What is an LLC + How to form an LLC in 2023
Create your LLC in any of the 50 states, no matter your residency or business activity. This guide is your shortcut to understanding LLCs: from the ‘what’ and ‘why’ to the ‘how’ of registering one anywhere in the U.S.
Whether you’re a startup or scaling up, we’ve got the essentials covered. Let’s jump in!
What is an LLC?
An LLC, or Limited Liability Company, blends the simplicity and flexibility found in partnerships with the robust liability protection typically reserved for corporations. In a nutshell, it shields your personal assets from business-related debts and lawsuits while enjoying a friendly tax treatment called ‘pass-through taxation’.
This means the LLC’s profits or losses pass through directly to you, the owner, making tax time a bit simpler. Whether you’re going solo or with partners, forming an LLC offers a flexible path to keep your business and personal worlds separate and secure.
Step 1: Choose a state in which to form your LLC
Choosing a state to form your LLC is crucial, and while you can select any state, most entrepreneurs opt to establish their LLC where they’ll conduct their business – often where they reside. Why? Here’s a bit of insight:
Local business, local registration: Forming an LLC in your business-operating state (commonly your home state) simplifies the process. If you opt for a state like Delaware, known for its business-friendly policies but don’t operate there, you’ll need to register as a foreign LLC in your operating state, adding an extra layer of paperwork and expense.
Navigating state variabilities: States present distinct costs, tax structures, and LLC regulations. Some may offer specific benefits for various business owners, so it’s worthwhile to weigh these variables. For a deeper dive into selecting a state, explore more about choosing the perfect state for your LLC formation.
Your LLC’s foundation is pivotal, so selecting a state that aligns with your business operations and goals is key. Let’s ensure your LLC starts off on the right foot.
Step 2: Decide on a business name for your LLC
For example, you can’t choose a business name already used by another business in your state.
Additionally, most states prohibit LLC names that include certain words that imply you’re in a specific type of industry, such as ‘bank.’ And, you’ll need to have ‘LLC’ or ‘Liability Company’ in your LLC’s name so that people know your company is an LLC.
For the specific requirements in your state or in the state where you intend to register your LLC, looked at our detailed guides for forming an LLC in your state. You can also search existing registrations to ensure that the business name you intend to register isn’t already taken in your state. And if you’re not ready to form your LLC yet, it is a good idea to reserve the name. Many states let you do that for a small fee.
Generally, most states require the following:
- LLC name must be unique
- must include the phrase ‘Limited Liability Company,’ ‘LLC,’ or ‘Ltd.’ (or an acceptable variation)
- cannot include words or phrases that could make people think you’re a government agency (‘IRS,’ ‘FBI,’ ‘Police’)
- cannot include certain words like ‘Hospital’ or ‘Bank’ unless you’re chartered or authorized to operate a business in that industry.
Don’t overthink this process. Remember that you can always change the name of your LLC at a later date. You don’t need to operate your business using your registered legal name. You can create your LLC using one name but run the company using a fictitious trade name by filing a ‘doing business as’ (DBA) certificate.
For example, lets say you form an LLC for your cleaning business and name it Residential Cleaning Masters LLC. After a while, you start getting commercial jobs and expand your business to offer residential and commercial cleaning services.
Your original name – Residential Cleaning Masters LLC – no longer makes sense because you’re doing residential and commercial work. And it might confuse potential commercial customers.
You can rename your LLC or file a DBA (as described above) and operate under the assumed name ‘Cleaning Masters’.
You also should get a matching domain name, even if you don’t plan to create a business website immediately.
A matching domain name will give you a personalized email address with your company’s name and start you on a path to build a strong brand identity for your new business.
So, once you pick an LLC name and register a DBA and domain, you’ll have the following identity, using our example above:
LLC Name: Residential Cleaning Masters LLC
DBA: Cleaning Masters
Step 3: Designate a registered agent
Every state requires LLCs to have a registered agent.
You don’t need to pay someone to be your registered agent. Anyone at least 18 years old can be a registered agent, and you can name yourself, a friend, or an employee as your registered agent.
However, the registered agent must be available at a physical address within your state during regular business hours. As a result, it’s more common for people to designate an attorney, accountant, or company that specializes in providing registered agent services. Typically, you’ll pay $100 to $250 annually for registered agent services, depending on your registration state.
