How to Create a Limited Liability Company (LLC) in 9 Steps (including links to resources)

Creating a Limited Liability Company (LLC) is popular among business owners due to its legal protections and flexibility. Here’s a straightforward guide on how to do so, broken down into manageable steps.

A graphic for an article series that discusses how to create an LLC. The graphic contains cellular organisms that represent the different types of business structures.

What is a Limited Liability Company (LLC)?

A Limited Liability Company (LLC) is one of the many business formation structures. It offers personal asset protection similar to a corporation. However, unlike corporations, LLCs benefit from the tax advantages of a general partnership. This includes pass-through taxation, where profits and losses are reported on the members’ personal tax returns, avoiding double taxation. LLC owners, known as members, are not personally liable for the company’s debts or legal issues.

How to Create an LLC is 7 Steps

1. Choose Your LLC Name

  • Brainstorm a list of potential names. Your LLC’s name should be unique and not too similar to existing business names in your state. Most states require that the name ends with “LLC” or “Limited Liability Company.”

1a. LLC Naming Resources

2. Designate a Registered Agent

  • Decide whether you will act as your own agent or hire a service. A registered agent receives legal documents on behalf of your LLC.
  • Keep in mind the agent must be available during business hours and have a physical address in the state of formation.

2a. How to Find a Registered Agent

  • I’ve worked with LegalZoom’s registered agent service, which was reasonably straightforward. It lacked some transparency but was adequate for finding professional registered agent services.
  • We do NOT receive commissions from LegalZoom.

3. File Articles of Organization

  • Complete and submit the Articles of Organization to your state’s LLC filing office online or by mail (see instructions). This document includes basic information about your LLC, including name, address, and member information.
  • Be prepared to pay the filing fee, which varies by state.

3a. How to File Articles of Org.

  • Most states mandate registration with the Secretary of State’s office or through an associated business entity. To find registration resources (government websites and partner sites) by state, use the U.S. Small Business Administration’s state lookup function. This is the best place to start.
  • Once you’ve reached your state resource, look for your state-specific articles of organization. There may be an option to complete online and pay the fee with a credit or debit card. If not, download and fill out the required form details and follow the instructions to submit the completed form. Instructions are often located at the bottom or on the backside of your state-specific form.

4. Create an Operating Agreement

  • Draft an Operating Agreement that outlines your LLC’s ownership and operating procedures. You might include details on profit sharing, voting rights, procedures for joining and leaving the LLC, etc. Though not always legally required, an operating agreement helps keep members on the same page.

4a. How to an Op. Agreement

  • LawDepot provides free Operating Agreement templates tailored to your state. The downside is that you must complete a lengthy form, but to “print, edit, or download,” you are required to sign up for a free trial or purchase a premium license. I might suggest the Forbes alternative (below).
  • Forbes has done a fair amount of the work for you. They’ve drafted a free LLC Operating Agreement template, which you can easily fill out, download, email, print, etc. However, this version doesn’t contain the state-specific nuances of the previous version.
  • We do NOT receive commissions from LawDepot or Forbes.

5. Apply for an EIN

  • Apply for an Employer Identification Number (EIN) through the IRS website. An EIN is necessary to hire employees, open a business bank account, and file taxes. You can get an EIN from the IRS for free (linked below).

5a. How to Obtain an EIN

6. Understand Tax Commitments

  • Pass-through Taxation: By default, LLCs are treated as pass-through entities for tax purposes. This means the LLC itself does not pay taxes on its profits. Instead, profits and losses are passed through to the owners (members), who report them on their personal tax returns.
  • Self-Employment Taxes: LLC members who are actively involved in the business must pay self-employment taxes on their share of the profits. These taxes cover Social Security and Medicare.
  • Employer Obligations: If the LLC has employees, it must withhold payroll taxes and possibly pay state unemployment insurance taxes and workers’ compensation insurance.
  • Quarterly Estimated Taxes: If the LLC’s income is substantial, members might need to make quarterly estimated tax payments to cover their expected tax liability.
  • Sales Tax: LLCs that sell goods or taxable services must collect sales tax as state and local laws require. Registration with state tax authorities is typically necessary to do this.

6a. Tax Commitment Resources

7. Obtain Licenses and Permits

  • Identify federal, state, and local licenses and permits required for your business.
  • To do this, refer to the following U.S. Chamber of Commerce resources (below/right). They’re worth reading and will help cement your understanding of this complex topic.

7a. LLC Naming Resources

8. Announce Your LLC

  • Some states require that you publish a notice in a local newspaper about forming your LLC. The specific requirements vary by state. If your business was formed in Arizona, Nebraska, or New York, you’ll need to contact your local newspapers or directly contact your Secretary of State (SOS) to understand the process and costs involved.

9. Keep Your LLC Complaint

  • Staying compliant ensures your LLC remains legally operational. Maintain your LLC’s good standing with the state by paying annual fees, filing required reports, etc.
  • Regularly review state requirements to ensure your LLC complies with new laws.
  • Please see the resources (below/right) for more insight into your unique situation.

9a. Compliance Resources

Pros of Starting an LLC

  • Limited Liability Protection: LLC members (owners) are protected from personal liability for business debts. This means personal assets (home, car, savings) are usually not at risk if the LLC faces bankruptcy or lawsuits.
  • Flexibility in Ownership: LLCs offer flexible management structures. They can be managed by the members (owners) directly or by managers appointed by the members.
  • Tax Advantages: LLCs typically benefit from pass-through taxation, where business profits are only taxed once on the members’ personal tax returns, avoiding double taxation.
  • Credibility: Operating as an LLC can enhance your business’s credibility with potential customers, suppliers, and financial partners compared to operating as a sole proprietorship or partnership.

Cons of Starting an LLC

  • Costs and Formalities: The initial and ongoing costs and regulatory requirements can be burdensome, especially for small or solo entrepreneurs.
  • Limited Growth Potential: LLCs cannot issue stock, which may limit the company’s ability to raise capital from investors compared to corporations.
  • Variability by State**: Variability requires business owners to be well-informed about their state’s specific regulations and can complicate operations if the business operates across state lines.
  • Self-Employment Taxes: LLC members may be subject to self-employment taxes on their share of the profits. While the pass-through taxation structure has advantages, the impact of self-employment taxes on profits can offset those benefits, particularly for high-earning members.

LLCs vs. Partnerships and Sole Proprietorships

CriteriaLLCsPartnershipsSole Proprietorships
Basic Tax InformationPass-through taxation; profits taxed on members’ personal tax returns.Pass-through taxation; profits taxed on partners’ personal tax returns.Pass-through taxation; profits taxed on the owner’s personal tax returns.
LiabilityLimited liability; members are not personally liable for business debts or legal actions.Unlimited liability; partners are personally liable for business debts and legal actions.Unlimited liability; the owner is personally liable for business debts and legal actions.
Estimated Cost to Get StartedModerate to high; Costs can range from $500 to over $1,000, depending on the state.Low to moderate; costs mainly involve obtaining necessary permits and licenses. Costs vary but are generally under $500.Low; costs mainly involve obtaining necessary permits and licenses. No formal filing fees required. Typically under $300.

Now, It’s Your Turn

Starting an LLC involves considering its advantages, like liability protection, and its drawbacks, such as costs and regulatory requirements. Your decision should be based on your business’s unique needs, growth potential, and financial status. Consulting with legal and financial experts can provide personalized advice and help you navigate the setup process more effectively.

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