Starting an 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.
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.
First-time business owners will often choose one of these three states when forming their LLC.
Unfortunately, it is not so easy to escape the taxman. 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:
- You will end up paying your home state taxes anyway
- You will likely pay twice for registered agents, annual filings, franchise taxes, and more
- 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 annual report fees.
You are located in California and opened an e-commerce store three months ago. The store is starting to generate income, so you decide it’s time to get serious.
You form an LLC and elect for S-Corp taxation in neighboring Nevada, thinking you'll avoid California's state corporate income tax.
Although you formed your LLC in Nevada, California considers your LLC to be doing business in California.
That's because your primary place of business is your home address in California (where you are operating your online store from).
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 an 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.
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.
You form an LLC for your lawn care business and name it Lawn Patrol LLC.
Later, business is booming, and customers begin offering you more landscaping jobs. You hire employees and expand.
In addition to lawn care, you begin offering:
- Trimming and pruning hedges and trees
- Planting and maintaning plants and flowers
- Installing and maintaning watering systems
Now that you're doing more landscaping, you realize Lawn Patrol LLC is too narrow of a name and may confuse potential customers.
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.
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 .com domain immediately. Domains are only about $10 per year.
Once an LLC is created, its name is publicly available. Squatters use public databases to automatically search for and register matching .com domains for new LLCs.
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!
Many English .com domains are currently owned by squatters who never plan on creating a website. You may find out yours is already taken. 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
Email: [email protected]
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 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. If courts can’t contact you, your trial may continue in your absence.
The solution is to appoint a 3rd party to be your registered agent. That 3rd 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 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:
- Business address of the LLC
- Name and Address of registered agent
- Name and Address of founding members
- Member-managed or manager-managed
- Effective date
- Duration of your LLC
- Statement of purpose
Filing the articles of organization can be done online or via mail. Filing fees 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.
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.
Basic Formation: Covers the essential business entity creation. Includes – at minimum – filing of Articles of Organization and the drafting of an Operating Agreement for an LLC or corporate bylaws for a corporation.
Full Formation: Additionally includes – at minimum – a registered agent service, which most owners will find essential.
Full Formation + Website: In addition to full formation services, includes a website, domain, security certificate, and other services necessary to securing your company’s online presence.
Step 5. Create an Operating Agreement
The operating agreement is your LLCs most essential document. It’s crucial to making sure your business structure works for you.
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.
The operating agreement explicitly establishes the separation between you and your business and ensures the limited liability protections will be maintained.
Without an operating agreement, you’re relying on precedent alone to protect your LLC’s personal liability protection.
And without personal liability protection, your business is more like a sole proprietorship or partnership, meaning creditors can go after your personal assets.
An operating agreement also creates a contract that states:
- Who the LLC members are, and how much of the LLC each of them owns
- Who runs the LLC
- How major business decisions are made
- How the LLC will be funded
- How profits will be distribute
Technically, states do not legally require operating agreements. But hopefully, we made their importance clear
Formation services and law offices are best suited to creating an operating agreement for your small business.
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 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 sent by mail. You will receive your EIN immediately after filling out the form online.
Single-member LLCs are not required to apply for an EIN. You can use your social security number instead. That said, we highly recommend getting an EIN to prevent identity theft and to help separate personal and business finances.
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, for the same reasons we recommended signing an operating agreement.
It strengthens your personal liability protection.
Non-separated bank accounts will be challenged in court and used against you as a way to pierce the corporate veil.
The legal concept of separation between an organization and its shareholders by which shareholders are protected from liability.
According to Cornell Law School, corporate veil piercing is the most litigated issue in United States corporate law. (Link to Cornell Law Review PDF)
Treating your LLC’s assets as your own and not operating a business bank account creates an easy point of attack for lawyers.
It is thus important to open a business bank account immediately after forming your business entity.
Other important reasons why you need a business bank account:
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 transactions.
Come tax season, you will have to provide your bookkeeper with all expenses incurred over the fiscal year.
Suppose you mixed business finances with your personal finances. In that case, you’ll have to go through thousands of entries and isolate them by hand.
It’s a frustrating task that can take hours.
With a business bank account, you can simply request a year’s statements from your bank and forward them to your bookkeeper. Online banking and accounting software can do this for you.
Prove 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 IRS 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.
