An LLC (Limited Liability Company) is an ideal business structure for small businesses and start-ups.  It combines the benefit of pass-through taxation from sole-proprietorships with the advantage of personal asset protection from corporations.

Starting an LLC can be a big step towards a successful enterprise. Large companies that have become household names, such as e-commerce giant, Amazon, and brewing company, Anheuser-Busch, started out as LLCs.

An LLC is a simple and affordable legal business entity to form and maintain. Follow our step-by-step guide below to learn how to form an LLC.

Steps to Form an LLC

Forming an LLC can be a fairly simple process depending on your state. As compared with a corporation or a non profit, LLCs have considerably lower formation fees and require significantly less upfront paperwork.

Follow these six simple steps to start your LLC today!

Step 1: Select a State

The first step to forming your LLC is to select a state. The best option is to start your LLC in your home state. Any LLC that operates within your home state is called a Domestic LLC.

Your LLC may not always be the state in which you conduct business or are headquartered. If you plan to conduct business in a state other than the state where you live, it is important to register it with the second state as a Foreign LLC. If your business operates entirely online, then you only need to register your LLC in your home or chosen state.

States like Nevada, Delaware, and Wyoming have a reputation for providing LLC-friendly business environments because of the low LLC filing fees and low franchise taxes. While these states offer tax and filing benefits to business owners who live in and conduct business within them, they offer little benefit to those who operate outside them. Any LLC formed in these states will also need to register as a Foreign LLC in other states in which they conduct business.

Step 2: Name Your LLC

Once you have selected which state to form in, you will need to come up with a unique name to provide your state when you file your LLC formation documents.

Once you decide on a name, you need to ensure that it is different from the other registered business names in the state. To ensure this, do an LLC Name Search in your state to ensure you don’t try to register your LLC with a name that’s already been used.

Some of the common rules that apply to naming your LLC include the following:

•  Your LLC name needs to include the following terms or abbreviations: “Limited Liability Company,”, “Limited Company,”, “LLC,”, or “L.L.C.”. The words “Limited” and “Company” may be abbreviated as “Ltd.” and “Co.” respectively.
• Do not use words that may confuse your LLC with a government agency (State Department, FBI, etc.).
• In some states, some words (such as Bank, University, Insurance) are restricted and may require additional paperwork. Words associated with licensed professions require an individual in that profession to be part of the LLC, such as doctors, lawyers, engineers, or accountants.

Step 3: Assign a Registered Agent

An LLC registered agent (also known as a resident agent or statutory agent) is an individual or business that sends and accepts legal documents and tax notices on your LLC’s behalf.

All 50 states require an LLC owner/member to assign a registered agent for their LLC business. Your designated registered agent will receive the following documents on behalf of your business:

• Tax forms and notices
•  Legal documents
• Summons and lawsuit notices
• Annual reports and other government correspondence

You can also be your own registered agent for your LLC or  appoint someone (a member or a colleague) as a registered agent. The appointed person must meet the following requirements for being a registered agent:

• Must be 18 years or older
• Must have a physical address in the state where the business is formed
• Must be available in person during normal business hours

Tip: For added protection, privacy, and peace of mind, the best option is to hire a professional registered agent service. Registered agent services are business service providers that accept tax and legal documents on your LLC’s behalf for a small fee.

Step 4: File Your LLC Articles of Organization

All states require a formation document for LLCs. This formation document is called Articles of Organization (also called Certificate of Formation or Certificate of Organization).

The Articles of Organization contain important information about your LLC, including business name, owners/members, start date, duration of the business, name of registered agent, and corresponding address, if applicable.

The filing fee for the Articles of Organization depends on the state, but can range from $50 to $500.

Select Member-Managed or Manager-Managed

Before filing your Articles of Organization, you need to make a decision on how your business will be managed.

LLCs have two management structures: member-managed and manager-managed.

Member-managed LLCs have members actively running the daily operations and management of the company. Manager-managed LLCs have members appoint managers (may be members or non-members) so that members can focus more on building the business and managers help oversee the needs of the LLC on a daily basis.

Step 5: Create Your LLC Operating Agreement

An Operating Agreement is a legal document that defines your LLC’s ownership structure and member roles and duties.This agreement brings credibility to your business and prevents misunderstandings about roles and responsibilities. An operating agreement may also include information on business continuity and succession in the event that a member departs the LLC.

The Operating Agreement contains six sections:

• Organization
• Management and Voting
• Capital Contributions
• Distributions
• Membership Changes
• Dissolution

If you are starting an LLC specifically in California, Delaware, Maine, Missouri, Nebraska, and New York, you are required to have an operating agreement. Even if an operating agreement is not required in your state, it is advisable to create one so that members can make well-informed financial and management decisions.

LLC operating agreements are not required to be filed with the state. This is a document that you will store internally and use or update when necessary.

Step 6: Get an EIN for Your Business

An Employer Identification Number, (also known as the Federal Employer Identification Number or the Federal Tax Identification Number), is a nine-digit number assigned by the US Internal Revenue Service (IRS) to identify and tax businesses.

You will need to get an EIN after you form your LLC and to hire employees. EINs are free when you apply directly with the IRS – on its website, via fax, or by mail.

Step 7: File a BOI Report

Starting January 2024, the vast majority of LLC owners will be required to file a Beneficial Ownership Information (BOI) Report with the US Financial Crimes Enforcement Network (FinCEN).

Existing LLCs will be able to file anytime between January 1, 2024, and January 1, 2025, while new LLCs will have up to 90 days to do this (30 days for LLCs formed after the start of 2025).

Keep in mind that failure to file your LLC’s BOI report on time can result in exorbitantly high fines (i.e., $591 per day) or even jail time (up to two years).

Note: Not every LLC owner is required to file a BOI report. For example, companies with more than 20 full-time employees, accounting firms, and banks are exempt. For a full list of filing exemptions, you can have a look at FinCEN’s website.

After Forming Your LLC

By following the steps, you have now established your LLC. However, there are a few more things you should attend to before conducting business.

Register Your LLC For State Taxes

If you are selling physical products, you are required to collect sales tax and deliver them to your state’s designated tax collecting agency. There are also sales tax collection laws that may apply if your LLC sells to out-of-state customers.

If you plan to hire employees, you’ll need to register for employment withholding tax and unemployment insurance tax.

In some states, LLCs also need to file annual reports, where you need to pay annual fees or franchise taxes.

Tax requirements and annual reports for LLCs are all state-specific. Find what is required in your state.

Get the Proper Licenses, Permits, and Insurance

A business cannot  legally operate without obtaining the necessary licenses and permits to stay compliant.

The permits and licenses your LLC will need will depend on the type of business you operate.  You’ll need to check for these requirements at the city, county, and state levels to ensure all of your bases are covered.

Examples of permits and licenses include transportation and logistics license, liquor permits, environmental permits, zoning permits, health permits, and more.

Along with licenses and permits, you also need to ensure that your business carries the proper insurance policies. These policies will not only protect your business assets in the case of damage or loss, but can also get you in the door when bidding on jobs or renting an office space.

Follow Hiring Requirements

When hiring employees, there are legal compliance requirements to follow. These requirements include:

• Confirm that new hires are legally eligible to work in the US
• Report new hires to the state agency that handles your state’s new hire reporting program (you must report new employees within 20 days of hiring)
• Withhold employee taxes
• Purchase workers compensation insurance
• Pay employees at least the state and federal minimum wage

Resources

• IRS – Limited Liability Companies

For all related articles, have a look at our LLC Formation Resources page.