A registered agent’s job is simple: they receive official or legal documents sent to the LLC and send these documents to the appropriate person at the LLC. Typically, they scan your documents and send you electronic versions via email or online portal.
But while the job sounds simple, is rarely a good idea to appoint yourself as your LLC’s registered agent.
Registered agent information is public and can be accessed online. So, if privacy is essential, donэt appoint yourself as your LLC’s registered agent.
And, because registered agents must be available during regular business hours, you be unable to close the office and take a vacation or leave (unless someone is available to receive service of official documents).
We highly recommend Northwest Registered Agent. One standout feature of Northwest’s Registered Agent Service is the option to use their office address during your LLC registration, allowing you to maintain privacy from public records.
Furthermore, they promptly scan and upload any mail addressed to your LLC to your online account.
Step 4: Prepare an LLC operating agreement
- Member and manager directives. Clearly defined rights, duties, and managerial permissions for LLC members and non-member managers.
- Management and membership protocols. Procedures for onboarding new members, exit strategies for departing ones, and hiring or termination of managers.
- Financial mechanisms Detailed allocation and distribution protocols for profits among members.
- Conflict resolution. Mechanisms on how and when profits are disbursed to members and strategies for conflict resolution and avoidance.
- Legality and modifications. Specifications on the LLC’s legal boundaries, conditions for ending the LLC, and protocols for altering the operating agreement.
While the agreement hones the operational context, it simultaneously:
- Preserves the LLC’s autonomy. It reinforces the LLC’s separate legal standing, bolstering protections against personal liabilities and shielding members under various circumstances.
- Mitigates future contingencies. Having a predetermined action plan for unexpected scenarios, such as a member’s inability to manage the business or resolution of potential conflicts, ensures smoother sailings.
- Overrides default state provisions. Enabling your LLC to steer clear from stringent default state provisions, it provides the liberty to carve out its own governance norms.
Despite most states not requiring the filing of operating agreements with state entities, maintaining it as a private, internal document becomes indispensable. It meticulously orchestrates the rights, obligations, and protective mechanisms for the owners and members, weaving a secure safety net that minimizes disputes and furnishes a structured operational pathway for your LLC.
Always engage an attorney to review your operating agreement. This ensures all bases are covered, and your LLC is fortified against potential internal and external disputes.
Don’t rush to register your LLC in business-friendly states
Several states – Delaware, Nevada, and Wyoming – have laws that favor businesses. Delaware doesn’t tax out-of-state income, while Nevada and Wyoming don’t tax any business income.
So it’s tempting to register an LLC in one of those states when forming an LLC. And many business owners do that. After all, it seems like a massive win if you can run an LLC and avoid paying state income tax.
But while this seems like a no-brainer, it’s not as clear-cut as it initially appears.
If you register your LLC in one of those states, you could pay more in taxes if you operate your LLC in your home state. That’s because you’ll pay two annual filing fees and two registered agent fees, and you’ll still have to pay taxes on your income from the LLC because, as noted above, LLCs are typically taxed as a partnership, so all revenue passes through to its members.
Your home state doesn’t care where you registered your LLC. If you receive income from the LLC, they’ll tax that income.
For most people, registering an LLC in our home state is cheaper, faster, and more convenient. But you should discuss this issue with an accountant or lawyer to consider your specific needs and requirements.
Step 6: Obtain an EIN
After establishing the LLC, you may need to get an employer identification number (EIN) from the IRS.
This is not required if you’re a sole owner and don’t have employees. But you might want to get an EIN anyway to keep your personal and business taxes separate to be sure that you can quickly hire when the time comes to expand your business and open a bank account. The IRS has a helpful checklist to help you decide whether you will need an EIN to run your business. If you do need an EIN, you can register online for free.
Additionally, in each state where the LLC will be doing business, you must apply for a tax identification number and register with the state’s Department of Labor.
Step 7: Open a business bank account
You are not required to have an LLC business bank account. But it would be best to separate business finances from your personal finances.
