Setting up an LLC is crucial to many businesses — mainly because they help businesses create separate identities for their companies (so that its members don’t take the fall for the company’s wins and losses).
However, for new business owners, the steps of setting up an LLC can get a little muddy. And this can be attributed to the fact that LLC formation isn’t the same across the United States — in fact, the process widely differs from state to state.
Worry not! In this guide, we’ll take you through all the steps of setting up an LLC without leaving any room for questions.
What are the Benefits of Filing an LLC, and Do I Need to Set Up an LLC for My Business?
The biggest benefit of setting up an LLC is personal liability protection. If you run into issues with your business, then having an LLC will limit your liabilities and debts because the business and you’re recognized as separate entities.
Aside from this, you also get some tax advantages — that’s to say, you only pay taxes when your business brings in revenue, as opposed to the double taxation system that corporations are led accountable to. You can also claim the losses your LLC makes on your personal income tax return.
Besides these benefits, LLCs are also easy to form, provide a structure to your business, help allocate profits and losses, and make you look trustworthy in front of your clients and stakeholders.
So, LLCs are like DDoS attack prevention for your business, just as important and necessary to keep the business operating smoothly and to mitigate risks.
Steps to Setting Up an LLC
Before we begin to explain how to set up an LLC, let’s clear the air on what types of LLCs there are and what requirements shift from state to state.
So, here are the various kinds of LLCs businesses can form in the United States:
- Single Member
- Multi-member
- Member-managed
- Manager-managed
- Series LLCs
- Restricted LLC
- Low-Profit LLC
Other types of LLCs, such as Professional Limited Liability Companies (PPLC) are only exclusive to certain businesses, like CRNAs, lawyers, architects, accountants, engineers, etc. — PPLC members (like CRNAs), will need to meet requirements like getting the licensing board’s approval for your articles of organization and will also need to adhere to other requirements set by your state.
LLC structures can also differ — for example, they can be anonymous, general, set up as corporations, etc.
As far as state requirements are concerned, here are the LLC requirements that differ from state to state:
- Filing fee and annual fee
- Reporting requirements
- Rights given to LLCs and its members
This resource by LegalZoom might be a good place to start to understand how to set up an LLC in different states: LLC State Requirements. For the most part, however, the process will stay the same regardless of whichever state you belong to.
Now that we’ve covered the basics, let’s explore the five steps to setting up an LLC.
Step 1: Choose a name
First things first — before you set up an LLC, decide which name you think emulates your brand the most. Now, there are a few requirements vis-a-vis LLC names:
- Your company name will need to have the words “LLC,” “Limited,” or “Limited Liability Company” behind it.
- You can’t take the name of an existing business — for example, if you want to set up a business called “ABC LLC” and a business already exists by the same name, you can’t take that name (the agency responsible for filing your business name will tell you which names have been taken from the market).
- As per certain state requirements, you can’t explicitly use the words “banking” and “insurance” as they can be misleading. If you find using these words necessary, you’ll need to get permission from the same agency to use them.
- You can also set up a DBA (doing business as) name, which is basically like the stage name of your business.
Step 2: Get an agent
Not only is the need for a registered agent absolutely mandatory by law (in all 50 states), but a registered agent will help you with legal correspondence, such as receiving tax forms, subpoenas, annual reports, and notices of litigation, and will then forward them to you.
Some states may require your agent to be located in the same state as your LLC. But aside from this, there are no major requirements. For example, your agent may be above 18 years of age to operate. They can also be a member of your LLC, affiliated with a legal service organization, or you can appoint yourself as your registered agent.
Step 3: Fill in the article of organization form and file it
To be viewed as a legal entity in the eyes of the law, you’ll need to fill in and file the “article of organization” form. This form is usually available within your state under the name of “articles of organization” or “certificate of formation.”
While the information on the form will differ from state to state, most forms will still ask for basic details like:
- Name and address of your business
- Why have you created the venture
- How do you plan to manage it
- Who is the registered agent
- How long will the LLC be active for
Once done filling out the forms, you can submit them to your state by paying a filing fee. If your documents are approved, you’ll be issued a certificate that’ll recognize you in the eyes of the law, so you can now go ahead and file for a tax ID or set up your business bank account.
