Is it worth setting up an LLC?

Yes, especially for the liability protection LLC owners receive. When you form your business as an LLC, your personal assets are protected should your business fall on difficult times. Owners of LLCs also enjoy pass-through taxation and deal with less administrative red-tape than corporations.

What is the downside to an LLC?

The primary downside to forming an LLC is the maintenance cost. Unlike a sole proprietorship which doesn’t require registration with your Secretary of State, LLCs must file Articles of Organization and usually have to file annual reports and pay respective state fees. These costs can add up to several hundred dollars a year.

What are the benefits of becoming an LLC?

Since an LLC is a separate legal entity from the business owner, you receive extra protection of your personal assets should your business have any legal or financial troubles. Additionally, an LLC lets you add members (business partners) to raise capital, ensure more efficient profit distribution, and project greater credibility to customers.

What documents are needed for an LLC?

To create an LLC, you’ll need to fill in the Articles of Organization form and file it with the Secretary of State. This document will list critical information about your company, like the name and address of the business, the registered agent’s contact information, and the LLC’s members’ names and addresses. You’ll also want to create an LLC operating agreement that documents how the company will be managed and operated.

Is an LLC a one-time fee?

You’ll pay a one-time fee to file your Articles of Organization which form your LLC. After that, there are recurring fees you’ll pay for things like annual reports and state franchise taxes (if these apply).

What state has the cheapest LLC cost?

The initial LLC registration costs are the cheapest in Arkansas, with just a $45 filing fee. Followed by Colorado, Hawaii, Iowa, Michigan, Mississippi, and New Mexico, where you can register a company for $50. However, there are also recurring LLC fees involved, such as annual reports and taxes. If you factor these in, the overall cheapest state to register and maintain an LLC is Wyoming. With a $100 initial filing fee and annual report fees starting at $50 and no income taxes, Wyoming is one of the cheapest states to have an LLC.

An LLC can expire or become inactive if it fails to file periodic reports (due annually or biannually) and pay the associated fee. When this happens, the LLC loses the right to do business in the state, and more importantly, LLC members lose their personal liability protection. The LLC generally can be reinstated by filing the delinquent reports and paying a late fee or penalty.

Does an LLC really protect you?

Because the LLC is a separate legal entity, your personal assets are off-limits if your company faces legal or financial trouble. But, your company’s assets are not protected. For example, if your business is sued, its bank accounts, real estate, equipment, and inventory can be used to pay any legal settlement. However, your personal bank accounts and personal assets can’t be touched.

How to Start an LLC (Beginner's Guide)

A limited liability company (LLC) is a popular business structure for small business owners as it’s cost-effective, tax-friendly, and scalable alongside your business operations.

You’ll need to file the required paperwork with your local secretary of state (SOS) to form an LLC.

The exact requirements vary from state to state, but overall establishing an LLC is a straightforward process.

Here are the step-by-step instructions explaining how to form an LLC.

Select an incorporation state
Choose a name for your LLC
Choose and appoint a registered agent
Decide on your management structure
File Articles of Organization
Prepare an operating agreement
Register your LLC for tax purposes
Obtain required business license and permits
Key takeaways
FAQ (Commonly asked questions)

Ready to get started with your LLC? Let's get to work!

Step 1: Select an incorporation state

The U.S. has 50 states plus the District of Columbia (DC) and a few island territories like Puerto Rico, the Virgin Islands, and Guam.

You can register your LLC in any of these locations, but starting your LLC where you live and do business is usually the best option for most new business owners.

If you plan to have operations (e.g., warehouse, storefront, employees, etc.) in other states, you’ll need to register your business as a foreign LLC in those states.

Out-of-state registrations mean you’ll need to comply with laws and regulations in both your home state and your registration state.

On the more positive side, you may be able to reduce your tax bill if you incorporate an LLC in a different state.

Delaware, Nevada, and Wyoming are some of the best states to form an LLC for companies that want to limit their tax exposure legally.

In-state vs. out-of-state registration comparison
In-state	Out-of-state
Only one set of state laws to comply with	Two or more sets of laws to comply with
Registration fees may be more expensive	Registration may be cheaper
Pay taxes in only one state	The tax bill can be cheaper or more expensive, depending on the state

Step 2: Choose a name for your LLC

After determining the incorporation state for your business, you’ll need to research and select a legal name for your business. Below is a lowdown of the main steps.

1. Conduct a name availability search

No two companies can operate under the same (or similar sounding) business name. Thus, you’ll need to check if your selected business name is available for registration.

Most states have a business name search tool on the Secretary of State website.

Business name lookup Florida department — Source: Florida Department of State.

Note: Since your LLC name will have to appear on customer-facing assets (your website, receipts, etc.), aim for an easy-to-remember, brandable business name.

