So you've grown your business and decided that you want to incorporate it. You've done your analysis on LLC vs sole proprietorship and decided it's a good idea to start a limited liability company (LLC). Now what?
How to create an LLC seems like a complex process that you definitely don't want to mess up. You probably have questions like “what legal documents do I need?”, “do I need an employer identification number?”, and “do I need to file an annual report?”
This post will answer all of those questions and more. You'll learn about the exact steps you need to take to create an LLC, and also some online services that can help you do so.
Ready to incorporate your business and take it to the next level? Let's get started.
What is an LLC?
Before getting into the nitty-gritty of how to create an LLC, it's important to first understand what exactly an LLC is. Put simply, an LLC is a business structure that gives you limited liability protection as well as pass-through taxation. Similar to corporations, LLCs are separate entities from the owners, meaning owners themselves can't be held responsible for any liability and debt incurred by the business.
LLCs also allow you the benefit of pass-through taxation. What this means is that income is not taxed at the entity level and any profit or loss is “passed through” to your own income. If there are multiple LLC members a tax return needs to be completed (differing from if it's only a single-member LLC). The LLC owners then must report the income on their own tax returns and pay the required tax.
Some of the benefits of creating an LLC are:
- Limited Liability – As soon as you create an LLC, you are shielded from any potential liabilities your business might incur. This means that creditors can't come for your personal assets to pay off business debts (the business entity remains separate from you). This protection is not afforded to those who choose to start a general partnership or sole proprietorship instead of an LLC.
- Management – LLC members can elect a board to manage the business or manage the business themselves. This is different from coroporations which need to have a board to directors.
- Credibility – An LLC might help you establish credibility if you're a new business (more than a sole proprietorship or partnership).
Some of the disadvantages of creating an LLC are:
- Costs – Creating an LLC requires upfront costs which come in the form of a formation fee and filing fee. A lot of states might also impose ongoing fees (like annual reports and franchise taxes).
- Ownership – Transferring or altering ownership is much more restrictive in an LLC than in a corporation. All members must agree before any changes can happen (in regards to ownership).
How to Create an LLC: Steps
Now that you know what an LLC is, here's exactly how you can create one. Regardless of what state you're in, here are the steps you'll need to take to form an LLC.
Choose a State
Depending on which state you choose to incorporate under, the taxation, costs, and LLC laws will differ (because state law differs).
Most people choose to start an LLC in the state that they plan to do business in (usually the state you're living in). The reason for this is that if you choose to form an LLC in a state you're not doing business, you'll need to file to become a foreign LLC in your actual state (usually increasing LLC formation costs).
That being said, it may be advantageous for you to start an LLC in a certain state based on what your business goals are and how you want your business to run.
Choose a Name for Your LLC
The first step you need to take when creating your LLC is to choose a name! Though this may sound simple, there are a few things that you should keep note of:
- Make sure that your name ends with “LLC”.
- Check to make sure your LLC name isn't taken already. (You can do this with IncFile's business name search).
In most states, you can reserve your LLC business name for a short period of time for a small fee (until you file your articles of organization).
Choose a Registered Agent
A registered agent is someone who receives important documents (like legal notices and tax documents) for the LLC. Also, in the event that the LLC is sued, a registered agent must be available to receive service of process (a summons and complaint that notifies the LLC that a lawsuit has been filed against them). The registered agent must have an actual physical address in the state and can not use a PO box.
While a lot of LLC owners choose to take on the role of registered agent, there are some reasons to go with a registered agent service provider instead. For example, if an owner is not available to receive time-sensitive documents, it can cause the LLC some problems or incur extra fees.
File Articles of Organization / Certificate of Formation
The next step to create an LLC is to file articles of organization. This is usually done with your state's corporate filing office, usually the secretary of state. In some states, this is called the certificate of formation, and in others still, it's called the certificate of organization.
To file your articles of organization, head over your Secretary of State's website (there will usually be a form you need to fill out). You'll need some basic information like your LLC name, the name and address of the registered agent, and the names of the LLC owners. There will also typically be a small fee when completing this step (usually less than $100).
The other way to do it is to use an incorporation service like IncFile. The state websites can be very confusing to navigate, so services like Incfile can make the process a whole lot easier.
Decide on Member / Member Management
As mentioned above, LLCs can either be managed by the members or by people appointed by the members (kind of like a board of directors). Management will typically be in charge of big issues like taking out a business loan, purchasing a piece of property, and the future plans of the business. You'll want to decide on how you want to go about member/member management before creating your LLC.
Create an Operating Agreement
This isn't strictly required to start your LLC, but definitely consider creating an internal LLC operating agreement that outlines how your business will be run. With an operating agreement, you can make sure that your business will be managed and move in the direction you want it to. Without an operating agreement, state laws will govern your business.
