How to Start an LLC: A Step-by-Step Guide

A limited liability company (LLC) is a business structure that helps shield the personal assets of the owner or owners in the event of a lawsuit, legal judgment, or bankruptcy. This article explains the steps involved in forming an LLC, as well as how to decide whether an LLC is the right business structure for you.

Step 1: Choose a Business Name

Unlike a sole proprietorship, which can simply do business under its owner’s name, LLCs must register a formal name with their state. Typically, the name must clearly indicate that the business is an LLC.

State laws may prohibit or restrict the use of certain words in business names, so it’s worth learning the naming rules for your state and any other states where you plan to do business. You can also ask the state offices where you will be filing your paperwork to check their records and make sure that the name you have in mind isn’t already taken.

Otherwise, the general rules for naming any kind of business also apply to LLCs. Try to make it unique and memorable. Consider making it specific enough that people will have some idea of what your business does, but not so restrictive that it will no longer be a good fit if you decide to diversify and expand into other areas.

Step 2: Research State Requirements

LLCs must generally be registered in their home state and any other states where they operate. According to the U.S. Small Business Administration (SBA), that can include having a physical presence or employees in a state, meeting regularly and in person with clients in that state, or if the state accounts for a significant portion of the company’s revenue.

In most states, registration is handled by the secretary of state’s office, or a business office or agency, which can provide details on their state’s requirements. Today, the registration process can often be completed online.

Step 3: Prepare LLC Formation Documents

In general, anyone who wants to form an LLC must create and file two documents with the appropriate states: articles of organization and an operating agreement.

The articles of organization provide basic information, such as the company name, its address, and its members (as the owners are called). The operating agreement goes into greater detail about the company’s decision-making structure and the role that each of its owners will play in making those decisions.

Regarding LLC operating agreements, the SBA notes, “It’s widely recommended to create one to protect yourself and your business, even if your state doesn’t mandate it.”

Step 4: Appoint a Registered Agent

States require that the owners of an LLC have a registered agent—a person or company designated to serve as the primary contact point between the state and the LLC for any legal or tax matters. In preparing articles of organization for the states where it plans to do business, the LLC will need to identify a registered agent, so this is a decision that has to be made early in the process, although LLCs can change registered agents later.

LLCs can select one of their owners, their attorney, or someone else they know to be their registered agent. However, experts generally advise choosing an individual or company that does this professionally. A professional registered agent is likelier to know the rules and be available whenever needed.

Step 5: File LLC Formation Documents

As mentioned, an LLC needs to file certain formation documents with both its home state and others where it intends to do business (often referred to as “foreign states”). Each state has its own procedures, but instructions—and often applications—are available online.

The filing fees tend to be relatively modest—rarely exceeding $200 in most states—but can add up for an LLC that plans to operate in many locations.

Step 6: Obtain an EIN and Business Licenses

LLCs must obtain an employer identification number (EIN) from the Internal Revenue Service (IRS) to use on their tax forms and for other purposes. They can apply online at the IRS website and receive a number right away. There is no charge for this service.

In addition, the new LLC may need to apply for federal or state business licenses or permits. This depends largely on the nature of the business. For example, the federal government licenses some companies in the agriculture, transportation, and broadcasting industries, among others. States may require licenses from businesses such as dry cleaners, plumbers, and restaurants.

Step 7: Maintain Compliance and Record-keeping

Once it has been successfully established, an LLC must keep up with a variety of ongoing compliance rules. The SBA divides these into external and internal requirements.

External requirements are things that the LLC must do to satisfy federal and state government rules, such as filing the proper forms and paying taxes. Internal requirements are matters to which the LLC must attend in order to comply with the LLC’s own organizational rules, such as proper record-keeping and holding annual meetings for members.

Most external requirements are imposed on the state level. According to the SBA, those typically include:

• Filing an annual report or biennial statement, depending on which the state requires.
• Paying statement filing fees and possibly franchise taxes. Franchise taxes don’t refer to franchises like hamburger chains, but to taxes that some states impose on companies for the right to do business there.
• Updating the LLC’s articles of organization with the state if something significant has changed, such as a new company name or address or new owners.

As to internal requirements, the SBA notes that the rules for LLCs are more flexible than those for corporations, but says LLCs “are generally advised to maintain an updated operating agreement, issue membership shares, record all membership interest transfers, and hold annual meetings.”

Is an LLC Right for You?

LLCs are more complicated to start up and maintain than sole proprietorships, but they offer greater protection for the owner’s personal wealth. If you have a lot of assets that could be at risk, an LLC might be the better choice, especially if you’re going into the kind of business where lawsuits are common.

If your business will have more than one owner, a sole proprietorship is no longer an option. Instead, your choices will be between an LLC, a partnership, an S corporation, or a C corporation.

Partnerships are less complex than LLCs. One type—a limited liability partnership (LLP)—does provide some liability protection to its owners, although less than an LLC in some states.

S corporations are another option. According to the SBA, corporations “offer the strongest protection to its owners from personal liability, but the cost to form a corporation is higher than other structures. Corporations also require more extensive record-keeping, operational processes, and reporting.” C corporations are more complex and tend to be very large companies.

The Bottom Line

Starting a limited liability company (LLC) involves some extra paperwork and added costs compared with a sole proprietorship. However, the legal protections that an LLC provides may make that more than worthwhile for some business owners.