How to Start an LLC

13 Apr 2024
 Steps to filing your new business as an LLC

Taking an idea and turning it into an idea to bring to market is an exciting prospect. Once you solidify your business idea and formulate a plan, you’ll have to make many important decisions. One of the primary decisions to make is to choose a business structure.

LLCs are growing in popularity as the small business landscape continues to evolve. Over the past five years, 35% of small businesses were LLCs. Even partnerships are forming as LLCs. For instance, 70% of partnership returns filed taxes as LLCs in 2020 instead of other partnership structures.

There is a good reason for the dramatic shift to an LLC structure. Learn more about LLCs and the steps you need to take to start one.

What is an LLC?

Limited liability companies (LLCs) are a business structure separating a business owner’s finances and legal obligations from those of the business. In the simplest of explanations, LLCs are a hybrid model combining attributes of corporations with those of sole proprietorships or partnerships.

The financial and legal protections are a primary reason many entrepreneurs choose this route, along with obtaining certain tax benefits. Characteristics are similar to corporations in that articles of organization need to be filed in the state the company does business in but the LLC is easier to establish. Additionally, members of LLCs can elect to either pass through profits and losses on personal tax returns or file like a corporation would, providing a level of flexibility for meeting tax obligations.

The governing of LLCs falls under state regulations, which will vary, along with different costs to establish and maintain an LLC.

Types of LLCs

Any business, from a single business owner to a large company, can register as an LLC, but there are different types. Some will be single-member LLCs, whereas others are multi-member LLCs. The primary types of LLCs available in the U.S. to business owners include:

Domestic LLC

The most common type, a domestic LLC, is a company an owner creates and operates in the same state. They don’t operate across state borders, and many startups opt to form as domestic LLCs since fees are typically lower. This is perfect for brick-and-mortar businesses doing business locally, real estate investors interested in singular markets, freelancers, consultants, and those doing side hustles.

Foreign LLC

A foreign LLC registration is the best option for business owners wanting to do business in more than one state. Initially, they incorporate as a domestic LLC and then register the same LLC in additional states they want to do business in. To qualify for this type of LLC, the company needs to maintain a physical presence and routinely do business in the states they want to sell products or services.

Professional LLC (PLLC)

The PLLC structure is a type of LLC licensed professionals, including but not limited to accountants, attorneys, and physicians, use when they form their businesses. The PLLC is available in 29 U.S. states. It comes with additional requirements and restrictions to adhere to, e.g. industry code of conducts, maintaining proper licenses, and obtaining necessary permits.

Anonymous LLC

Owners preferring higher levels of privacy can register as an anonymous LLC. This type of LLC works much like a domestic LLC, but it’s a rarer option since it’s only available in Delaware, New Mexico, and Wyoming.

Restricted LLC

Only businesses registering LLCs in Nevada can form a restricted LLC. This type of LLC cannot be taxed or make distributions for 10 years once created. Primarily, owners wanting to pass assets to another individual utilize this type of LLC formation.

Nonprofit LLC

Owners seeking to form an entity to perform charity or other nonprofit activities can form a nonprofit LLC. To qualify, owners must create a mission, have limited ownership, restrict profit distributions, and follow state regulations for nonprofits. A benefit to this is obtaining tax-exempt status. Only a handful of states recognize nonprofit LLCs.

Low-Profit LLC (L3C)

L3Cs are available in 15 states and blend traditional LLC attributes with nonprofit ones. L3C businesses must pursue a social mission, cannot focus on building profits, and, in return, can obtain specific tax benefits like nonprofits can.

Series LLC

Owners can create a Series LLC as a tier-like structure with one primary “parent” company and other LLCs owned and operated under it. Currently, 19 states allow this type of LLC formation. Owners utilize it when they want to have access to advanced liability protections since each LLC under the umbrella operates as its own legal company.

Note that not all of the above LLCs are available in all 50 states, so before formation, be sure to check to make certain the LLC type you prefer is available in the state you plan to register your business.

Apply for an EIN or tax ID

An initial step you should take before forming your business is to apply for an Employer Identification Number (EIN), otherwise referred to as a tax ID. This number is a 9-digit identifier (much like a Social Security number but for businesses) and is useful in many ways.

If you’re a solo operation (e.g., sole proprietor or single-member LLC), you don’t technically need one, but it’s to your benefit to have one. Obtaining your EIN offers more flexibility and, in some instances, is required by law. For example, if you either have or plan to have employees at some point, you must have an EIN to legally hire and onboard them. You also cannot withhold payroll taxes and report withholdings to the IRS without a tax ID.

Other benefits to applying for your EIN include empowering you to open a business bank account, helping establish business credit, helping obtain better access to loans, and offering stronger credibility. It also enables you to maintain a higher level of privacy since you can use your EIN instead of an SSN.

Choose the state where you will form your LLC

Every state sets its own rules and regulations for LLCs, so this is a factor to consider carefully when choosing where to form your LLC.

Conventional wisdom suggests the best and simplest option is to create your LLC in your home state where you plan to operate. It’s tempting for new LLCs to select a state with low filing fees or no income tax. However, this may not be the most cost-efficient option since annual renewal fees can be costly, and you’ll potentially have to pay taxes in several states. Additionally, owners registering in their home states can benefit from incentives or other business-specific programs their state offers to resident businesses.

Like everything else, there are some exceptions to conventional wisdom. For instance, if you reside in one state but your business operates in another, forming an LLC where the business is located makes sense. Another scenario where forming an LLC in a state benefiting tax status would be if you are a non-U.S. resident since you don’t have a home state to file. Sometimes real estate investors form their LLCs in the states where they’re renting or selling properties.

Determine if you will need a Registered Agent if you will be doing business in any other state

A registered agent is a person or company you designate to receive legal correspondence on behalf of the LLC in a timely fashion. An LLC needs to have a registered agent to legally operate, however, who you choose can vary depending upon your specific situation.

Your registered agent can be yourself, an employee, an attorney, or another trustworthy individual. You can also hire a company to serve as your registered agent. Check with your state’s laws to ensure the party you choose meets the state’s legal requirements to serve in this capacity.

Additionally, the person or other entity listed as a registered agent must physically be located in the state where the business operates (no PO boxes allowed). They are expected to be physically present at this location during normal business hours.

Prepare an Operating Agreement if there will be more than one member of the LLC

Most states require LLCs to prepare operating agreements if the company has more than one member. With that being said, even if it’s not a state requirement, it’s a good idea to construct one. Oral agreements are often permitted, but having the agreement in writing avoids potential misunderstandings or conflicts down the road. An operating agreement:

● Lists all members of the LLC

● Delineates division of ownership

● Outlines each participant’s authority, duties, and obligations

● Defines profit-sharing agreements

● Contains other business-specific stipulations

Even solo operations should consider creating a written document to acknowledge the separate existence of the LLC. This is especially true if you become incapacitated or otherwise cannot manage the company and want it to continue running in a specific way in your absence.

Open a bank account in your LLC name

Now that you have the ball rolling to establish your LLC, be sure to open a bank account specifically to handle your business funds. Having your EIN already handy will drastically facilitate this process.

Establishing an LLC involves additional steps not required by law for other types of business structures, but the benefits you can achieve are usually worth the effort.