How to Start an LLC: Guide for First Time Entrepreneurs

Starting a limited liability company (LLC) is much easier and cheaper than you may think.

These days, you no longer need to spend thousands on business formation.

If you’re eager to get your small business started but are dreading the first hurdles, you are not alone. Every successful entrepreneur has felt what you’re feeling right now.

To help you along, we will teach you what you really need to know about forming an LLC, without the jargon.

By the end of this article, you will know:

• How to start a Limited Liability Company
• What important tasks you will need to address after starting an LLC
• How to save on time and money, every step of the way

Let’s get started!

Step 1. Choose a State

LLCs can be formed in all 50 states, regardless of where you live or plan on conducting your business.

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Three states – Delaware, Nevada, and Wyoming – have state laws that are especially favorable to businesses. Delaware doesn’t tax out-of-state income. Nevada and Wyoming don’t tax any business income.

A first-time business owner will often choose one of these three states when forming their LLC.

Unfortunately, it is not so easy to escape the tax man. If you form in one of these states, chances are you will actually end up paying more.

If business entities could avoid business income taxes simply by forming in Nevada or Wyoming, then everyone would form their businesses there.

We highly recommend forming your LLC in your home state.

There are three key reasons to avoid forming your new LLC outside your home state:

1. You will end up paying your home state taxes anyway
2. You will likely pay twice for registered agents, annual filings, franchise taxes, and more
3. It’s just plain inconvenient

Remember the following rule of thumb: Taxes are paid where the money is made.

Your home state doesn’t care where you formed the LLC. They care where it’s doing business.

You will owe taxes in the state your LLC is “doing business” in.

What qualifies as “doing business”? States can’t agree, of course.

Texas tells you to figure it out yourself. But if you’re wrong, you’re liable. California, on the other hand, likes to keep things clear. If you live there, your business is considered to do business there.

If you have an out-of-state LLC, but your home state deems that your LLC is doing business in your home state, they will require you to register your LLC as a Foreign LLC.

You will effectively own two LLCs.

You’ll pay the taxes you tried to avoid in the first place, plus you’ll pay double for formation, registered agent, and the annual report filing fee.

You now own two LLCs. You’ll pay for the taxes you tried to avoid, plus you’ll pay twice for annual filing fees and registered agent fees.

For most of us, starting a domestic LLC in our home state is cheaper, faster, and more convenient.

Step 2. Name your LLC

People often get stuck at this stage. They want their small business to have the perfect name.

Our advice: Don’t overthink it. Pick a name that makes sense for your business and move on.

Here’s why:

You are not stuck with the name you pick for your LLC.

Your LLC name is mostly going to be used on legal documents. Your customers will likely never see your LLC’s name if you don’t want them to.

You can always file a Doing Business As (DBA), also known as a Fictitious Business Name (FBA). DBAs allow you to use a name of your choice as your trade name.

With a DBA, your LLC name remains the same, but your brand name can be different.

The solution is to file a DBA requesting the trade name Landscape Patrol.

Your LLC, Lawn Patrol LLC, will own the rights to use the fictitious business name Landscape Patrol.

Notice how a DBA does not require LLC to be appended? It can be anything you want, so long as it follows your state’s naming requirements.

Now you can create new flyers, mailers, a website, contracts, all with your new trade name; Landscape Patrol.

Naming Requirements

Before you settle on a name for your LLC, you need to conduct an LLC name search to ensure your business name is available. You will also need to follow naming guidelines established by your state. Regulations vary slightly by state, but the following requirements are universal:

• Must be a unique name
• Must include the phrase “Limited Liability Company”, “LLC,” or “Ltd.”
• Cannot include words or phrases that could cause it to be confused with government agencies, e.g., “IRS”, “Department of State”, “Police Department”, etc.
• Cannot include protected words, such as “College”, “Hospital”, or “Bank”, without an appropriate reason to do so.

Get a Matching Domain Name

After you settle on a name, we recommend you get a matching domain as soon as possible. Even if you don’t have immediate plans to create a business website.

Once an LLC is created, its name is publicly available.  Competitors can buy your perfect domain and its variations to block you from using them.

So called “domain squatters” sift through public records and register matching domains for newly registered LLCs to immediately put them up for sale with a huge markup.

If you try to register your domain months after founding your LLC, you may find the name has been bought and is now up for sale at 10x the original price or worse, redirects to a competitor.

A custom domain name from GoDaddy.com or a similar registrar may cost you between $20 and $50 per year, with regular specials and sales where you can get substantial discounts.

