How to start an LLC in 5 easy steps

In 2023 alone, American entrepreneurs started a record-breaking 5.5 million small businesses—the lion's share of which were LLCs. This year, experts believe that the upward trajectory will continue, in large part because of how painless it has become to create and register an LLC.

Instead of the overly complex, painfully slow process from decades past, starting an LLC in 2024 comes down to five simple steps (and a few extra notes to keep in mind).

Key takeaways

• Form an LLC in only five steps: Select a unique name, appoint your registered agent, determine your LLC’s structure, create an operating agreement, and file articles of organization.
• Set your new LLC up for success: Stay compliant with federal and state law, think about taxes early, and build a strong financial structure.
• Compare the benefits of different LLC types: LLCs are popular for several reasons, but which of the eight types is best for you?

The 5 steps of creating an LLC

Limited liability companies, or LLCs, provide business owners with liability protection, lower startup costs, and greater flexibility for management and taxes compared to other business structures, making them an attractive choice for many small business owners.

Chief among these benefits, however, is just how quickly and easily one person can start an LLC. In general, filing for an LLC online can be done in an afternoon, and getting approval can take as little as a couple of business days (depending on the state).

Simple as the process may be, however, learning the five legally required steps of how to start an LLC helps ensure that your new business starts without a hitch.

1. Choose your business name

More often than not, your business' name will be the first thing a prospective customer interacts with—and the first chance you have to hook their interest. A unique, memorable, and evocative name can set you apart from competitors, build a strong foundation for future branding efforts, and set your business up for success overall.

But it's not just about branding—your LLC's name also needs to meet specific legal requirements, many of which vary by state and the nature of your new company. Though we strongly suggest researching the specific requirements of the state in which you'll be doing business, most states require that your business' name must:

• Be distinguishable from competitors. As a way of preventing customer confusion and protecting business reputations, all states require a business' name to be adequately distinguishable from the names of pre-existing companies within that state. Consider a business search through your Secretary of State's website to check for similar names.
• Include a business-type designator. While the specific list of accepted abbreviations varies from state to state, all states require that official business names include an indication of the business' structure. These business type designators may include "limited liability company," "LLC," or other such variations and are generally placed at the end of your business name.
• Avoid restricted terms. Without specific pre-approval, businesses typically aren't allowed to include terms such as "bank" or "insurance" in their names. For companies where such terms would be appropriate, keep in mind that getting approval can be a lengthy process.
• Respect existing trademarks. Trademarks are a common way of protecting a company's reputation and intellectual property, so litigation for trademark infringement shouldn't be taken lightly. Before choosing a name for your business, make sure that it doesn't open you up to potential legal troubles from existing companies.

Keep in mind that most states allow you to reserve a name temporarily, even if you aren't yet ready to create your LLC. Simply submit your state's name reservation form and the required filing fee to reserve a name.

2. Designate a registered agent

An LLC's registered agent (also known as a resident agent or statutory agent) has one job: to receive legal documents, such as lawsuits and subpoenas, on behalf of your LLC and then deliver them promptly to the appropriate person within your business.

Every state has its own requirements for who can serve as a registered agent, but typically, the registered agent services must be either a state resident over the age of 18 who has a physical address in the state (known as the "registered office''), or a company authorized to provide registered agent services in the state.

In most states, you can act as your own registered agent, designate an employee or other individual as an agent, or hire a registered agent service. This last option may be necessary if:

• Your business doesn't have a physical location in the state where it is formed
• No one is available at your business location during normal business hours
• You run a home-based business and don't want your personal address appearing in public records

3. Determine your LLC's structure

Before you can move on to creating an LLC operating agreement, you'll need to first determine the structure of your new company. Generally, this comes down to choosing between one of two structures:

• Member-managed LLCs. With a member-managed LLC, all members (also referred to as owners) actively participate in the business's day-to-day operations and decisions. Although possible for larger companies, this structure is far more common among smaller LLCs with owners who prefer to be more hands-on in managing the business' routine operations.
• Manager-managed LLCs. With a manager-managed LLC, owners choose one or more people to operate as managers and handle day-to-day decision-making. Importantly, the chosen managers do not need to be owners or members of the LLC itself. A manager-managed LLC structure is typically better when not all members want to be active or when the LLC is especially large.

Although you technically only need to decide between two options when choosing the structure of your LLC, it's important to give the decision the time and thought it deserves. Choosing the right option for your LLC can streamline daily operations, clarify legal and work responsibilities, and significantly improve your business' chances for success overall.

