How to Form an LLC [The Ultimate Guide for 2021]

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Starting a business is an increasingly popular practice among young entrepreneurs. There are several options available to prospective business-starters, but one of the most appealing options is establishing a Limited Liability Company (LLC). This article addresses what this type of company is and how to form an LLC

What Does LLC Mean?

LLC stands for Limited Liability Company, a business structure whose owners are not personally responsible for any liabilities of debts the company may accrue over time. 

What is an LLC and how does it work? A Limited Liability Company (LLC) is a popular type of business where the owner’s assets cannot be used as collateral to pay off a company’s debts. Even though the owners might lose the money they invested in the company, their personal property is not at risk. LLCs are a preferred option for business beginners because they are easy to set up and operate. These companies—besides offering liability protection—are easier to manage and offer some tax advantages.  

Before you start an LLC, there are some key points you should know, such as the ownership can be distributed among several people, known as members. LLCs, however, can also be single-member companies in contrast to corporations, which are owned and controlled by a select number of shareholders and harder to form. An LLC member is not liable for the negligence of co-members and will face no repercussions if this occurs.

Once you’ve created an LLC, it means that you have a functional company that can be used for business endeavors. LLC owners are self-employed, and, much like a sole proprietorship, they are required to pay self-employment tax, which includes Social Security and Medicare taxes, taken out of the net income of the business. 

How Much Does It Cost to Start an LLC?

The main expense in forming an LLC includes a state filing fee, which, depending on the state, ranges from $40.00 to $500.00. Additional costs are applied if you want to reserve a name for your business, hire a registered agent, obtain legal help, or expand your business to several states. 

How to Register a Company in the US

US citizens (as well as non-citizens) can register a company in the US. Owning a company in the US can be quite beneficial because it allows you to open a US (business) bank account, which improves the public image of your business in the US and your home country.  

Before beginning the process of how to make an LLC or corporation, it’s necessary to research the state tax laws. (Try to base your operations in a state that doesn’t impose business taxes.) After you choose the type of company you want to form (LLCs are most advisable), you need to obtain an Employer Identification Number (EIN) from the IRS, even if you don’t have a Social Security Number (SSN). This is one of the LLC requirements. If you’re unsure as to what this means, check out our guide on EIN, TIN, and other important numbers

Next, you must have a US mailing address registered to your business and a dedicated phone number. You also need to open a US bank account to send and receive payments. If you don’t feel confident about doing this on your own, you can turn to the best LLC service, which will take care of everything for you. 

NOTE: LLCs aren’t required to abide by strict taxation policies as other companies do. But this doesn’t mean that they’re exempt from paying taxes. As an LLC owner, you can check out the best business tax software that will do the work for you. 

How to Form an LLC: Step-by-Step Guide

The process of forming an LLC varies from state to state, but some recurring conditions need to be realized to start a Limited Liability Company. If you cannot go through the process on your own, it’s a good idea to hire an attorney with experience in the field. If you decide, however, to do it on your own, here are seven steps to forming an LLC:  

Establishing Business in a State

Before you begin the process and file LLC formation documents, you need to choose the state where your LLC will be based. Generally, the best option is to base the company in the state where you’ll be conducting business. If your LLC operates in multiple states, you’ll need to register a different LLC for each state where you intend to work. 

Your first registered LLC is referred to as a domestic LLC, while an additional LLC based in a different state is known as a foreign LLC. Although certain states, such as Nevada and Delaware, have LLC-friendly laws, if you don’t live or do business there, it’s not advisable to register your company at that location. Registering out of state might incur additional costs and require more paperwork. It’s crucial to do your research and find the best state to form an LLC.

Choose a Name

Choose a unique name for your company that won’t be the same as one of any existing companies that comply with the state rules of eligibility. Be careful that the name is not too similar to others, since this might be cause for dismissal rejection. You can reserve a name that you’ve chosen for a fee of $10.00 to $50.00. The company name and all LLC documents must include an LLC designator—either with the phrase Limited Liability Company or its abbreviation: L.L.C. or LLC. In addition to the name, it’s always a good idea to create an LLC logo.    

A Good LLC Name 

Your name should be unique and memorable and describe the main function of your business. It shouldn’t be too long, as it needs to be domain and social media-friendly. If you’re having trouble with your business name search, consider a more detailed account on how to choose a good name for your LLC

Unpermitted Names

Your LLC name mustn’t include any words or abbreviations that might confuse it with a government agency, such as Treasury, FBI, CIA. Some words, such as ‘university’, ‘bank’, or ‘attorney’ might require you to employ a licensed individual in your company.

File Articles of Organization

While making an LLC, you’ll be required to file an Articles of Organization form with the state’s corporate filing office, often the Secretary of State. These forms are typically available on the official website of the Secretary of State. In the form, you need to submit your LLC name, the name and address of your registered agent, the names of the owners, and the management system. When you file the form, you need to pay a filing fee, which in most states is around $100.00.

Names for the Articles of Organization Form

Various states have different names for the same form required for founding an LLC, such as a Certificate of Formation or Certificate of Organization

Appoint a Registered Agent

When filing the paperwork for an LLC, you need to have an appointed registered agent. Also known as a statutory agent, this is a person or company that is licensed to receive the company’s official correspondence and all legal papers on your behalf. This is a requirement in almost all US states. But one of the benefits of LLC is that you or any of your employees can execute this function or you can consider finding the best registered agent

Management Structure

Before beginning your official business operations, decide on a management structure and voting system for your company. When researching how to register a company of this type, you’ll learn that there are two basic management structures for LLCs:

Member-Managed

The most common management style in LLCs involves all LLC members (usually the company’s owners) as responsible for the management of all operations. 