It pays to check.

Once you have your domain name, you can also create a branded email address through GoDaddy.

If you follow all our recommendations, you’ll end up with something like this:

LLC Name: Lawn Patrol LLC
DBA: Landscaping Patrol
Domain: www.landscapingpatrol.com
Email: YourName@landscapingpatrol.com

Now that looks professional!

Step 3. Appoint a Registered Agent

A registered agent is an individual or company that functions as the official point of contact for your LLC.

Government agencies and attorneys will always send official correspondence and service of process (legal papers relating to lawsuits) to the mailing address of your registered agent.

Any person over the age of 18 can be your registered agent, so long as they have a physical address in the state in which you formed your LLC. Companies can be registered agents too.

Legally, you can appoint yourself as your LLCs registered agent.

We strongly recommend against appointing yourself.

The registered agent information is public and can be accessed online. If privacy is important to you, never appoint yourself.

Registered agents must also be available during regular business hours. If you appoint yourself, you:

• Can never take vacations
• Can never take a sick day
• Can never leave the office during business hours

If legal papers don’t reach you because you were out of the office, it’s your fault. This could ruin your business.

If you don’t get a complaint, for example, and fail to answer, the court could skip a trial altogether and award a hefty default judgment against your LLC without giving your any opportunity to defend yourself.

The solution is to appoint a third party to be your registered agent. That third party is usually either a law office or a registered agent service.

Registered agent companies typically charge about $120 per year to be your registered agent. Attorneys will often charge more – up to $500 per year.

We recommend you go with a dedicated registered agent service. They are professionals who specialize in this single service.

Registered agent services scan your documents within minutes of receiving them, notify you, and let you download them online.

Step 4. File your Articles of Organization

This is where things get exciting!

Filing your articles of organization with your Secretary of State officially forms your limited liability company.

Formation documents must include:

• The business address of the LLC
• The name and address of the LLC’s registered agent
• The name and address of founding members
• Whether your LLC is managed by its members or non-member managers
• Effective date
• Duration of your LLC, if you want it to end at a certain time
• Statement of business purpose

Filing the articles of organization can be done online or via mail. The exact filing fee will vary by state.

It’s very important to provide error-free information when filing this document. Formation services often file them for free as part of their formation packages. We recommend taking that route.

Formation services handle the entire LLC formation or incorporation process from start to finish, all online. They are the fastest and easiest option for starting an LLC.

Because they file everything online, they tend to be more affordable than traditional options such as hiring a lawyer or CPA.

We have reviewed and compiled pricing information of the most popular formation services in the table below. You can click the links to read out in-depth reviews. 

Step 5. Create an Operating Agreement

The operating agreement is your LLC’s most essential document. It sets the rules for how your company works internally and with the public. It’s thus crucial to make sure your business structure works for you.

Most states do not require LLCs to have operating agreements, but having one is an important way to start on the right foot and give your business the best chance at success.

The purpose of a limited liability company is to protect your personal assets. If your business gets sued or goes bankrupt, your personal assets, such as houses, cars, and savings, are not at risk.

And without personal liability protection, your business entity is more like a sole proprietorship, meaning creditors can go after your personal assets. The result can be a disaster for your business and your life.

The LLC operating agreement expressly sets down the relationship between you, other LLC members, and the company. It ensures that you and other members get the full protection of the LLC business structure and that the business runs properly.

Operating agreements ensure these protections in many different ways:

• They determine the rights and duties of LLC members. If one LLC member is responsible for running the business or managing the books, the LLC operating agreement should say so. 
• They say what a non-member manager has the right to do. Managers also have special duties to the company and the members. The operating agreement should state these.
• They outline what the LLC is legally able to do. The operating agreement should also set down how the company is allowed to conduct its business from day to day.
• They say how new members can join the company. They also have rules about how an exiting LLC member can leave.
• They set down how and when profits are paid to members. They can also create different types of membership and payment schemes.
• They say whether members or managers are in charge. They also say how to hire and fire managers.
• They say how and under what circumstances the LLC should end. You might not want to dissolve your business now, but you might in the future. It’s best to think about it and plan before it becomes an issue.
• They say how to change the rules. You may need to amend your LLC operating agreement in the future. The operating agreement should set down the rules for making changes.

If you look at most states’ laws, you’ll find that they often have their own “default” rules for how these things run in an LLC. In most cases, operating agreements let you change the rules to fit your unique situation.

If you don’t have an LLC operating agreement, then, and something unexpected happens, the future of your LLC could be determined by what the state law is at the time. Having your contract in place gives you control over your company and its future.