Remember that your LLC can protect your personal assets if someone sues the LLC or it goes bankrupt. But you have this protection only if you strictly keep your personal and business finances separate. Otherwise, a creditor can sue you and attempt to ‘pierce the corporate veil.’ An LLC is not a corporation, but this legal maneuver is still called ‘piercing the corporate veil’ when asserted against an LLC).
Business bank accounts typically offer other benefits unavailable in a personal bank account. For example, banks that provide merchant services (allowing you to accept credit card payments) offer purchase protection for your customers and ensure that their personal information is secure.
Finally, a business bank account helps you make large purchases and establishes a credit history for your business.
Here are a few other reasons why you should consider opening a business bank account:
Step 8: Register to do business in other states (optional)
If your LLC does business in more than one state, you may need to register to do business in those states.
Many factors determine whether an LLC transacts business in a state. Sometimes, this gets confusing. Some of the common factors include whether your LLC:
Consider the following questions when deciding on the best business structure for your company:
LLCs versus C Corporations
C corporation is what most people think of when they hear ‘corporation.’ Most large companies are filed under this structure, as it offers business owners the most asset protection and tax-related options. It is also typically the only choice for owners who would like to be taxed separately from their company, is the legal entity preferred by nearly all investors, and is the most common structure for publicly traded companies on the stock exchanges.
But, a C corp structure isn’t the best choice for everyone. Filing as a C corp requires more paperwork and formal processes that must be carefully and regularly filed. Corporations are often also more closely monitored than other types of businesses because they are one of two types of corporations that can issue stock to the public.
C Corporations have the following advantages:
LLCs versus S Corporations
S corp is an election a business can choose to make whether they form an LLC or a C corp. Making your S corp election does not impact the personal liability protections of forming an LLC or corporation. It is usually done for tax advantages, but before you decide to make the S corp election, you must understand the benefits and some of the limitations it may put on your corporation or LLC.
A few differences exist between businesses that opt for an S corp election and those that form a C corp, or Inc., without the election.
For one, owners of an S corp can claim operational losses as part of their personal income should the business fail to turn a profit.
An S corp can also help business owners avoid what is referred to as the ‘double taxation’ issue impacting C corporations. With C corps, taxes are imposed on the profits at the corporate level. Then, when the profits (after payment of taxes) are passed down to the owners, they also have to pay taxes on their dividends. Corporations are treated more like partnerships in that all profits or losses are passed through to the owners and aren’t taxed at the corporate level. Thus, the profits are only taxed once.
The management team controls the distribution of dividends in an S corp. As a result, it’s difficult for shareholders to predict how much in dividends they will receive. This contrasts with dividends paid by public corporations because you can use a dividends calculator to calculate your anticipated (and historical) dividends paid by public companies.
Making the election does put some restrictions on a C corporation. For example, all business owners of S corps must be U.S. citizens, limiting international growth. Moreover, the shareholders are limited in number and type when you make an S corp election. You cannot have over 100 shareholders; most incorporated entities cannot be shareholders. Finally, there can only be one class of shares in an S corp.
S Corporations have the following advantages:
LLCs versus Nonprofit
Nonprofits have a charitable purpose or association and are eligible for tax exemptions. To receive a tax-exempt status with the IRS, most nonprofits must qualify under section 501(c)(3) of the Internal Revenue Code.
Nonprofits are similar to corporations through their structure and process of creation. But if you intend to operate your business for profit, this is not an appropriate business structure.
Nonprofits have the following advantages:
LLCs versus Sole Proprietorship
A sole proprietorship is the default entity type when one owner starts a business.
Unlike LLCs or Corporations, states do not require you to file your business initially or file periodic reports if you want to operate a sole proprietorship. The downside is that the owner is liable for all losses, legal issues, and/or debt the business accrues. There is no distinction between the entity and the business owner.
Sole Proprietors include freelancers, artists, consultants, virtual assistants, and other home-based owners who have not formally registered as an LLC or corporation.
Sole Proprietorships have the following advantages:
LLCs versus General Partnership
General partnerships allow for two or more business owners, also considered ‘partners.’ A general partnership, like a sole proprietorship, is the default ‘legal entity’ if two or more people join together to conduct business without registering with the state.
