Starting an LLC can pave the way for entrepreneurial success. Millions of new businesses are formed every year, and many of those are LLCs, as entrepreneurs are drawn to benefits like liability protection and pass-through taxation.
LLCs combine the tax treatment of a partnership or sole proprietorship with the liability protection of a corporation – helping shield your assets if your business is sued. However, forming an LLC also involves navigating a web of legal and compliance requirements that can quickly become complex. From choosing your ideal business structure to filing paperwork and creating operating agreements, this guide on how to start an LLC breaks down every step of the process in detail.
Choosing a Business Structure
When starting a business, one of the first key decisions is choosing your legal structure. Each structure has implications in areas like taxes, regulations, liability protection, and startup costs.
While sole proprietorships require minimal paperwork and are easy to form, they offer unlimited personal liability – your personal assets like bank accounts and property can be seized to settle business debts.
Partnerships allow multiple owners to share resources and decision-making, but partners can also be held responsible for each other's actions.
Sole Proprietorship Partnership LLC
Limited liability companies (LLCs) provide the liability protection of a corporation with the pass-through taxation of a partnership or sole proprietorship.
By forming an LLC, only the money you've invested into the LLC is at risk rather than exposing your personal assets (worth an average of $80k-$100k) to creditors and lawsuits.
The LLC structure also helps limit recordkeeping hassles compared to corporations. With flexibility around management and fewer regulations than S-corps, LLCs are suitable for many small businesses.
Steps to Form an LLC
Once you decide on an LLC structure, the formation process involves several key steps: Registering your LLC (1-2 weeks)
The first legal step is to register your LLC with your state. You'll need to file "articles of organization", which serves as your official business charter.
This document includes your business name, address, purpose, ownership details, duration, and management structure. Each state has its filing requirements and fees, typically $100-$800. Approval averages 1-6 weeks.
Obtaining licenses and permits (1-4 weeks, $100-$500+ fees)
Depending on your industry, you may need special business licenses and permits locally and at the state level.
Common examples include sales tax permits (avg $20/yr), food service permits ($350/yr), and professional licenses for services like home improvement, childcare, transport, etc ($150+ application fees). Failing to comply can lead to penalties of $200+ per violation.
Understanding compliance
As an LLC owner, you are still responsible for correct recordkeeping, tax payments, annual reports, and maintaining compliance. Requirements vary by state. While compliance may seem tedious, staying legally compliant helps avoid issues as your business grows.
Creating an Operating Agreement
An operating agreement lays out the financial and functional decisions in your LLC between members. It's an internal document that is not filed with your state. Operating agreements are especially crucial for multi-member LLCs to outline ownership percentages, voting rights, member responsibilities, and more. Here is an excerpt example:
"Member A owns 51% of company shares, Member B owns 49%. Company profits and losses will be allocated to members' capital accounts on a pro-rata basis..."
Key Sections to Include No Matter the LLC Type
Ownership structure
Spell out percentage splits between members and terms around transferring/adding new members. If additional contributions are required, the operating agreement should establish members' obligations.
Distributions
Describe payment frequency, allocation methods, and rules around member withdrawals. Include parameters around taking money out of the LLC.
Voting
Detail member voting power, rules around meetings, quorum requirements, electing managers, etc.
Capital contributions
Define expectations for members contributing money/resources. While single-member LLCs are not required to have an operating agreement, they can still provide helpful clarity on business guidelines and continuity for the future. The agreement flexibility allows customizing to your specific needs and vision.
Ongoing LLC Management
Launching your LLC is only the first step. You'll also need to handle ongoing administrative and legal tasks:
Holding member meetings – Document your annual meeting minutes, voting outcomes, member attendance, and any major decisions.
Recordkeeping and accounting – Maintain detailed financial records. Stay organized with bookkeeping software or an accountant ($300-$800 annually). Disorganized records are among the most common reasons small businesses get into legal trouble.
Tax compliance – LLCs are pass-through entities, so profits/losses pass to members' personal tax returns. File necessary registrations and submit annual tax documents.
Hiring employees or contractors – If hiring help, be aware of labor regulations around overtime pay, discrimination, health insurance, etc. Issues with contractors can also create legal liability.
While handling the legal, financial, and employment aspects of an LLC may sound daunting initially, taking a systematic approach and seeking expert guidance ($150/hr+ for attorneys) can simplify matters over time.
FAQs on Starting an LLC
How much does it cost to start an LLC?
Costs vary by state but often range from $100-$800 for filing fees plus any attorney fees. You may also spend money on licenses, permits, registered agent services, and operating agreement creation.
How long does it take to get an LLC approved?
Approval times range from 1-6 weeks depending on your state. You can start operating as an LLC as soon as your articles of organization are approved.
Do I need a lawyer to start an LLC?
While legal help is not required, attorneys well-versed in small business can help ensure full compliance and identify any issues upfront. They're beneficial for complex or high-risk businesses.
What paperwork is required to start an LLC?
The articles of organization form is the key document that must be filed with your state to register your LLC. An operating agreement is also recommended to codify financial processes, ownership, and decision-making rules between members.
Can I form an LLC in any state?
You can form your LLC in any state, regardless of whether you live or operate there. However, registering in a state where you have physical business operations helps avoid extra annual fees ($25+ per state) and potential tax complications.
How often do I need to hold member meetings?
Most states require formal member meetings at least once per year. Document key information like voting outcomes, attendance, decisions made, and any other major updates.
Do I need a registered agent?
Appointing a registered agent (avg $100-$200 per year) who can receive important legal documents on behalf of your LLC can make compliance easier. They will address any issues if you move or aren't available.
This article was written by the small business experts at ChamberofCommerce.org to equip budding entrepreneurs with the key information needed to successfully form an
LLC. Our knowledgeable team stays on top of the latest regulations and compliance requirements to provide the most up-to-date, actionable advice.
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