4. Prepare an LLC operating agreement

A written operating agreement is one of the most important documents for any LLC. In it, you and any partners you may have will outline your LLC's operational and financial guidelines, details about the business' structure, ownership interests, and how profits will be divided.

Even in states where such an agreement isn't legally required, it is strongly advised that you take the time to draft a thorough, fair operating agreement that fully explains to each member what to expect from the LLC going forward. By doing so, you can:

• Avoid potential conflicts among members
• Provide an additional layer of personal liability protection
• Ensure your LLC operates smoothly
• Safeguard personal assets

Although it's entirely possible for owners of a single-member LLC to create their own operating agreement, it's typically best to consult a qualified business attorney when dealing with multi-member LLCs. While this may add a small amount to your LLC's startup cost, it will likely save you time, money, and conflict in the long run.

5. File your articles of organization

After you've pinned down a name, registered agent, and thorough operating agreement, it's time to move on to everyone's favorite step: paperwork. Specifically, you'll need to file your LLC's formation paperwork, which may be referred to as "articles of organization," "articles of incorporation," "certificate of information," or "Statement of Information."

Regardless of what they're called in your state, an LLC's articles of organization contain information such as:

• The LLC's name
• The address of the LLC's main place of business
• The duration and purpose of the LLC
• Whether the LLC is managed by its members or a manager
• The name of the LLC's registered agent
• The address of the agent's registered office
• The signature of one or more of the LLC's organizers

At this stage, many business owners opt for an online service in order to streamline the LLC formation process and ensure that all documents are correctly submitted. Doing so can add an extra layer of protection to the process, remove confusion, and free up more of your time to handle the other necessary parts of starting a business.

Whether you choose to do the paperwork yourself or with the help of professionals, however, most states allow you to file your LLC's articles of organization online. Filing fees vary by state but usually range from $50 to $200.

Some states process LLC articles of organization instantly, while others take a few days to weeks (with some charging an extra fee for expedited processing). After your LLC paperwork is approved, you'll receive a certificate of formation from the state confirming that your limited liability company officially exists. At this point, you can congratulate yourself as a new business owner, announce the formation of your LLC, and move on to the crucial next steps of running a business.

What to do after you create your LLC

Soon after your LLC is officially created, there are some time-sensitive tasks that need attention. While these things aren't technically required to create an LLC, many are necessary to legally operate that LLC, such as filing for the correct permits. Others, such as brushing up on LLC-specific tax law, can save you money and hassle when done correctly.

1. Get an EIN and business bank account

Once your LLC is official, you can apply for an employer identification number (EIN) from the Internal Revenue Service. The EIN is a nine-digit number that identifies your business for federal tax purposes—similar to an individual's Social Security number.

While single-member LLCs without employees can technically use the member's Social Security number in place of an EIN, many financial institutions ask for an EIN when opening a business bank account.  Additionally, using an EIN in place of your Social Security number can help protect your private information, so it may be better even within single-member setups.

For any LLC with more than one member or any employees whatsoever, an EIN is required by federal law for hiring employees, filing taxes, and even applying for business licenses. You can get an employer identification number at no cost on the IRS website. Once you have an EIN, you can set up a business bank account to handle your LLC's income and expenses.

2. Obtain business licenses and permits

Depending on the type of business you have and where it's located, you may need one or more licenses or permits to operate legally. Here's an overview of some of the more common ones:

• Seller's permit. If you sell taxable goods or services in a state that charges sales tax, you'll probably need a sales tax license or seller's permit from the state. The permit allows you to collect sales tax and remit it to the state.
• General business licenses. A few states require all registered businesses to have a general business or operating license. More commonly, your city or county may require you to have a business license to operate within its boundaries.
• Industry-specific licenses. Federal, state, and local governments all have a hand in regulating certain industries and issue everything from liquor licenses to occupancy permits and commercial fishing licenses.
• Registration in other states. If your business has a location other than where you formed your LLC, you'll need to register as a foreign LLC in that state.
• DBAs. In general, you'll only need to file a DBA if you are doing business under a name other than your legal name. If your LLC only uses its official limited liability company name, then it doesn't need a DBA. DBA requirements vary by location, so you may need to file with your city, county, or state.

Industry trade associations and local and state government offices are great resources for determining the types of licenses and permits your business may need. Alternatively, working with a business advisor can help ensure that you have everything you need to get your business up and running.

