Limited liability companies (LLCs) are extremely popular business entities for new entrepreneurs because they’re an ideal middle-of-the-road option. They provide you with more formal business architecture and liability protection than a simple sole proprietorship or partnership, yet aren’t nearly as complicated, expensive, or time-consuming as corporations. It’s important to review the LLC and S corporation differences since they are very similar but offer unique benefits. They’re treated as a separate business entity, granting their owners liability protection, yet are simple and flexible enough that they can suit most types of operations.
One of the biggest advantages of an LLC is that it’s incredibly easy to start one. The question is, how do you go about this if you’ve never done it before?
Steps to Starting an LLC
LLCs follow different rules, and may need to comply with different procedures in different states. However, these general steps should apply in nearly all cases:
- Pick a unique name and register your business. You’re going to officially register your LLC under a chosen name; this name needs to be completely unique for registration purposes. Come up with something clever you can build a brand around, possibly including your own name in the mix. Then, run a search with the state and see if the name is currently being used. If it is, you may need to come up with an alternative idea (or set up a DBA). Either way, you’ll need to register your business (and typically, pay a fee).
- Create and file your articles of organization. Your articles of organization are a simple document that provides the state with key details they’ll need when managing details pertaining to your business. These are usually simple; for example, you’ll likely need to provide your name, address, contact information, and social security number (SSN), and similar personal information for any business partners you have.
- Create an LLC operating agreement. Though not always formally required by state governments, it’s wise to create a formal LLC operating agreement with your business partners. This document will provide details about the nature of your LLC, and the relationships between all its partners. For example, you may decide to split official ownership of the business evenly between all your members, like 33-33-33, or unevenly, like 50-25-25, depending on their roles and responsibilities. This is also your chance to outline who is responsible for what. For example, you may only require some of your partners to work part-time.
- Determine other required paperwork. In most states, the above steps will be enough to consider your LLC completely legitimate. However, you may be required to submit additional paperwork, depending on the state of your origin. For example, in Arizona and New York, you’re required to publish a formal notice of your business’s creation in a local newspaper. The nuances of state law can get complicated, so make sure to contact a local authority to ensure you’re in compliance.
- Get your tax ID numbers. If your LLC has multiple members, or if you plan on hiring employees, you’ll need to get a federal tax ID number, also called an employer identification number (EIN). Depending on the state in which you’re operating, you may also need to get a state-level tax ID number. State tax ID numbers are commonly required of businesses selling taxable goods and services in the state.
- Obtain the licenses and permits you need. Some states require businesses to have a license or permit to operate. Sometimes, these are regulated at the local level. Certain industries are more likely to need licenses and permits than others. Just make sure you’ve done your research and have any forms of certification that apply to your business in your area.
- Be ready to file your annual report. Many states treat LLCs as hands-off as possible, but some require them to prepare and file an annual report. If your state requires this, familiarize yourself with the details of an acceptable annual report, and be prepared to pay an annual filing fee.
Is an LLC Right for You?
LLCs are advantageous business entities for many businesses, but they aren’t right for everyone. For example, if you’re an amateur freelancer and you’re making a few hundred dollars a month with your side hustle, it may not be worth the time or effort to create and maintain a formal LLC. Conversely, if you’re planning on creating a business with potential to grow to a national scale, something bigger and more protective like a corporation may be more appropriate.
Make sure to spend time writing and developing your business plan, regardless of how you’re leaning. Your business plan will help you outline your goals and future plans, giving you context you can use to make a better decision on your organizational structure. It’s also going to sharply increase your chances of success once you begin operations.