2. Check name requirements

Research LLC name requirements in your state. Most require terms like “LLC” or “limited liability company” to be included in the company’s name.

Also, many states don’t allow to include words such as “corporation” or “incorporated” into an LLC name since this may create confusion. You should also avoid words that may be misleading.

For example, you can’t name your LLC “IRS, LLC” because it could be confused with the Internal Revenue Service.

Likewise, you’re often not allowed to use wording that indicates belonging to certain types of entities, e.g., “bank” or “trusts,” unless you operate as one.

For example, to use words like “Doctor” or “Lawyer” in the company name, you may need to have a licensed individual among the members of your LLC.

3. Consider a name reservation

If you have a business name that’s available in your state, but you’re not quite ready to file your LLC paperwork, most will let you reserve a name for a period of 60 to 120 days on average.

While the name is secured, no other business can apply to use it.

To obtain a name reservation for an LLC, you’ll need to fill in a respective form and pay a state fee.

Most states support online name reservation filings, and the ballpark costs are $15-$25.

Given that over 4.4 million new businesses were registered in the US last year, reserving a name makes a lot of sense.

4. Decide if you need a DBA

DBA is short for “doing business as.” Also called trade, assumed, or fictitious name, this document lets you use another name for your operations.

For example, instead of adding “Alex LLC” to your billing, you can use “Software Gem.”

A DBA is a way to brand your business but offers no legal protection to your personal assets.

So if you’re a sole proprietor who registers your trade name in your state, you’re still legally a sole proprietor. Your legal business name doesn’t change.

Forming an LLC provides the personal liability protection you won’t receive as a sole proprietor who operates under a fictitious name.

Step 3: Choose and appoint a registered agent

Legally, all LLCs need a registered agent.

A registered agent, also known as a statutory or resident agent, is a person or business designated to receive service of process or other official mail and legal documents on behalf of your company.

Anyone meeting your state’s requirements can act as your registered agent. Generally, there’s a minimum age requirement (18+ years).

Also, the agent must be available during regular business hours at a physical location at an address in the state you’re registered in.

Registered agent costs

You have three options for appointing a registered agent:

Act as one yourself
Designate another LLC member or company employee
Use a professional registered agent service

Using a registered agent service will cost you up to a few hundred dollars a year. But appointing the business owner or an employee won’t cost anything extra.

Some states (e.g., Florida) charge a fee for changing registered agents. But the initial appointment of an agent is generally bundled into the state filing fee for the Articles of Organization.

Step 4: Decide on your management structure

An LLC is a business entity. Respectively, it should have a proper business governance structure.

Depending on your company headcount, you may want to:

Manage your LLC on your own (or with other LLC members)
Appoint an LLC manager

Member-managed LLCs

It’s the more common management structure since most LLCs are small businesses and don’t need a separate “layer” of oversight (a board or a CEO). Plus, most don’t have the funds for that.

In member-managed LLCs, all members share responsibility for the day-to-day operations of running the business.

You can designate a specific role and scope of duties to each member within the operating agreement.

Manager-managed LLCs

Manager-managed LLCs can delegate some of the member’s responsibility to another LLC member or a non-member, a hired professional manager, for example.

It’s common in LLCs, where some members prefer to be passive investors and not actively participate in running the business.

Opting for a manager-managed LLC is best for:

Large LLCs with many owners
LLCs with passive investors
Business owners who wish to maintain privacy (since all managers must be included in corporate filings, which become publicly available)

Managers are usually appointed from among the members, but you can also hire an outside professional.

Step 5: File Articles of Organization

Now that you’ve settled on your company name, registered agent, and management structure for your LLC, it’s time to form your company officially.

Every state requires you to file Articles of Organization, also referred to as Certificate of Formation or Certificate of Organization, with the Secretary of State (or an equivalent government agency) as the core step of company formation.

In general, you’ll need to provide the following information:

Business name, address, and contact information
Business purpose
Registered agent contact information
LLC management structure
Member names and contact information

LLC formation times vary depending on the state. Those that accept digital filings can approve your Articles of Organization within several days.

Mailed-in and in-person submissions can take up to several weeks. Many states offer expedited processing (from 1-day to 2-hours) for an extra fee.

LLC filing fees vary but can be as little as $40 and as high as $500.

Step 6: Prepare an operating agreement

Only certain states legally require LLCs to have an operating agreement. Nevertheless, if you’re registering an LLC in another state, having one is a good idea.

The operating agreement spells out the financial and management rights and responsibilities of the LLC members. It addresses matters like:

How can membership interest be transferred
Who contributes what if the LLC needs additional capital
When and how profits are distributed
What happens when an LLC member wants to leave the business

Having an operating agreement is crucial for multi-member LLCs as it specifies ownership percentages and can help prevent disputes between members.

