You’re probably anxious to get started if you’ve created a business and plan to form a limited liability company (LLC). Forming an LLC is not complicated, but there is more to it than just filing paperwork.
This handy guide details all the key steps involved and how long it takes to get an LLC up and running.
What Is an LLC?
An LLC is a popular business structure for startup companies due to its many benefits. An LLC provides personal liability protection, for example, so your assets are not at risk if your business is sued or cannot pay its debts.
An LLC is a “pass-through entity” in taxes, meaning that the LLC itself is not taxed. Instead, income passes through the company to the LLC owners or members, who report it on their tax returns on Schedule C.
LLCs also offer flexibility in management, as there are few requirements regarding organizational structure.
How Long Does It Take to Create an LLC?
Filing the LLC formation paperwork with your state should take less than an hour. State approval times vary but usually take up to a few weeks. In some states, your LLC will be formed as soon as you file your paperwork.
Still, you’ll have work to do before and after your paperwork is filed. But either way, you should be able to get your LLC up and running pretty quickly.
How to Form an LLC
You’ll have a series of steps to take before you open your doors for business.
1. Name Your LLC
Naming your business can be challenging. You want a name that’s unique and easy to remember and conveys what your business does. You also want it to be SEO-friendly, so it can easily be found on Google. To choose a name, you can try a few different methods:
- Ask people you know for suggestions
- Use an online business name generator
- Brainstorm some ideas and ask family and friends for their opinion
Your business name is your business identity, and the first impression people will have of your company, so take care with this step of the LLC formation process.
Once you have a few business name ideas, make sure they’re available. First, do a business name search on your state’s relevant website, usually the Secretary of State’s. Also, check your state’s LLC naming regulations to make sure yours comply.
Next, you’ll want to make sure the name is not trademarked. Then, check with the US Patent and Trademark Office to ensure the name is available nationally.
You should also check to see if the domain name is available, which you can do on a site like GoDaddy. For example, you’ll want a .com domain name rather than .org or .co to give your business domain more credibility.
Once you know it’s available, you can reserve the name with your state using their name reservation form.
2. Select a Registered Agent
Most states require that you appoint a registered agent for your LLC. A registered agent is a person or company authorized to accept official correspondence for your business, such as legal, tax, or financial documents.
A registered agent ensures your business stays in compliance with state laws. In addition, the registered agent’s job is to ensure that important notices or documents are not missed.
In most states, a member of the LLC can be the registered agent, or you can choose an individual that meets your state requirements. Generally, the requirements are that the registered agent:
- Be 18 years or older
- Have a physical address in the state
- Be available during regular business hours
- If the agent is a business, it’s registered to operate in the state
Some states have more specific requirements, so check the rules in your state.
Many business owners hire a registered agent service to ensure all necessary documents are received and addressed promptly. A registered agent service also offers convenience.
If you choose to be your registered agent, you’ll have to be available at your registered agent’s address during regular business hours. However, a registered agent service will allow you the flexibility to run and grow your business wherever you need to be.
3. Determine Your Management Structure
Members or managers can manage LLCs. In a member-managed LLC, members handle all management duties. In a manager-managed LLC, non-member employees oversee operations and management duties.
Note that with a manager-managed LLC, a member can be a manager, but only in cooperation with another manager who is not a member.
Member-managed LLCs generally work best for LLCs with few members, all of whom can take an active role in day-to-day operations. Conversely, manager-managed LLCs are best for LLCs with multiple members, some of whom want to be “silent” or passive members and not involved in day-to-day operations.
Most LLCs are member-managed, as they are small businesses that cannot afford a management team.
Some states require that when you register your LLC with the state, you declare whether your LLC will be a member- or manager-managed, so be aware that you may need to make this decision before you file.
4. File Necessary Documents with Your State
In most states, the document you need to file to make your LLC official is the articles of organization. In some states, it’s called a certificate of organization or a certificate of formation.
Generally, you can file the document online, usually on the Secretary of State’s website. The document requires your business name, address, registered agent information, and sometimes member or manager information.
Filing fees vary by state and range from $40 to $500. Depending on the state, your LLC should be approved within a few weeks of filing.
Some entrepreneurs use an LLC formation service like ZenBusiness to handle this step. It saves time and ensures the process is done correctly.
5. Determine Your Tax Status
As mentioned above, LLCs are pass-through entities, which means income passes through to the member or members. If the LLC has only one member, it’s taxed as a sole proprietorship. If the LLC has more than one member, it’s taxed as a partnership.
However, LLCs are unique because they can elect to be taxed as a corporation if the members decide it makes financial sense. This is done by filing an election form with the IRS. In addition, you can choose to be taxed as a C-Corp or an S-Corp.