Under this structure, a business cannot issue any type of stock, and partners are held personally liable for any taxes or debts. There is no legal separation between individual assets and business assets. Additionally, like a sole proprietorship, the partnership dies when one or more partners exit the partnership. However, provisions can be made as long as two or more partners remain in the business.
General Partnership has the following advantages:
LLC versus DBAs
Getting a DBA doesn’t mean you’ve set up a formal business structure. If you only register a DBA and skip the legal business setup, guess what? By default, you’re running a sole proprietorship.
Many businesses start this way, but it’s not without its pitfalls. As a sole proprietor, you’re on the hook for any business debts or legal issues. No safety net.
Formal structures like LLCs, LPs, LLPs, or corporations offer a safety cushion. They protect your personal assets from business troubles. But sometimes, their legal names aren’t catchy for trading. Enter the DBA, giving your business the name flexibility it needs.
Frequently Asked Questions About LLCs
Wondering what forms you need to launch your Limited Liability Company (LLC)? The starting point is your Articles of Organization! Sometimes referred to as a Certificate of Organization, this key document must be thoughtfully prepared and submitted to your state to bring your LLC to life. Besides filing the Articles, you’ll also navigate through paying filing fees and any upfront franchise taxes or additional initial fees required in your state. A bit much? No worries – we have a simplified, stress-free path just for you! For a quick, affordable, and simple formation experience, our unique partnerships with two of the best in the business ensure you are in capable hands.
You must decide if the LLC structure makes sense for your business. The benefits of an LLC include personal liability protection, tax flexibility, a simple process, less paperwork, management flexibility, and fewer ownership restrictions.
Forming an LLC is typically $250, including formation services. Most states charge $50-$150 in filing fees. Expect to pay $50-$150 for a service that can help you register your LLC. Lawyers can charge $1,000 or more for the same service.
You can form an LLC as quickly as the same day. But most LLCs are formed in 3-5 business days and can take a few weeks, depending on the state, the time of year, and other factors outside your control. LLC registration services can typically offer same-day or next-day service.
No. You can form an LLC yourself or use an LLC formation service or accountant to register your LLC. For a quick, affordable, stress-free, and simple formation experience, our unique partnerships with two of the best in the business ensure you are in capable hands.
An LLC usually costs more to form and maintain than a sole proprietorship or general partnership. And depending on what you plan to do, it might not be the ideal business structure for investors or lenders.
For most people, it is best to form your LLC in their state. Talk to a lawyer or accountant to see if it makes sense for you to form an LLC in another state, such as Wyoming, Nevada, or Delaware.
No attorney? No problem! You can handle the creation of your LLC on your own by preparing and filing the crucial Articles of Organization. Ensure you’re familiar with the rules of your chosen state of incorporation. Not sure about the best business structure for you? Explore our guides. And if any questions linger, feel free to seek advice from an attorney or an accountant.
You should start the LLC as soon as you begin operating your business and decide that the LLC structure is best for you. That way, you can shield yourself from personal liability. If it is close to the end of the year, you can delay until after January 1 and avoid having to file a separate LLC tax report for the current year.
The easiest way to start an LLC is to hire an LLC formation service. For a quick, affordable, stress-free, and simple formation experience, our unique partnerships with two of the best in the business ensure you are in capable hands.
Yes. LLCs can hold real estate, segregate assets, or raise capital. You do not need to have a business idea to form an LLC.
Picking a name for your new company is essential. Aim for a name that radiates the image you wish to project and is easy to remember and spell for your customers. From a legal standpoint, your chosen LLC name must not be misleadingly similar to any existing company in your state and must be distinctly recognizable. Be mindful that your first-choice name may not be available. Plus, most states mandate that your chosen name indicates your business is an LLC by including ‘Limited Liability Company’ or its abbreviation ‘LLC.’
Almost anyone! While there are usually no residency or legal rules about who can create an LLC, some states do require members to be at least 18. For specific state details, peek at our state guides on LLC Formation Requirements. We’re here to guide you through it.
Understanding how LLCs are taxed doesn’t have to be complicated. In most scenarios, LLCs experience pass-through taxation, resembling how partnerships are taxed. While multi-member LLCs must submit an informational tax return, single-member LLCs skip this step. Regardless, both entity types ‘pass through’ profits or losses directly to owners, reflecting these figures on their personal tax returns and ensuring taxes are paid at the individual level.