Without an agreement, your LLC will be governed by the default rules and laws of your state. And this could lead to undesirable consequences.

California, Delaware, Maine, Missouri, Nebraska, and New York based LLCs are legally required to have an operating agreement.

Step 7: Register your LLC for tax purposes

The dreaded part of running a business is paying taxes. You’ll need to consider how both federal and state taxes will impact your company.

Federal taxes

By default, all single-member LLCs are taxed as a sole proprietorship. LLCs with more than one member are taxed as general partnerships.

Default federal taxation of LLCs
Number of members	Default taxation
1	Sole proprietorship
2+	Partnership

Both the sole proprietorship and the partnership provide pass-through taxation.

That means that the company pays no federal income tax. All corporate profits “pass-through” to the members and will be taxed on the individual’s tax return.

But LLC members can elect to get another tax classification with the IRS. Such as:

S-corp
C-corp

S-corporations

By choosing to have your LLC taxed as an S-corp, which is short for “small corporation,” you can receive some tax benefits.

That’s because all corporate profits from sole proprietorships or partnerships are subject to the 15.3% self-employment tax and your personal income tax rate.

By contrast, business income from an S-corp isn’t subject to self-employment tax. Instead, you’ll pay taxes on profits distributed as a salary and then a respective personal income tax rate. Taking this route can be a more cost-effective option in some cases, especially if you don’t intend to cash out all profits.

However, S-corp taxation may not work for every business type. Be sure to check with your tax professional about whether it’s right for your LLC.

C-corporations

You can also choose to have your LLC taxed as a C-corporation or large corporation. This tax classification is best for companies that expect to grow and have more than 100 investors, which is the limit for S-corps.

The downside to being taxed as a C-corp is that you’ll be double-taxed because tax is charged at the corporate level and again at the individual shareholder level.

Payroll taxes

If you have employees, your company will be responsible for paying federal payroll taxes, including:

FICA tax (commonly known as the Social Security and Medicare taxes)
Federal unemployment tax (FUTA)

Employer identification numbers

To report federal taxes, you’ll need to get a federal employer identification number (FEIN) from the IRS as an LLC. This number will act as a Social Security number for your business and is needed to open a business bank account.

Getting one doesn’t cost anything, you can apply online, and your EIN will be immediately issued when you complete the application.

IRS Form SS-4 Getting an EIN. — A snippet of IRS Form SS-4 – Application for Employer Identification Number. Source: IRS.

State taxes

At the state level, LLCs can be responsible for several types of taxes too, including:

Annual franchise taxes
Sales tax
State corporate income taxes

Franchise taxes

Franchise taxes are also known as privilege taxes and are levied by some states on businesses operating within the borders.

Contrary to what the name may imply, a franchise tax isn’t imposed on a franchise. Despite their line of operations, all qualifying legal entities must pay it for the right to exist and do business in a particular state.

States charging franchise taxes (or a variation): Alabama, Arkansas, California, Connecticut, Delaware, Washington DC, North Carolina, Rhode Island, Tennessee, Texas, and Washington.

Sales tax

If your company sells taxable goods or services, you’ll need to collect sales tax from your customers and remit that tax to the state.

Some states collect statewide sales tax only. Others also do so on a county-city level.

Per Tax Foundation:

45 states and the District of Columbia levy statewide sales taxes.
38 states collect local sales taxes too. They can sometimes rival or even exceed state rates.
The five states with the highest combined sales tax rates are Tennessee (9.53%), Louisiana (9.52%), Arkansas (9.47%), Washington (9.21%), and Alabama (9.22%).

To collect and remit state and local sales taxes, you’ll need to register with a local tax authority and sometimes obtain a sales business license.

State income tax

Most states have a corporate income tax charged on company profits. But unlike most federal income taxes, this tax is paid by the LLC.

States with no corporate income taxes: South Dakota and Wyoming.

And some states impose a tax on your company’s revenue, not on its net income. These types of taxes are commonly called gross receipts taxes.

States with gross receipts taxes instead of corporate income taxes: Nevada, Ohio, Texas, and Washington.

Payroll taxes

If you have employees, you’ll have state payroll taxes to pay, which can include:

State unemployment tax
Headcount or employer privilege tax

Again, check with a local tax authority to learn about your obligations.

Step 8: Obtain required business license and permits

LLCs don’t need to apply for a blanket business license at the formation stage in most states.

But when you start operating your business, you may need a business license or special permit.

Some of the industries requiring business licenses include:

Agriculture
Restaurants
Childcare centers
Law
Medicine
Accounting
Plumbing

Check with your state and local government offices to determine if your type of business needs a license.

Commonly asked questions (FAQ)

Here are the most frequently asked questions regarding LLC formation.

Last updated: May 2023

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How to Start an LLC (Beginner’s Guide)

Table of contents

Step 1: Select an incorporation state