend forming your LLC in your home state because that is where your LLC conducts business.
Which State Has the Lowest Business Tax?
South Dakota, Wyoming, and Nevada have no individual or corporate income tax. However, Nevada imposes gross receipts taxes. Furthermore, Alaska doesn’t have individual or state-level sales tax, and Florida doesn’t have individual income taxes. Lastly, New Hampshire and Montana have no sales tax.
Read our guide to state corporate tax rates for more information.
Step 2: Name the LLC
Your next task is to name your LLC. However, you can’t simply choose any name. You must make sure the name is available for use or not in your state. Furthermore, you must ensure your business name doesn’t violate another business’ trademark.
This means you can’t choose a name that’s identical to another business’ name or that is only different because of an “s” at the end or another business entity identifier. For instance, you can’t start an LLC called “John’s Kitchen Supplies, LLC” if there is already a “John’s Kitchen Supply, LLC” in your state.
If you check available business names before filing your paperwork, you can avoid having your LLC formation request denied because of naming problems.
Here are a few essential LLC naming guidelines to follow:
- You must include “Limited Liability Company” or abbreviations like LLC or L.L.C in your business name.
- You can’t include words that may confuse your company name with a government agency, such as Treasury, State Department, and FBI.
- You can’t use words such as Bank, University, and Attorney in your LLC’s name. These words may require further paperwork in addition to a licensed person like a lawyer or doctor as part of the company.
Most importantly, you should choose a name that’s distinctive and relates to your type of business. The name should do a good job of telling people what products or services you sell or offer. You also want to pick a name that’s memorable and easy to pronounce. It’s a good idea to check if your LLC’s name is available for domain name registration before finalizing your decision.
How to Check if a Business Name is Taken?
Each state has a secretary of state or other state agency responsible for business entity filings. In most states, the online site of the state business filing agency has an entity name check tool. Use the tool to search business names and learn whether or not another business is already using the name you want.
Can I Reserve My Business Name?
You can reserve LLC names for up to 3 months if you don’t want to register your LLC right away. However, each state has different rules regarding LLC name registration. Furthermore, you are required to pay a reservation fee and submit a name reservation form with your state business entity filing agency.
Step 3: Nominate a Registered Agent
After naming your LLC, the next step is to choose a registered agent. A registered agent is an organization or person who receives legal documents on behalf of your company. These documents include official correspondences like legal summons and state filing notices.
All LLCs must have a registered agent to ensure the LLC receives these official notices and documents. Furthermore, the registered agent must be 18 years or older and have the right to conduct business in the state. The registered agent must also have a physical street address in the state. As such, you can be your own registered agent if you meet the eligibility requirements.
However, we recommend using professional registered agent services for this purpose. Hiring a professional registered agent ensures you receive all the crucial mail and information that may get lost in translation if you’re your own registered agent.
How Much Does It Cost to Hire a Registered Agent?
The cost of hiring a registered agent depends on which state you want to start an LLC in. It also depends on which registered agent service you use. While the cost can go up to $300, Northwest Registered Agent offers a standalone registered agent service for $125 a year.
Step 4: File LLC Formation Documents
Step four is the most important step when you start an LLC. The LLC formation documents are known as the Certificate of Formation or Articles of Organization.
You must fill in the form, either online or in PDF, and send it to the Secretary of State after paying the formation state fee. The filing fee depends on which state you file in. For example, the fee starts from $40 in Kentucky and can go up to $500 in Massachusetts.
So, visit your state LLC filing agency’s website and fill out the Articles of Organization.
Some basic information you must provide includes:
- Your chosen business name
- The address of your principal place of business
- The purpose of your company
- The way your LLC will be managed (member or manager-managed)
- Contact information of the registered agent
- The duration of the LLC, if not perpetual
Once you finish filling out the Articles of Organization, the business owners must sign the form. Furthermore, a few states, such as New York and Nebraska, require you to publish a notice in the newspaper specifying your desire to register your LLC. You must complete this step before filing your Articles of Organization in these states.
The Articles of Organization will explain if you need to take any further action before submitting the form.
Step 5: Create an Operating Agreement
Once you submit your LLC formation documents, you must create an operating agreement. An operating agreement includes the details of the legal, financial, and management rights of all members of your LLC. It also details how profits are distributed, how members leave the LLC, and who provides capital for the business.
In essence, the operating agreement contains all the relevant information related to your business operations. Although many states don’t require an operating agreement, creating one is strongly recommended. This is especially important if you have more than one member or partner.
The operating agreement ensures everybody agrees on their designated rights and responsibilities. While creating your own operating agreement is an option, you can find dozens of free templates online to get you started.
Here are the six primary sections of a standard operating agreement:
- Capital Contributions
- Membership changes
- Management and Voting
Step 6: Apply For an EIN
Next, you need to get an Employer Identification Number (EIN) for your LLC. An EIN is a unique 9-digit issued by the Internal Revenue Service (IRS). Every LLC is required to get an EIN to help the IRS distinguish each business for general tax purposes. Therefore, an EIN is similar to a Social Security (SSN) number for your LLC.
Your company’s EIN is crucial if you plan to hire employees or open a business bank account. You can obtain an EIN by applying directly on the IRS website. The IRS will issue your EIN immediately once it verifies your application.
All multi-member LLCs need an EIN, regardless of whether they are taxed as a partnership or have chosen to be taxed as a corporation. However, the IRS treats single-member LLCs as a disregarded entity unless they elect to be taxed as a corporation.
Therefore, single-member LLCs are not required to obtain an EIN unless it has one or more employees or excise tax liabilities.
Step 7: Receive a Certificate from the State
After your LLC formation documents are filed and approved, your state will send a certificate to confirm that your LLC formally exists. After you receive the certificate, you can handle further business matters like obtaining business licenses and opening a business bank account.
After You Start an LLC
After starting your LLC, there are additional tasks to manage and review. Here are other essential things to address after forming an LLC.
- Set Up Business Accounting. Having a business accountant who will help you take advantage of tax benefits is crucial. Accurate bookkeeping is essential for any successful business.
- Get Permits and Licenses. Check if your business needs any business licenses or permits to stay compliant with your state’s laws and regulations.
- Separate Personal Assets From Business. It’s vital to open a dedicated business bank account and credit accounts to avoid blending them with your personal bank accounts. If you don’t separate personal assets from business assets, your personal assets (your car, home, and other valuables) are at risk if your LLC gets sued.
- Get Business Insurance. In most cases, businesses with employees must get workers’ compensation insurance. Although general liability insurance is not a legal requirement, we recommend getting it to protect your business assets from lawsuits.
How to Start an LLC – Frequently Asked Questions (FAQs)
Before you head out, we want to answer a few common questions we receive about how to start an LLC. This way, you will have all the information you need to launch your business without any headaches along the way.
Bottom Line on How to Start an LLC
Learning how to start an LLC is quick and painless once you know the exact steps. If you follow the above guidelines to a tee, you will have your LLC up and running in no time. However, if you want to expedite the process, we recommend using a professional LLC formation service from ZenBusiness or Inc Authority.