How to start an LLC
One of the first things that business owners do when starting their business is form a Limited Liability Corporation (LLC). Unlike a C-Corp, an LLC is very flexible and offers several advantages. If you want more information on what a LLCs, S-Corps elections or C-Corps are, read our article here. In the meantime, here are a few that stand out:
- No residency required: If you don’t live in the United States or are not a U.S. citizen, you can still form an LLC.
- Legal Protection: You only stand to lose what you have invested into the business. If your company is sued and the resulting judgement is more than what the company can afford, the members of the LLC aren’t personally liable to pay the judgement or make up the difference (with few very specific exceptions). Your house, personal property, and your family are safe.
- Easy tax returns: With an LLC, you may not need to file a corporate tax return. You can just report your share of profit and loss on your individual tax returns. This streamlines the tax filing process and helps you avoid double taxation.
- Low start-up cost: Starting an LLC is a relatively cheap process. The cost of forming an LLC is state dependent and can range anywhere from $50-$300 or more. For example, Delaware’s Certificate of Formation of a LLC is $90 with a $50 fee if you want it processed in 24 hours.
However, there are a couple of disadvantages to opening up an LLC. Here are some:
- Can’t issue stocks or shares: With an LLC, you won’t be able to offer shares of stock to attract investors. Because of this, you may face a limit on how much you can grow.
- Treated differently state to state: Each state has different laws on how the requirements of LLCs and how they deal with them. Delaware is the most popular state to form LLCs but if you choose to form one elsewhere, make sure you weigh the pros and cons of forming in that state. Each state is different!
Is an LLC right for me?
That depends. It’s important to think about your plans for the future of your company and how you want it to grow. An LLC might be for you if:
- You want a business entity that offers limited liability to its members
- You need flexibility in sharing profits between owners
- You want minimal formal documentation
- You want to be flexible in your accounting
- You don’t want to be forced to meet the meeting requirements imposed on Corporations.
Starting an LLC
Starting an LLC is a relatively simple and painless process. The basic steps to starting an LLC are:
- Choose a legal name and reserve it (Optional)
- Obtain a Registered Agent (Like us!)
- Draft and file your Articles of Incorporation with your Secretary of State
- Decide who will run your business / Operating Agreements
- File form SS-4 or apply online to obtain an Employer Identification Number
- Obtain the other necessary state specific documents and ID numbers (each state is different)
1. Choosing a Legal Name:
Your business name is how the state identifies your business. Each state has different regulations around what is required of a business name. Most states don’t allow you to register a name that’s already been registered and some states even require your name to reflect the kind of business it represents. In Delaware, you can reserve a name for $75 if you’re not ready to file your official paperwork yet. Your reservation will be effective for 120 days and you can find the reservation paperwork here.
2. Obtaining a Registered Agent:
Most states, including Delaware, require that every business entity have and maintain a Registered Agent in the state where the LLC is formed. The registered agent must have a physical address in Delaware. A registered agent is required to be available during normal business hours and will forward you any important communication as it arrives. For more information on registered agents for Delaware (the most popular state to file), visit the State of Delaware page.
3. Drafting and Filing your Articles of Incorporation
Articles of Incorporation are documents that establish your corporation as a separate business entity. The articles are considered to be public record and provide information like the entity’s name, contact information and any information about shares and stock (not applicable to an LLC). Sample forms, instructions, and fees can be found on your state website. For Delaware, that information is found on Delaware’s Division of Corporation website. Once you submit your paperwork, expect the state of Delaware to process your incorporation in about 3 weeks. At the type of formation, you can also request a Certificate of Good Standing for an additional $50. Some financial institutions may require a Certificate of Good Standing when doing business with your LLC (like opening a company bank account).
4. Deciding Who Will Run Your Business / LLC Operating Agreement
If you are the sole owner and employee of your business, then this is an easy decision for you. However, if you have multiple partners or already are thinking of hiring a team to help you, it’s best to figure out how decisions are made and who will be making them. All of this lives in an important document called the LLC Operating Agreement. The operating agreement can outline:
- How profits and losses will be split
- How and when meetings will take place
- Succession planning – procedures for buying out or transferring ownership
- Roles and responsibilities of key positions and members
- Specific rules for your company – not state specific ones
- Voting rights
- Any other important business considerations
The state of Delaware does not require that you file an Operating Agreement publicly, but you will want to create one to protect your business and to also give it direction and clarity as it grows. Additionally, a bank may require you to provide a copy of your Operating Agreement if you wish to open a bank account for your LLC (but not always). If you would like look at some Operating Agreement templates that cover Single-member LLCs to Multi-Member LLCs with Member Classes, check out Harvard Business Services’ page on Operating Agreements.
5. Obtaining an Employer Identification Number (EIN)
Once you have formed your LLC and have drafted your Operating Agreement, it’s time to obtain an Employer Identification Number (EIN) for your business. The EIN will be how the IRS identifies your business entity and will determine how it will be taxed. Obtaining an EIN is as simple as either filling out Form SS-4 and faxing it to the IRS or applying online on the IRS website. Some incorporating services often charge a fee for obtaining an EIN but this is something that is free to do and you can obtain an EIN instantly if you apply online.
6. Obtaining State Specific Licenses
The State of Delaware has a great infographic on the requirements for registering a business in Delaware. One registration requirement that many new business owners overlook is the need to obtain the correct business licenses and contacting the appropriate state agencies to inform them of the creation of your new business entity.
The State of Delaware makes this easy for new business to register with the necessary state agencies, like the Division of Revenue, Division of Unemployment Insurance and the Office of Workers Compensation, through their One Stop Business Registration and Licensing System. License Fees also vary on the type of business you start so make sure you check out the license fee chart to get a better understanding of additional start-up costs.
Forming an LLC is one of the smartest decisions you can make for your business and it’s relatively easy. However, it’s important that you take a moment to not only familiarize yourself with state specific LLC laws, but also determine how your company will function. Think about how you and your partners, if you have any, are going to split responsibilities, profits, losses, and make decisions. Create a plan of what agencies you are going to contact and make sure that you obtain the right certifications and license for your business. Lastly, figure out how all of this is going to get done – are you going to hire a business service to do this for you or are you going to tackle it yourself? Once you have all of that figured out, you can finally begin being your own boss!