3. Get LLC-specific tax advice

Tax law is complicated, and it doesn't get any simpler when you start an LLC. Often, properly handling business taxes is one of the biggest challenges a new LLC will face, and improperly handling them can lead to issues such as:

• Penalties and interest. When you incorrectly file taxes for your LLC, you run the risk of significant penalties and interest charges from the IRS.
• Unclaimed deductibles. For new businesses and established companies alike, tracking every possible deduction can seem nearly impossible. By failing to take advantage of deductions such as home office space, travel, and business-related equipment and software, you're essentially leaving money on the table.
• Legal costs. In the most severe cases, incorrect taxes may lead to a business audit or investigation by the IRS, which, in turn, may necessitate hiring legal and accounting professionals.

From a tax standpoint, LLCs are unique because the IRS does not have a specific LLC tax classification. By default, the IRS classifies one-member LLCs as sole proprietorships or “disregarded entities," whereas multi-member LLCs are classified as partnerships. That said, LLCs can choose to ignore the default classification and instead file as either an S corp or C corp, with each having its own benefits:

• Filing as a sole proprietorship. Allows for "pass-through taxation," meaning business profits are directly reported on the owner's personal tax returns without being taxed at the business level.
• Filing as a partnership. Similar to sole proprietorships, partnerships also allow pass-through taxation, with each member being responsible for taxes on the share of business profits they received.
• Filing as an S corporation. These businesses are largely exempt from federal income taxes, but shareholders are subject to individual taxation.
• Filing as a C corporation. These businesses are subject to corporate income tax but have access to a larger range of tax planning opportunities and benefits.

When considering tax implications for your LLC, it's essential to consult with a tax professional or accountant to determine the most advantageous tax structure for your specific situation. By understanding the various tax options available to LLCs, you can make informed decisions to help your business thrive.

4. Maintain compliance and good standing

Once your newly created LLC is up and running, the last thing you need is legal trouble due to non-compliance or overlooked regulations. In order to remain in good standing with state and federal guidelines, make sure to:

• File annual reports
• Pay any fees associated with your LLC
• Stay informed about your state's LLC requirements
• Pay any franchise taxes that may apply to LLC owners
• By maintaining compliance and good standing, you protect your personal assets, ensure the legal operation of your business, and reinforce your credibility with clients, customers, and partners—all of which ensure your LLC's long-term success.

The 8 types of LLCs: Choosing the right structure

Depending on your specific needs and circumstances, certain types of LLCs may offer greater benefits than others. Here's a quick breakdown of the eight main types of LLC.

Domestic LLCs

A domestic LLC is an LLC that operates within the state in which it was initially created. This is, by far, the most common form of LLC, and is generally the simplest to create and maintain.

Foreign LLCs

Contrary to what the name might imply, a foreign LLC does not operate in another country. Instead, an LLC is designated as "foreign" when it does business in a state other than the one in which it was created. For example, if an LLC is formed in Wisconsin but wants to expand and do business in California, it needs to register as a foreign LLC in California.

Professional LLCs

A relatively niche type of LLC, professional LLCs were specifically designed with certain licensed professionals in mind. These PLLCs include people such as doctors, accountants, or lawyers, and generally include specific laws about what types of people can be made members.

Restricted LLCs

Although not available in every state, restricted LLCs are a special type of LLC that can provide significant benefits for estate planning. Specifically, restricted LLCs cannot distribute profits to their members for a set period, generally 10 years. Instead, such profits must be reinvested into the LLC itself. In addition to ensuring an LLC’s growth, this also protects members from tax liabilities until the distribution period has elapsed.
 

Anonymous LLCs

For individuals who want to create an LLC without sacrificing personal privacy, some states allow the formation of anonymous LLCs. Usually, anonymous LLCs designate a "nominee manager" to serve as the LLC's public representation without having any real power or authority over the LLC's operations and funds.

Series LLCs

Also known as "umbrella" LLCs, this type of LLC allows members to create a series of distinct business entities, which each fall under the primary LLC. Each of these business entities generally has its own members, funds, and liabilities, making it a popular type of LLC for those looking to minimize risk across different areas of their business portfolio.

Low-profit LLCs (L3Cs)

An L3C is a relatively rare "hybrid" between a nonprofit and for-profit LLC structure. This type of LLC is usually created for a specific social objective but can also earn profits (within certain limitations). L3Cs are particularly attractive for those looking to obtain private investments for charitable or educational purposes.

Nonprofit LLCs

Though rare, it's possible to form an LLC for non-profit purposes. A key distinction with this type of LLC is that they are allowed to earn a profit, but that profit must be reinvested into the company or otherwise used to further the company's charitable goals. Keep in mind that tax law can get especially complex with non-profits, so consider consulting an expert in non-profit taxation when opting for this type of LLC.