However, it’s noteworthy that LLCs have an alternative option: to opt for taxation similar to corporations, thereby having profits taxed directly at the business level. Remember that state tax treatment of LLCs’ profits and losses might align with or deviate from IRS tax treatment, depending on the specific state regulations.
Moreover, LLCs must address any applicable franchise taxes levied by the state of incorporation simply for holding the status of an LLC. These are typically annual obligations, with varying amounts across different states. For a practical example: New York LLCs are subject to a franchise tax based on their gross income. The minimum tax is $25, and reports and payments are usually due each year on or before March 15th. Ensure to comply and keep an eye out for any reminders from the state to uphold your LLC’s good standing!
Anonymous LLCs are only allowed in four states – Delaware, Nevada, New Mexico, and Wyoming. But if you operate the business in other states, you must register a non-anonymous foreign LLC in the state where you are conducting business. So, the advantages of an anonymous LLC are modest and only make sense if you operate in a single state where your LLC can be anonymous.
Certain states necessitate the announcement of the formation of an LLC through a publication requirement. This means placing a notice in a newspaper to inform the public of the new business. Key states with this mandate include Arizona, Nebraska, and New York.
The Publication Requirement generally involves announcing the formation of your LLC in designated newspapers within a certain timeframe and submitting proof of publication to relevant authorities.
For example, New York mandates that limited liability entities publish a formation or registration notice in two newspapers and submit a certificate of publication to the Department of State within a 120-day window. Notably, the publication occurs at the county level, and adherence to these rules is crucial. Non-compliance results in suspending the company’s authority to conduct business within New York.
Navigating the publication requirement can be seamless with the right information and assistance.
One-member LLCs to qualify for pass-through tax treatment.
The organizational framework of an LLC is distinguished by its simplicity and flexibility. Essentially, an LLC is owned by members, who can be likened to partners in a partnership or shareholders in a corporation, depending on the LLC’s management style. Here’s a breakdown:
Members as primary decision-makers: Without designated managers, members directly influence company decisions, resembling the role of partners in a partnership. They have an active role in managing the business and making crucial decisions.
Managers in the lead: When an LLC appoints managers, members typically take a step back from daily management, mirroring the role of shareholders in a corporation. The members will primarily be involved in high-level decisions and allow managers to control the day-to-day operations.
Regardless of the management model, a member’s ownership is signified through their membership interest, comparable to how partnership interest or corporate stock signifies ownership in other business structures. This membership interest is pivotal in decisions that require voting, such as those related to the company’s future direction or potential sale.
Embarking on your LLC journey or expanding to another state necessitates appointing a registered agent – it’s not just recommended; it’s mandatory. This agent handles pivotal legal and tax documents on your company’s behalf, ensuring you never miss a beat with compliance or crucial notifications.
A multi-member LLC is registered the same way as a single-member LLC. The only difference is that your articles of organization list more than one owner.
A professional limited liability company (PLLC) is a limited liability company that provides professional services in industries that require a state license.
Let’s unravel the four distinct types of LLCs, each offering varied perks and structures to fit diverse business needs:
Standard LLC: The go-to choice for many small businesses, offering flexibility and straightforward management.
Professional LLC (PLLC): Tailor-made for licensed professionals like doctors and lawyers, PLLCs often need a nod from state licensing boards and might be required to limit ownership to licensed individuals within the respective profession.
Series LLC: Envision a parent LLC sheltering several sub-LLCs, each operating independently and shielded from others’ liabilities. Ideal for businesses juggling varied investments or properties, though available only in select states.
Benefit LLC: Blending profit with purpose, Benefit LLCs aim to generate not just revenue but also positive societal impacts, though they’re recognized only in certain states.
Each LLC type presents unique benefits and regulations.
Yes. You can even use your unemployment money to fund the LLC.
The LLC registration form varies from state to state but will generally require you to provide the following information: business name, address of your principal place of business, the purpose for which the LLC was formed, how the LLC will be managed (e.g., one manager or board of managers), the name and address of the registered agent, duration of your LLC and if you want it to end at a specific time.
Yes. Credit has no impact on forming an LLC.