Establish business credit
Much of business comes down to relationships. Nurturing your relationship with your bank can pay huge dividends down the line.
It’s best to start this process as soon as possible. Having an established history of creditworthiness will always come in handy.
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
Small business owners 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.
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!
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:
- Save many hours of time
- Lessen your tax liability
- Stay compliant at all times
- Receive valuable business advice
- 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:
- Alcoholic beverages
- 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.
Online businesses are usually more fortunate; they can often skip most permits and licenses.
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.
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.
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.
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.
Starting an LLC FAQs
How do I start an LLC?
Starting an LLC can be done quickly and easily online. The process includes these six steps:
- Choosing a state
- Naming your LLC
- Appointing a registered agent
- Filing with the state
- Creating an operating agreement
- Getting an EIN
If you follow our recommendations, the entire process takes only a couple of hours.
How much does it cost to form an LLC?
The average cost to form an LLC is $250. Most states charge $50-$150 in filing fees. Some charge more. Expect to pay $40-$150 for the formation services we recommend. Lawyers can charge up to $1500 for the same service, and CPAs usually charge somewhere in between.
How long will it take to form an LLC?
Most LLCs are formed in 3-5 business days. Turnaround times can be as high as several weeks, depending on the state, the time of year, and other factors outside your control. You can call your state’s Secretary of State office and ask for an estimate.
Do I need a lawyer to start an LLC?
No, you do not need a lawyer. You are not legally required to hire a lawyer to form an LLC. We recommend hiring a formation service and consulting with a CPA afterward.
What is the easiest way to start an LLC?
The easiest way to start an LLC is to hire a formation service. These services specialize in forming LLCs. Expect the entire process to cost about $150.
Which is the best state to form an LLC in?
It's generally best to form your LLC in your home state. Forming an LLC in Nevada, Delaware, or Wyoming (if you’re not in one of those states) often comes with many extra costs. Read our article to learn more.
What do I need to start an LLC?
Starting an LLC is quicker and easier than most people think. All you need is some basic information. You need to decide on or have:
- Business address of the LLC
- Name and address of registered agent
- Name and address of founding members
- Statement of purpose
Once you have this info prepared, you can hire one of the formation services we recommend to complete the filing. Costs for a completed LLC start at $39.
Can you start an LLC with bad credit?
Yes, you can. Bad credit has no bearing on your rights to form a company. You are also not legally required to open a business bank account for your LLC. Although we usually recommend against using your personal bank account, doing so is not illegal.
Can you start an LLC without having a business?
Yes, you can. LLCs are not just used for businesses. LLCs can also hold real estate, segregate assets, or raise capital.
Can you start an LLC while on unemployment?
Yes, you can. You can also use your unemployment money on your new business. Your unemployment payments will only be affected once your new business is generating an income for you.
When is the best time to start an LLC?
Usually, as soon as possible. LLCs are cheap and easy to start. It makes sense to take advantage of an LLCs' liability protection as soon as you're making money.
If you're generating cash and it's the end of the year, requesting a “delayed filing” is often the best move. A delayed filing lets you effectively register on January 1st. That way, you’ll avoid filing a separate LLC tax report for your current year.
Where do I go to start an LLC?
You can start your LLC entirely online. You can do it yourself or hire someone to do it for you. The formation services that we recommend can create a standard LLC for a starting price of $39 + state fees.
Who can start an LLC?
Any person over the age of 18 can start an LLC. This includes non-US citizens and non-US residents.
How do I start an anonymous LLC?
Anonymous LLCs are only allowed in four states - Delaware, Nevada, New Mexico, and Wyoming - and they rarely live up to their name.
Suppose your business is not going to be located or exclusively making money in one of those states. In that case, you will have to register a non-anonymous Foreign LLC in the state you are conducting business in anyway.
How do I open an LLC bank account?
The same way you would open a personal checking account.
When opening a bank account for your LLC, a bank will likely ask for your LLC's Employer Identification Number, also known as its EIN. This is like your LLC's social security number. The IRS can issue EINs online, for free, in thirty minutes.
How do I start an LLC with two owners?
Multi-member LLCs formation is done through the same steps as it is for single-member LLCs. The only difference is that your articles of organization will include two owners.
Disclaimer: We try educate our readers the best we can, but we do not provide legal or tax advice and our content is for general information only. If you require legal or tax advice, please reach out to a qualified professional.