C-Corp status means income is taxed at the current rate for corporations (21% as of late 2022), which is lower than the usual individual taxpayer rate. But keep in mind that C-Corp shareholders – who are members in the case of an LLC – must also pay taxes on their distributions. This is called double taxation.
However, members are subject to self-employment tax in an LLC that is taxed by default as a sole proprietorship or partnership. Once such LLC switches to being taxed as a corporation, self-employment taxes no longer apply.
Similarly, self-employment taxes do not apply to members with S-Corp status, which is the main advantage of electing S-Corp status.
With S-Corp status, members are generally paid as company employees, which means more accounting and payroll expenses. Therefore, S-Corp status is only beneficial when the self-employment tax savings are greater than those additional expenses.
6. Draft an Operating Agreement
Most states do not require an operating agreement, but it’s a crucial document. It defines the ownership percentages of members and how profits and losses are distributed. Those are the most critical elements of the operating agreement, but it should also include the following:
- Each member’s rights and responsibilities
- Management structure and roles
- Voting rights of each member
- Rules for meetings and voting
- What happens when a member sells their interest, becomes disabled, or dies
You can find operating agreement templates online, but it’s best to have them drawn up or reviewed by an attorney. The language of an operating agreement is crucial and can often help determine how member disputes will be resolved.
7. Get Your Employer Identification Number (EIN)
The IRS uses an EIN to identify your company. It’s used for tax filing purposes. An EIN is required if your LLC has more than one member or hiring employees. Obtaining an EIN requires applying on the IRS website.
The IRS rules for obtaining an EIN are as follows:
All EIN applications (mail, fax, electronic) must disclose the name and Taxpayer Identification Number (SSN, ITIN, or EIN) of the true principal officer, general partner, grantor, owner or trustor. This individual or entity, which the IRS will call the ‘responsible party,’ controls, manages, or directs the applicant entity and the disposition of its funds and assets. Unless the applicant is a government entity, the responsible party must be an individual (i.e., a natural person), not an entity.
8. Obtain Business Licenses and Permits
Depending on the nature of your business, you may need to apply for various licenses and permits at the federal, state, and local levels.
At the federal level, licenses and permits are generally industry-specific and may include health licenses and permits from the Occupational Safety and Health Administration (OSHA).
You may need a general business license to operate at the state level. If you sell tangible goods or services subject to sales tax, you’ll need a sales tax license, also known as a seller’s permit.
Check the SBA guide for specific licenses required for your business. Here are some common licenses and permits you may need:
- Industry-specific licenses for certain professions and industries, such as construction, plumbing, electrical, childcare, food handling, liquor, architecture, and finance
- Building and zoning permits
- Doing business as (DBA) permits using a name other than your LLC.
- Health licenses and permits at federal, state, and local levels
- Fire permits
- Sign permits
This is an important step in the LLC formation process, so make sure that you check with your state and local government offices to find out all the licenses and permits you need.
You could face steep fines and penalties if you operate without the proper licenses and permits.
If you need help, it’s a good idea to consult a business attorney to ensure you’re in full compliance. You can also use a service like MyCorporation to do the research and provide you with all the forms you need to license your business.
Open Your Business Bank Account
When you have an LLC, keeping your business and personal finances separate for accounting and tax purposes is essential. Commingling your business and personal funds can threaten your liability protection since the line between business and personal assets will need to be clarified.
Most banks offer business bank accounts, so check with your local bank. You’ll need your EIN and a copy of your articles of organization. Your bank may require other documents as well.
Get Business Insurance
Insurance is the right choice to protect the investment you’ve made in your business. There are several different types of insurance you may need.
- General liability: A comprehensive type of insurance covering many business elements. It includes coverage against bodily injury and property damage.
- Professional liability: Protects against claims from a customer who suffered a loss due to an error or omission in your work. It’s also known as errors and omissions (E&O) insurance.
- Workers’ compensation: Provides compensation to employees injured on the job.
- Property: Covers your physical business space.
- Business Property: Covers equipment and supplies.
- Equipment Breakdown Insurance: Covers the repair or replacement of broken equipment due to mechanical issues.
- Commercial auto: Covers your company-owned vehicles.
- Business owner’s policy (BOP): This option combines the above insurance types.
Most states require you to file an annual or biennial report to verify you’re still doing business. These can generally be filed online. A small fee usually applies and varies by state.
Even with all these steps, your LLC should be fully approved and ready to start raking in revenue within a few weeks. Make sure you complete the entire process to comply with all regulations. It’s best to have an attorney or professional service involved, as they can ensure that all your documents, particularly the operating agreement, are properly drafted.