To make an LLC, you must follow several key steps, including choosing a unique business name, filing the necessary paperwork with your state, and creating an operating agreement. Learning how to make an LLC is essential, as selecting the right structure can significantly influence your business operations.
You should consider forming an LLC due to its advantages, such as reduced formalities and requirements, as well as limited liability protection. This form strikes an ideal balance between the complexity of a corporation and the unlimited liability typically associated with a partnership.
In this article, we will address questions like “How to make an LLC for free?” and provide details about the LLC application process and LLC requirements, so continue reading to discover the answers and more.
What is an LLC?
An LLC, or Limited Liability Company, is a business structure that combines the benefits of partnerships and corporations.
Its primary purpose is to provide limited liability protection, meaning that the owner's personal assets are generally protected if the LLC faces financial difficulties or bankruptcy. Moreover, an LLC is a straightforward business entity to manage. It offers tax benefits and requires less extensive documentation for both formation and ongoing operations.
This simplicity and tax advantages make it an appealing choice for those looking to start a business quickly and with minimal administrative burdens. An LLC is ideal for owners entering risky business ventures, those with valuable personal assets, or those seeking a lower tax rate than a corporation.
LLC vs. Other Business Types
When deciding on the best structure for your business, it’s important to understand how an LLC compares to other common business types, such as sole proprietorships, partnerships, and corporations.
Here is a quick overview of the key differences:
Sole proprietorship. A sole proprietorship is the simplest business form, with no distinction between the owner and the business. So, when comparing a sole proprietorship vs. LLC, one key difference is that a sole proprietorship does not offer personal liability protection, which is why the owner’s assets are at risk if the business incurs debt or legal issues.
Partnership. In a partnership, two or more people share ownership and responsibility for the business. Like a sole proprietorship, partnerships do not provide personal liability protection unless structured as a family limited partnership or limited liability partnership (LLP).
Corporation. A corporation is a separate legal entity from its owners, providing personal solid liability protection like an LLC. However, corporations are subject to more complex regulations and tax rules, and they often involve more administrative work and higher formation costs than LLCs.
How to Make an LLC in 7 Clear Steps
In this guide on how to start an LLC, we will break down the entire process into simple steps to help you understand what to expect as you start the formation process.
Let's start.
#1. Pick a Name for Your Business
First, you need to make your future business unique and easily recognizable by selecting a business name under which your LLC will operate. When choosing a business name, two key considerations are essential: it must be distinctive and legally acceptable.
Choosing a distinctive business name is essential to making a first impression with potential customers who will encounter your business primarily through its name. Therefore, your name should be unique, memorable, and different from your competitors to ensure it stands out.
Meeting legal requirements implies that your business name must include a term like “LLC” or “Limited Liability Company” to indicate its business structure.
Additionally, the name must not be identical or too similar to existing businesses. It is advisable to check for existing names in your industry to prevent rejection or legal issues in the future and gather for your business name.
#2. Designate a Registered Agent
A registered agent for an LLC (a resident agent or statutory agent) is a person or business entity responsible for receiving mail, such as legal documents and government notices, on behalf of your LLC.
Some general state requirements for a registered agent are as follows:
Be at least 18 years old
Have a physical address in the state where your LLC is registered
You can act as your registered agent, appoint a reliable individual, or hire a professional registered agent service. While professional services come with a fee, they are often necessary if your business lacks a physical location in the state.
#3. Determine LLC’s Management Structure
This step involves deciding how the LLC will be managed. In smaller LLCs, where a few individuals have founded the company, the members usually share management responsibilities, each bringing unique skills and working together to oversee the business.
In this case, the management structure is generally set up so that all members—owners—actively participate in the daily work and decision-making of the business.
Besides member-managed LLC, another option is to hire an external manager. In this scenario, a manager, neither an owner nor a member of the LLC, is appointed to oversee and handle the daily operations and decision-making.