Putting together an operating agreement may sound intimidating. The best way to do it is to get a lawyer or a business formation service for guidance on what your business needs.

Step 6. Get an EIN

An Employer Identification Number (abbreviation: EIN) or, incorrectly, EIN Number is your LLC’s nine-digit tax identification number. Think of it as your LLC’s social security number. The IRS uses these numbers to keep track of business entities for tax purposes.

The Government requires EINs for all LLCs that generate revenue or want to hire employees. Most banks also require an EIN to open a business bank account.

You have to apply for an EIN via the IRS. Applications can be filed online, or you can file form SS-4 via mail. You will receive your EIN immediately after filling out the form online.

In most cases, these are the six steps you need to follow to create an LLC.

Three states – Arizona, Nebraska, and New York – require you to publish notices in local newspapers.

Now that you have properly set up your LLC, it’s time to think about crucial first steps.

Below, we list five tasks to get you started. Everything from here on out depends on the type of business you plan to run.

It’s up to you to decide what’s best for your own business.

No need to get overwhelmed here. Tackle one task at a time, and the process will be a breeze!

Task 1: Open a Business Bank account

LLCs are not legally required to own and operate a separate business bank account.

We nevertheless recommend opening a separate business bank account primarily to maintain the legal protections of your LLC.

As an LLC owner, you need a bank account for the same reason to need an operating agreement: liability protection. LLCs protect your personal assets if someone sues the LLC or it goes bankrupt. This company/individual separation is called the corporate veil. (Even though an LLC is not a corporation, it’s still called a “corporate” veil.) 

If you treat your company’s assets like your own, the veil can be pierced, and you can lose all personal liability protection. So, for example, if you are taking the company’s money and using it to pay your household bills, you could lose all the legal protection that you got by forming your LLC! In that case, your personal property could be at risk.

There are some other good reasons to open a business bank account listed below.

It makes business accounting easier

If you want to make money, you must learn good accounting practices. You must keep detailed financial records about your business, its expenses, and its income. You can’t do that if you are mixing in your own information and money with that of the business. Your LLC’s books are easier to keep with its own account.

A bank account can make it easy to get credit for your LLC

Though you may not be worried about it now, getting credit for your business is also important. Sooner or later, you will likely need to make improvements or invest in new technology. When that time comes, the LLC should do the borrowing, not you. Get started building that business credit now.

You can accept credit card transactions

You need a merchant bank to process credit card transactions. Before that, you’ll need to open a business bank account with them first.

If you operate a physical storefront, you’ll also need a merchant bank to process POS (point of sale) transactions.

You can prove to the IRS that you’re running a business

It’s crucial to separate expenses if you run your small business from home.

Hobbies can be a source of income for people. The IRS, however, limits hobby expenses up to the amount of the hobby income.

They don’t want you deducting a $3000 lawnmower in your individual tax return just because your next-door neighbor paid you $50 to mow his lawn once.

People sometimes decide to form LLCs in an attempt to circumvent these limitations.

But the Internal Revenue Service investigates whether LLCs are genuinely running a business or are just schemes to reduce personal taxes.

If your LLC files net losses for three consecutive years, the likelihood of an IRS audit will skyrocket. At that point, the IRS may classify your business as a hobby. You won’t be allowed to deduct expenses on your tax returns.

Learn more from the IRS.

It makes your LLC look more professional

Mixing personal and business accounts is generally frowned upon in the business community.

It sends all the wrong signals; you’re not taking things seriously, and you can’t be bothered.

Folks want to deal with legitimate businesses. They want to see that you have some skin in the game. Some vendors won’t even accept payment from a personal checking account.

Task 2: Hire a Rockstar Accountant

Frequently, a small business owner will love finding every possible argument against quickly hiring an accountant. They tend to put it off until the last possible moment.

We like to keep it simple. We consider accounting an essential expense. Highly-qualified accountants are worth their weight in gold.

We highly recommend hiring an accountant as soon as possible.

Andrey’s anecdotes

I used to hate having to pay for an accountant every month. I tried to do as much as I could myself. I was 100% that guy. I’m grateful that my mentor at the time helped me completely shift my perspective.

Here’s what he told me:

“Andrey, instead of thinking about accounting as an expensive, necessary evil, find a way to turn obligations into advantages. Don’t look for the cheapest solution. Shop around and find the sharpest CPA you can. They will then become an asset to your business.“

This was one of my first Aha! moments. I learned two important lessons that day:

First – I needed to be smarter with my time.

