What is an LLC?
LLC stands for “Limited Liability Company.” It is a sort of business structure that combines a partnership’s flexibility with a corporation’s limited liability protection. One of the advantages of forming an LLC is that it offers limited liability protection while also allowing for pass-through taxation. This means that the company’s profits and losses are reported on the member’s individual tax returns, and the company itself does not pay taxes on its income.
How to Set up an LLC
Setting up an LLC involves several steps:
- Choose a name for your LLC
- Appoint a registered agent
- File articles of organization
- Draft an operating agreement
- Obtain necessary permits and licenses
- Obtain an EIN
See the six simple steps to start an LLC below for a detailed description.
Why Start an LLC?
LLCs are convenient for many potential business owners, regardless of state, for several reasons. True, the degree of convenience may vary depending on various internal and external factors, but the type of company in itself is quite favorable.
However, you might be unsure whether you should consider a different type of structure for your business, such as a sole proprietorship vs LLC.
Pros of starting an LLC
In short, the main benefits of starting an LLC are:
|Flexibility of Tax||LLCs offer flexibility in taxation. By default, LLCs have profits and losses passed through to the owners and taxed on their personal tax returns.|
|Less Complexity||LLCs generally require fewer formalities than other entities, such as corporations. For example: There are no annual meetings required, and the record keeping requirements are less stringent.|
|Protection of Personal Liability||An LLC’s primary advantage is that it protects the personal liability of its owners. This means that the owners’ personal assets have protection from any debts or legal actions taken against the business.|
|Credibility||Forming an LLC gives you more credibility and builds authority in the eyes of potential customers and partners.|
What is the downside of an LLC?
There are a couple of downsides to an LLC:
|Costs||Filing fees, annual report fees, fees for hiring a registered agent or an attorney to draft an operating agreement.|
|Taxation||Although there is tax flexibility, it’s important to note that LLC owners who are actively involved in the business may be subject to self-employment taxes, which can be higher than traditional payroll taxes.|
|Limited Life||LLCs have a limited lifespan. The operating agreement will specify the duration of the LLC, which could be a specific number of years.|
|State-specific Regulations||The regulation of LLCs is at the state level, and each state has its own regulations and requirements for forming and operating an LLC.|
|Limited Ownership Options||In some states, corporations and LLCs can’t own other LLCs and there may be restrictions on foreign ownership.|
Six Simple Steps To Start An LLC
Knowing how to start an LLC is essential for all prospective business owners in the US.
It essentially boils down to going through six steps:
Step 1: Choose a name for your LLC
- The name must be unique and not already registered in your state.
- You can check the availability of your desired name on your state’s business registration website. We also recommend using our Business Name Generator to find the perfect name and see if its domain is available.
- Avoid using complex or difficult-to-spell names, as this may make it difficult for customers to find your business online or in directories.
- The name you choose should reflect your brand identity and the products or services you offer. It should be easy to pronounce and relevant to your industry.
- Avoid using geographic locations in your name, as this may limit your business’s potential to expand beyond that location.
- Before choosing a name, check to see if it’s already trademarked. This will help you avoid legal issues in the future.
Step 2: Appoint a registered agent
- Determine the requirements in your state. Each state has different rules for who can serve as a registered agent and what their responsibilities are.
- You can also consider hiring a professional service. Many companies specialize in providing registered agent services. They typically charge a fee for their services, but it’s a convenient option for those who don’t have an individual agent in mind or want to ensure the role is adequately filled.
- If you prefer to choose an individual to serve as your registered agent, you should look for someone who also meets the requirements in your state. In general, the registered agent must be a resident of the state where the LLC is formed, have a physical address in the state, and be available during normal business hours.
Step 3: File articles of organization
These are legal documents that establish the LLC and include basic information such as:
- The name, address, and purpose of the LCC
- How long has the LLC existed so far
- The name and address of the registered agent
You can file the articles of organization with your state’s Secretary of State or similar agency, along with a filing fee.
Step 4: Draft an operating agreement
This is a document that outlines the ownership structure, management, and operating procedures of the LLC. While not required by law in all states, it is a good idea to have an operating agreement to clarify the roles and responsibilities of the members and prevent future disputes.
Step 5: Obtain necessary permits and licenses
Depending on your industry and location, you may need to obtain certain licenses and permits before you can operate your business legally. You can determine the specific requirements with your state or local government. Some licenses and permits may require additional documentation, such as proof of insurance or a business plan.
Don’t forget to renew your licenses and permits (usually) on an annual basis. It’s important to keep track of when they expire and to renew them on time.
Step 6: Obtain an EIN
An Employer Identification Number (EIN) is a unique nine-digit number the Internal Revenue Service (IRS) assigns to identify your business for tax purposes. You can apply for an EIN online through the IRS website. Most LLCs need an EIN, but there are some exceptions. For example, you may not need an EIN if you are a single-member LLC with no employees.
When applying for an EIN, you will need to provide information such as your business name, address, and type of business entity. You will also need to provide your Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN).
Once you have completed the application, the IRS will confirm your EIN via email or mail. Be sure to save this confirmation for future reference.
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How Long Does It Take to Start an LLC?
The time it takes to form an LLC can vary depending on factors such as the state you’re forming it in and the method used for transporting documents. Processing times differ between states, with some being faster than others.
For example, Delaware typically processes LLC paperwork in less than a day, while Arizona may take up to 6 weeks. On average, it takes between 2 and 3 weeks (14 to 21 days) to form an LLC in the US.
The Best States to Start an LLC
The five best states to start an LLC are:
- Wyoming: 0% tax for LLCs and an incredibly low unemployment rate, Wyoming is the absolute best state to start an LLC;
- Florida: Good overall state organization and low LLC taxes;
- Alaska: 0% individual tax and other benefits;
- South Dakota: 0% taxes and favorable business climate;
- Montana: 0% taxes and almost no unemployment rate.
The Worst States to Start an LLC
The five worst states where you should avoid forming an LLC are:
- New Jersey: Extremely high prices and taxes make it the worst LLC state, period;
- California: An overall more expensive standard makes starting an LLC a futile attempt;
- New York: High individual taxes only get worse if you start an LLC;
- Minnesota: Stay clear if you don’t want to spend too much money on taxes;
- Connecticut: A variety of high taxes and unfavorable business tax laws.
How Much Does It Cost to Start an LLC?
The cost of forming an LLC can vary depending on several factors, such as the state where you plan to form the LLC, the fees charged by the state, and any additional expenses you may incur.
The cost of forming an LLC can range from $50 to $500 or more. Some typical costs associated with forming an LLC include:
- Filing fees
- Registered agent fees
- Operating agreement costs
- Business licenses and permits costs
Starting an LLC can be relatively affordable, especially if you file the paperwork and don’t hire an attorney. However, it’s important to remember that ongoing costs may be associated with running an LLC, such as annual report fees and taxes.
Establishing an LLC is a relatively simple process if you know how to do it correctly. Get all of the necessary information and determine what steps you must take to simplify the procedure. In this article, we’ve listed what you require in order to form an LLC, how long it will take and how much it costs to start an LLC. Utilize this information to successfully launch your LLC business.