But again, when you use a formation service, they can provide you with a simple boilerplate operating agreement for a fee.
Comply with Tax Rules
Depending on how complex your business is and where you're choosing to incorporate, you may need to comply with additional tax and regulatory requirements. These might include:
- An employer identification number (EIN): The internal revenue service (IRS) requires you to get an employer indentification number if your LLC has more than one member. You can do this by heading over to the IRS website and completing an online EIN application.
- Business licenses: You may need to get some state or local business licenses depending on what kind of business you're operating and where you're incorporated.
- Taxes: You might need to register with your state's taxing authority (for sales and employer tax) depending on how you'll be selling goods/services and also if you have employees.
Obtain a Business Bank Account
This step is not necessary to start an LLC, but a really good idea for anybody hoping to grow their business. It's very important for you to separate your business finances from your personal finances, and a business bank account is one of the best ways to do that.
Also, in the event that your business gets sued, this is one of the key pieces of evidence that a court uses to decide whether or not to “pierce the veil” (hold members liable for their business debts). To set up a business bank account you'll need to go to your bank with some basic information like company formation date, business type, and owner names (+ info).
Business Formation Services To Help You
If you feel like there are simply too many steps to creating an LLC, you can also opt to choose an online LLC formation and/or incorporation service to help you out. Here are some of the best LLC formation services that could help you with incorporating your business.
Based out of Houston, Texas, IncFile is a business formation and registration company that handles all things from formation to compliance to entity filing. Among some of its core offerings are formation services for LLCs in all 50 states, a registered agent service in all 50 states, compliance services, and bookkeeping/accounting services.
The great thing about IncFile is its cost. For the most basic package (silver package), IncFile is free! The only downside is the EIN isn't included and you'll need to pay $70 separately for it with IncFile BUT you can also just go to the IRS and register your own EIN for free. It'll take 30 business days for your papers to get filed with IncFile (or 11 business days if you pay an extra $50).
The pros of using IncFile:
- Really good pricing; you won't find other services where you can basically do everything for free.
- IncFile's platform is extremely intuitive and easy to use from start to finish.
- Their online dashboard is second to none.
The cons of using IncFile:
- Some of the customer reviews aren't great.
- It might be tough for you to form a PLLC if you wanted to.
Legalzoom is an online legal service that's designed to be a one-stop-shop for small business owners. They are great for handling any and all legal needs and providing legal advice. These services include incorporating a business (starting an LLC).
Some of the pros of Legalzoom:
- Legalzoom is extremely well established and has been around for a long time (has a good reputation).
- There is a 60 day money back guarantee
- Their business plan includes tax advice as well as an annual business evaluation
Some of the cons are:
- Business formation costs are higher than some of the competitors at $79 (including an operating agreement).
- The customer service could be better (according to online reviews).
BizFilings follows a simple 5 step process to get your LLC set up and squared away:
- Quality check – After you submit your documents, BizFilings reviews them to make sure they are up to standard and meet state requirements.
- Name check – BizFilings will check whether or not your desired LLC name has been taken.
- Documents filed – Your documents will then get sent off to the state agency to get filed.
- Documents delivered – After everything is verified, BizFilings will send you the final documents.
- Post-incorporation – You can use BizFilings business license wizard to make sure you have all the necessary business licenses and permits.
Some pros of BizFilings:
- There are resources to make sure you're as educated as possible in the process.
- There are no hidden fees.
- BizFilings has a team of incorporation specialists dedicated to helping you with the process.
Some cons of BizFilings:
- For some small businesses, the price might be a little steep.
- You'll have no access to legal advice.
The newest out of all these services, ZenBusiness is a venture-funded public benefit company based in Austin, Texas. The company's mission: to help everyday Americans fulfill their dream of becoming an entrepreneur. As such, ZenBusiness offers several affordable LLC incorporation options plus various different services for launching your own startup.
Some of the pros of ZenBusiness are:
- ZenBusiness has a variety of addon products and services that might come in handy for you.
- It's easy to pay for a single service without getting a host of other services that you might not want.
- Their platform makes it extremely easy and intuitive to set up your business in as short a time frame as possible.
Some of the cons of ZenBusiness:
- If you want registered agent services, you'll need to pay a recurring fee.
Recap: How to Create an LLC
In today's day and age, it's easier than ever to become an entrepreneur and start your own business. If you want to grow, though, it's likely that you'll need to incorporate at some point in time. At that point in time, you'll need to know how to create an LLC.
This post has covered the steps required to create an LLC, as well as 4 different LLC formation services that you can take advantage of (if you don't want to do it yourself). So what are you waiting for? Get out there and start getting yourself the liability protection you need with an LLC. You'll be glad you did if you get sued…