The pros and cons of starting an LLC

Compared to the other various business structures, creating an LLC offers several advantages and drawbacks. Would-be business owners should weigh their own needs and goals when making the decision on what kind of structure to use.

Pros

• Limited liability protection: Done correctly, creating an LLC can protect members from being held personally responsible for certain profits or debts.
• Tax flexibility: The IRS and federal law grant LLCs impressive flexibility to choose how they're taxed.
• Management options: Whereas an LLC can be run by either its owners or designated managers, other business types have much stricter rules and regulations about management structure.
• Simplicity: Second only to sole proprietorships (which technically require no form setup), creating an LLC is an extremely simple process.

Cons

• Difficulties transferring ownership: Unlike businesses that are owned by a single individual, transferring ownership of a multi-member LLC often requires the agreement of all of its members.
• Limited life: Depending on the state in which it was formed, an LLC may need to be dissolved upon the death or bankruptcy of one of its members.
• Self-employment taxes: By default, members of an LLC are considered self-employed for the purposes of taxation, meaning they'll need to pay out of pocket for Medicare and Social Security.
• State-specific laws: Laws regarding LLC formation and maintenance vary from state to state, leading to potentially more complications than with a more nationally consistent business structure.

Weighing the benefits and drawbacks of forming an LLC is essential for making an informed decision about your business structure. When making the decision for yourself, do your best to predict any potential challenges and opportunities that your new business may encounter.

Why 2024 is the year to start an LLC

Between the increasing availability of new technologies and tools and the growing advantages of small, agile business ideas, 2024 is shaping up to be one of the best years in recent history for small business owners.
Fortunately, the barrier to entry for entrepreneurs is lower than ever, and starting an LLC takes little more than a good idea, due diligence, and the right support system. If you've been considering starting an LLC of your own, now is the time to reserve a name, get your articles of organization, and get to work.

FAQs

 

What else should I consider when choosing a business name?

Beyond compliance with state regulations, you should also choose a business name with a similar available domain name, good account name options on social media, and (if you plan to expand) naming availability in other states.

Can I use my personal bank account for my business?

In general, experts advise against mixing business and personal finances. By keeping your accounts separate, you can protect yourself and your business and avoid losing personal liability protections when tax season rolls around (or in the case of lawsuits).

Where should I form my LLC?

In most cases, the simplest and least expensive place to start an LLC is the state where you live. If you form an LLC in another state, you'll also need to register your LLC as a foreign business entity in your state. You'll need a registered agent in both states and be responsible for filing annual reports in both states. Regardless of where you form your LLC, you'll have to pay applicable taxes in the state where you conduct business.

How does LLC liability protection work?

Owners of sole proprietorships and general partnerships have unlimited personal liability for business debts.

Partners in a general partnership can also be liable for their partners' actions. When you create an LLC, you establish a new legal entity that exists separately from its owners—an entity that can have its own money, bank accounts, and assets.

Because the LLC is a separate entity, its members are generally not personally liable for business debts or the actions of other members. They remain liable for their own negligent or intentional conduct and for any obligations for which they've signed a personal guarantee. Business insurance can further minimize liability for you and your business.

Am I considered self-employed if I start an LLC?

You're self-employed if your LLC is classified as a sole proprietorship or partnership. You'll report business income and expenses on your personal tax return (partnerships also file a partnership return). You'll pay income and self-employment (Medicare and Social Security) taxes on your share of business profits.

Estimated taxes should be paid quarterly to avoid fees and penalties.

The default taxation system is simple, especially for single-member LLCs, but some profitable LLCs save on self-employment taxes by electing S corp taxation.

How much does starting an LLC cost?

The amount of money you need to start a new business will vary, depending on the state and type of your business. A business plan will help you estimate your expenses and how much money you'll need to get your business off the ground and keep it running.

There are a few costs related specifically to LLC formation and maintenance. You should have enough money to file formation paperwork, pay for legal and tax advice, hire a registered agent if necessary, and pay annual report filing fees and any annual franchise or operating taxes levied or required by law in your state.

Is starting an LLC worth it?

In most states, LLCs are inexpensive to set up and maintain. Many attorneys recommend that small business owners form an LLC because it provides liability protection at a minimal cost. But some states are more expensive than others. If you aren't sure whether an LLC is worth it, get advice from an attorney and a tax adviser.

What are the benefits of a professional registered agent?

There are several advantages to using a professional registered agent service. Some of these advantages include:

• Greater flexibility because you won't need to worry about missing time-sensitive notices
• Protection of your privacy because their address is used in public records instead of your own
• Access to expert advice and guidance on legal matters
• Assistance with compliance and ensuring that you meet all necessary requirements