Manager-Managed

A management structure exists for when some of the members don’t wish to be involved in business management—a manager, then, is appointed to run operations. The manager might also be a member, but they could also be an outside hire. You can get more info on the LLC management structure here. 

LLC Operating Agreement

After you’ve applied for an IRS Employer Identification Number (EIN) or a Federal Employer Identification Number (FEIN) and any necessary local business licenses, as well as all state business licenses, you need to create an operating agreement. This is a legal document that defines the ownership of the company, member roles within the LLC, and the business purpose for an LLC. In most states, this is not an obligatory requirement, but it’s a good practice to have all the details of your business recorded in an official document. If you don’t submit such an agreement, state law can determine how your company will operate. 

Tax and Regulatory Requirements

The tax structure of LLCs is quite simple. Although the regulations might differ from state to state, the taxation process is not difficult. What are the tax benefits of an LLC

LLCs are not subject to double taxation since all income passes through the owners and is taxed only as part of the recipient’s personal income, known as ‘pass-through’ taxation. Another significant perk of operating an LLC is that the IRS allows the owners to choose how their businesses will be taxed—as a general partnership, a sole proprietorship, an S corporation (S corp), or as a C corporation (C corp). The income owners receive from an LLC—unlike wages paid by an employer—isn’t subjected to withholdings (one of the LLC tax benefits). This means that the recipient of the income is required to file quarterly taxes on the estimated federal income tax.

Additional Requirements

Make sure that you’re aware of any state-specific tax laws you need to abide by, as well as any city or county requirements you need to be compliant with.

NOTE: If your business is selling physical products, as an LLC owner you’ll have to register for a sales and use tax

Key Takeaways

A Limited Liability Company (LLC) is a popular type of business in the US.
LLCs protect the private property of the owner—in case of bankruptcy, the owner won’t lose everything.
An LLC is easy to form—simply go through a few simple steps. The cost to start an LLC is low.
There are numerous benefits of owning an LLC: taxes, liability protection, flexible business operations—all of which make it an appealing choice.

LLC Advantages and Disadvantages

Before starting an LLC, you need to consider all aspects of starting this type of company. We have compiled a list of the most important Limited Liability Company advantages and disadvantages

LLC Advantages

First, take a look at the pros of forming an LLC:

  • Protection from liability: An LLC separates the personal assets of a member from their business assets. The member, then, is protected from losing their private funds and belongings. 
  • Pass-through taxation: The income from an LLC is not subject to double taxation. It’s only taxed once when an owner receives it as part of their personal income. 
  • Flexibility: LLCs can choose several ways in which they want to be taxed. They can also choose their management style. And there’s flexibility in registering a company in a different state. 
  • Less administration: There is significantly less paperwork than with other types of businesses. Filing fees are lower, as well. 
  • The number of owners: The number of owners is not strictly determined, as is the case in other types of companies. An LLC can be established by just one member, or ownership can be distributed across an unlimited number of people. Research more into the differences between LLC vs business license.

LLC Disadvantages 

Now, check what are disadvantages when forming a Limited Liability Company:

  • Self-employment tax: The owners are required to pay a self-employment tax since they are not a part of a larger company. 
  • Asset protection: Numerous US states do not provide asset protection for LLCs owned by one member—it’s a better idea to list multiple owners when forming an LLC. 
  • No wages: As an LLC member, you’re not allowed to pay yourself a monthly wage. The only income you can receive is from LLC profits. 

NOTE: Without a business continuation agreement, an LLC will dissolve if one of the members files for bankruptcy or dies. Such an agreement is also necessary in the case of a transfer or sale

Conclusion

Founding a company is often considered a costly and strenuous process. But starting a limited liability company dispels this belief. Establishing an LLC is simple, and the costs are low. There are also numerous benefits of having an LLC. These companies can be an excellent opportunity for young entrepreneurs to enter the business world.

FAQ

Can I file for an LLC on my own?

Yes, anyone can file for an LLC as a single member, as long as they are over 18 years old and submit all the necessary documentation.

Is it worth setting up an LLC?

For almost all types of prospective businesses, it’s a good idea to start an LLC since filing costs are low, and you are protected from liability.

Are LLCs easy to form?

The formation process of an LLC is fairly simple; it requires future owners to go through only a few steps that are easy to complete. Even if you can’t manage it on your own, professionals who specialize in such business development can help you.

How long does it take to set up an LLC?

The estimated processing time for an LLC is three to five weeks. But if you need to hasten the process, you can pay an additional fee and make it operational sooner. Beforehand, find out what LLC license is—so you’ll know what to expect when you receive it.

Do I need an LLC to sell online?

Having a registered business is not a requirement for selling online, but you can look up how to form an LLC to understand the significant benefits of owning a legitimate company.

ABOUT AUTHOR

I’m an entrepreneur by profession and an artist by passion. I do business to pay the bills and make music to bring the thrills. Thanks to a bachelor in Business Administration, I'm well-versed in all things business. Owning a construction company certainly helps, too, but it also brings out my love for building and home protection.

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