This external manager is often engaged in larger LLCs, where one or more managers are hired to cover various departments within the company.
#4. Prepare an Operating Agreement
An operating agreement is essential for an LLC as it serves as a comprehensive rulebook detailing the company's organization. This document outlines the roles, rights, and responsibilities of members, their investments, and ownership shares, effectively structuring the LLC's operations.
Although not always mandated by state law, a well-crafted operating agreement is crucial for preventing disputes and ensuring smooth business operations. To streamline the process, consider using our builder to easily create a tailored operating agreement for your LLC.
#5. File Your Articles of Organization
This crucial step in creating an LLC involves submitting the articles of organization, also known as the “certificate of formation” or “statement of information.”
This formal legal document includes the following information:
Business name of your LLC company
The address and contact information of the registered agent's office (and, in some states, the agent's signature)
The duration and purpose of the business
LLC's management structure
The effective date of the LLC
A list of LLC members and managers
You have the option to make an LLC for free by handling the paperwork yourself. However, depending on your state, you will still need to pay state filing fees, which typically range from $50 to $200.
Alternatively, you can make an LLC online using an online service to handle the paperwork. While this option involves a fee, it ensures all documents are correctly submitted and frees you from paperwork.
#6. Obtain EIN
An employer identification number (EIN) is required for your LLC by the Internal Revenue Service (IRS). Think of the EIN as a Social Security number for your business. This nine-digit number identifies your business for federal tax purposes, distinguishing your LLC from your personal assets.
Obtaining an EIN is mandatory in many states, especially if your LLC has more than one member. Banks also typically require an EIN to open a business account.
#7. Get Other Licenses & Permits
Depending on your business activities, you may need additional licenses or permits to operate legally. This requirement can involve obtaining specific licenses or paying certain fees related to your industry.
Therefore, it's essential to thoroughly research how to make an LLC in your area and comply with all local regulations to ensure you meet deadlines and avoid unnecessary costs.
4 Crucial Things to Do After Creating an LLC
Once you’ve successfully created your LLC, there are several important steps you need to take to ensure your business operates smoothly and remains compliant with the law.
There are the steps:
#1. Obtain Necessary Permits and Licenses
Depending on your industry and location, your LLC may need specific permits or licenses to operate legally. This could include local business licenses, health permits, or professional licenses.
It’s important to research the requirements for your specific business type and ensure you apply for and obtain all necessary documentation. Otherwise, you can face fines and penalties.
#2. Comply with State and Federal Regulations
Your LLC must adhere to various state and federal regulations, which include filing annual reports with the state authorities where your LLC was formed, paying state and federal taxes, and maintaining a registered agent who can receive legal documents on behalf of the LLC.
#3. Open a Business Bank Account
It’s essential to separate your personal and business finances by opening a business bank account. Having an LLC bank account simplifies accounting and tax preparation and provides legal protection by separating your personal assets from those of your business. A business account is also used to build customer and vendor relationships.
#4. Register Your Business in Other States
If you plan to operate your LLC in states other than the one where it was formed, you may need to register as a foreign LLC in those states. This process involves filing additional paperwork, paying registration fees, and meeting specific state requirements.
7 Main Types of LLCs
There are several LLC types, each designed to meet different business needs. Some LLCs are best for a single owner, while others are designed for businesses with multiple owners or specific management structures.
Here are some common types of LLCs:
Main LLC Types
Single-Member LLC: This is an LLC with only one owner, offering limited liability protection while allowing the owner to report business income on their tax return.
Multi-Member LLC: This type of LLC has two or more owners. It provides limited liability protection and allows members to share in the management, profits, and losses of the business.
Member-Managed LLC: All members of this LLC are actively involved in managing the business’s day-to-day operations. It is ideal for small businesses.
Manager-Managed LLC: This type is managed by a professional manager(s) rather than all the owners, and it is suitable for larger businesses.