Please note:
- Some states may require you to publish a notice in the newspaper before you file the form, and some may require the signature of your agent on the form.
- You can also set up an LLC as a minor, but it’d require your parent/legal guardian’s permission. You also can’t use your personal teen bank account but would need to conduct business through the business account (which would also require your legal guardian’s permission to set up).
Step 4: Create an operating agreement
Creating an operating agreement will provide your business with some sort of semblance and order. A standard operating agreement will usually include information such as:
- Allocation of profits/losses, duties, and responsibilities among all team members.
- Procedures to be followed in case of an event (e.g., death of a member or dissolving the LLC).
- Rules on voting, buying and selling, electing and removing managers or new members, etc.
- How and when to conduct annual meetings.
Do I really need to create an operating agreement for my LLC?
One might wonder if everyone on the team is friends with everyone else, what is the need for an operating agreement? Well, an operating agreement provides many benefits for an LLC, but the two main benefits are:
- It stops your state’s rules from coming into motion (for example, if you have no rules set in place, then your state will dictate how to allocate profits and losses or what procedures are to be followed).
- Since everything is on paper, it leaves no room for assumptions, disagreements, or issues later down the line.
Step 5: Get to business!
Once everything is in order, you can now get to business — set up tax IDs and business accounts, search for clients, and hunt for employees on LinkedIn, Salarship, Indeed, etc.
Maintaining your business in good faith is just as important as setting up your business in the eyes of the law, and you’ll need to file annual reports and pay the annual filing fee to keep the engines of your business running.
Hidden Costs
While there are no “hidden fees” of setting up an LLC, there are other cost considerations one must factor in:
- Business licensing fees
- Surety bonds
- Fees of professionals
- The technology it takes to run a business
- Capital costs
- Hiring employees
- Cost of acquiring permissions
- Operating capital to keep the business afloat (such as utilities, rent, etc.).
All businesses must consider all these costs when setting up any kind of legal entity, LLCs or otherwise.
FAQs About Setting Up an LLC
How much does it cost to set up an LLC?
The fees for forming an LLC can also vary by state, but most states charge a filing fee that ranges from $50 to $500.
In addition to the filing fee, you may also need to pay for a registered agent service and for any legal or professional services that you may need to help you set up your LLC.
Do I need an attorney to set up an LLC?
While having an attorney set up an LLC isn’t necessary, it can be helpful to seek legal advice to ensure that you follow all required laws and regulations.
Additionally, an attorney can help you draft an operating agreement outlining your LLC’s internal management and operations.
How long does it take to set up an LLC?
The amount of time it takes to set up an LLC can vary depending on several factors, including the state where you are forming your LLC and the complexity of your business.
In general, it can take anywhere from a few days to a few weeks to complete the process of forming an LLC, depending on the speed of processing at your state’s LLC filing office and any delays that may arise.
What kind of bank account should I open as an LLC?
As an LLC, you should open a business bank account to separate your personal and business finances.
Having a separate business bank account can help you maintain accurate financial records, make it easier to track your business income and expenses, and protect your personal assets.
Can I be my own registered agent?
Yes, you can be your own registered agent for your LLC.
If you choose to be your own registered agent, you’ll need to provide your own name and address as the registered agent for your LLC.
You’ll also need to ensure that you are available at the registered agent’s address during regular business hours to receive any legal documents in the mail.
The Takeaway
We understand that many entrepreneurs would love to start a business without wanting to waste any time and cost behind setting it up, acquiring permissions, getting it to a solid place, etc.
We recommend buying a business instead of setting up a business for those entrepreneurs. Thankfully, with Flippa, acquiring companies (or even purchasing domains, services, blogs, stores, sites, and digital real estate) is easier than ever.
Alternatively, if you’ve created your own business from scratch and want to sell it to an entrepreneur who can take care of it just the way you did, we can help you with that too.
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