As a founder, I needed to spend all of my time on my area of expertise: growing the business. Instead, I was spending “founder time” on bookkeeping and on rummaging through state laws.

I had no idea what I was doing, yet I was spending hours and hours on these tasks. What a terrible handicap to my business!

Second – I needed to shift from price-focused thinking to value-focused thinking.

If hiring an expert CPA would create more time for me to focus on my area of expertise, I would practically be buying myself an advantage over my competition.

I’ve taken this advice to heart. I now look to offload as many non-critical tasks as I can onto people who are more qualified than me. And I pay their bills with a smile!

Andrey Doichev

Here’s a list of tasks an accountant can help you with:

• Business entity structuring
• License applications
• Forming Business plan
• Bookkeeping setup
• Sales tax setup
• Payroll issue setup
• Reporting requirements

How sure are you that you can do all of this yourself?

Let’s assume you are confident you can.

Is it still worth your time, as the head of your business, to take on this burden?

With the help of a great accountant, you will:

1. Save many hours of time
2. Lessen your tax liability
3. Stay compliant at all times
4. Receive valuable business advice
5. Not have to worry

An often-overlooked perk of a CPA is the wealth of business knowledge they provide. That’s why we recommend new entrepreneurs shop around and find an experienced professional who fits best with their business vision.

We will end this with a statistic you’ll find valuable. According to Intuit:

“89 percent of small businesses say they are more successful when they use an accountant.“

Task 3: Apply for Business Licenses and Permits

Many businesses will require a combination of permits and licenses from both federal and state agencies before they start operating. Requirements and fees vary based on your activity and location.

Federal regulations are broad and are generally unlikely to apply to you. Some examples of federally regulated industries are:

• Agriculture
• Alcoholic beverages
• Aviation
• Firearms and Ammunition
• Fish and Wildlife
• Mining and drilling
• Nuclear energy

On the other hand, states, counties, and municipalities often overwhelm new businesses with their many regulations. Even if you don’t think that you need a license to do business, you need to check with your state’s division of professional licensing to make sure.

Online businesses are usually more fortunate; they can often skip most permits and licenses, though the law in this area is fast-moving, and it is wise to double-check.

Make sure to contact both your local business license department and a CPA. This is the fastest way to determine what business licenses and permits you need to have for your specific business.

Task 4: Get Business Insurance

The Federal Government requires businesses with employees to have worker’s compensation as well as disability and unemployment insurance. Some states even require one or more of these for businesses without employees.

Beyond that, we recommend small business owners figure out whether they need any of the following common business insurances:

• General liability insurance
• Product liability insurance
• Professional liability insurance
• Commercial property insurance
• Home-based business insurance
• Business owner’s policy (BOP)

Just as an LLC protects your personal assets, liability insurance will protect your business’s assets.

A classic example is the slip and fall lawsuit. Should a person slip and fall in your store or office, your business may be liable.

According to The Hartford, the average cost of a slip and fall claim is $20,000.

General liability insurance covers:

• Bodily injuries
• Property damage
• Copyright infringement
• Libel and Slander

Your insurance policy will help cover administrative costs, court costs, attorney fees, judgments, and settlements.

Task 5: Register for State Taxes

Most LLCs need to register for several types of state and federal taxes.

Below is a list of taxes that your startup likely has to register for.

Sales tax

If your business is selling physical products and has a “sales tax nexus” in a state, you must collect sales taxes from customers. That includes online sales.

A sales tax nexus is a significant physical or economic connection between your business and a state. Offices, employees, affiliates, warehouses, and inventory establish a nexus.

Above specific revenue thresholds, states will consider you to have an economic nexus with them as well. Thresholds for this vary by state.

Franchise Tax

Not to be confused with franchising as a business strategy, a franchise tax is just a fancy term that means you are being taxed for having a business. Not all states charge franchise taxes, and not all LLCs have to pay them.

California levies an annual $800 franchise tax on all businesses. Starting in 2021, though, LLCs don’t have to pay this tax for their first year.

On the other hand, Texas charges between 0.5% and 1% of gross annual receipts above a $1,180,000 threshold.

Employment Taxes

These taxes include withholding tax and unemployment insurance tax.

Withholding tax is a form of income tax payable by the employer on behalf of the employees (hence the name). It’s a more reliable way for the Government to collect payroll taxes.

Unemployment insurance taxes occur at both the federal and state level. They contribute to unemployment payments for eligible unemployed workers looking for jobs.