Series LLC: A series LLC allows a single LLC to have multiple series or divisions, each with its own assets, members, and operations.
Restricted LLC: This type is mainly used in certain states, like Nevada, to limit the distribution of earnings for a period (usually ten years).
Low-Profit LLC: This is a hybrid entity that operates like a for-profit LLC but has a social mission. It is ideal for businesses that seek to combine earning a profit with making a positive social impact.
4 Key Pros & Cons of Starting an LLC
Starting an LLC offers benefits like protecting your personal assets and providing flexibility in management and taxation. However, it also involves certain costs and administrative obligations.
Understanding these pros and cons can help you decide if an LLC is the right choice for your business.
LLC Pros
Limited Liability Protection. One of the main advantages of an LLC is that it provides limited liability protection. This means your personal assets, like your home, car, or boat, are generally protected from business debts and lawsuits. If your LLC faces legal trouble or financial issues, your personal assets typically won’t be at risk.
Flexible Management Structure. An LLC offers flexibility in how it can be managed. You can choose to manage it yourself or appoint managers to handle day-to-day operations.
Tax Benefits. By default, an LLC is treated as a pass-through entity for tax purposes. This means the business itself doesn’t pay income tax. Instead, the profits and losses of the LLC pass through to the owners’ personal tax returns. Each owner reports their share of the LLC’s profits or losses on their personal tax return, which can simplify the tax process and help avoid double taxation.
Fewer Formalities. Compared to corporations, LLCs have fewer regulatory requirements and formalities. There is no need for a board of directors or annual meetings, which reflects on simpler administration and reduced paperwork.
LLC Cons
Self-Employment Taxes. While LLCs offer tax flexibility, members may be subject to self-employment taxes on their share of the profits. This means you’ll need to pay both the employer and employee portions of Social Security and Medicare taxes, which can be higher than what’s required for traditional employees.
Limited Lifespan. In some states, an LLC may have a limited lifespan. For example, if a member leaves or dies, the LLC might need to be dissolved or restructured, depending on the operating agreement and state laws. This can raise concerns regarding the continuity of the LLC.
State-Specific Rules and Fees. LLC formation and maintenance rules vary by state, which can lead to complications if you do business in multiple states. Additionally, some states impose higher fees or taxes on LLCs, which can add to the cost of running your business.
Limited Ability to Raise Capital. LLCs might face challenges when it comes to raising capital. Investors often prefer corporations because they offer stock options and other mechanisms for raising funds. As a result, an LLC may find it harder to attract venture capital or large investments.
Final Thoughts
Don't let your innovative business ideas and eagerness to get started be hindered by delays in selecting the appropriate business structure and handling the associated procedures.
Setting up an LLC is a simple and efficient process with minimal administrative burdens. By choosing an LLC, you benefit from streamlined formation and management, allowing you to focus on what truly matters—running your business successfully.
Take the steps to establish your LLC, determine your management structure, and move forward with confidence!
How to Make an LLC FAQ
The cost to start an LLC varies by state, typically ranging from $50 to $800. This includes filing fees and, sometimes, additional costs for required permits or licenses.
LLC owners make money by taking distributions from the company’s profits. These distributions are not subject to payroll taxes, unlike a regular salary.
Whether you pay yourself a salary depends on your LLC’s structure and income. For most single-member LLCs, distributions are more common, but a salary may be appropriate if you are an employee of the LLC.
You don’t need an attorney to form an LLC, but legal assistance can be beneficial for ensuring compliance with state laws and drafting an operating agreement.
An operating agreement outlines the ownership and operating procedures for your LLC. While not required in every state, it is highly recommended to avoid future disputes among members.
Yes, you can form an LLC in another state, but you may need to register as a foreign LLC in the state where you actually conduct business, which involves additional paperwork and fees.
To make an LLC online, file through your state’s Secretary of State website or use an online formation service. The process typically takes from a few days to several weeks, depending on state processing times and whether you choose expedited service.
