Starting an LLC: Costs, Benefits, and Steps to Create a Limited Liability Company

The limited liability company (LLC) is one of the most popular business structures in the U.S., especially for side hustlers.

LLCs provide legal perks, flexible management options, and tax benefits. Plus, starting an LLC is simple, affordable, and fairly low maintenance in most U.S. states.

While forming an LLC isn’t the only option for small business owners, it’s often the best choice. Setting up an LLC is much less complicated than forming a corporation. And unlike a sole proprietorship or general partnership, an LLC helps safeguard owners’ personal assets with liability protection.

. . .

What Is an LLC?

LLCs are often described as hybrid entities that combine the simplicity of a sole proprietorship or general partnership with the legal protections offered by a corporation.

LLC vs. corporation

When you form a corporation, you need to elect officers and form a board of directors. Not so with an LLC. Your LLC can be managed by its owners (called members), hired managers, or some combination of both — whatever works best for your business.

Additionally, corporations are subject to “double taxation.” Corporations pay tax at the business level, and then business owners are taxed again on income from the corporation when they file their personal taxes. 

LLC profits are only taxed once. LLC earnings pass through to business owners, who then pay personal income tax. 

LLC vs. sole proprietorship

When you have a sole proprietorship or general partnership, there’s no legal separation between business and business owner.

This means that as an owner, you must take full personal responsibility for business-associated risks, including all debts and any legal charges or lawsuits.

By contrast, with an LLC, you’re only liable for debts up to your investment in the business, and legal actions are brought against the business entity, not you personally.

Why Get an LLC?

Many small business owners don’t need to form an LLC because they won’t be accruing large debts or performing work that puts them at risk of being sued. If you're a side hustler working by yourself, a sole proprietorship often does just fine.

However, if you foresee your business handling large amounts of money (or seeking significant funds to back new products or services) or if you work in an industry where you may be vulnerable to lawsuits, forming an LLC can provide you with much-needed liability protection.

READ MORE: Do I Need an LLC?

6 Steps to Start Your LLC

The exact process for starting an LLC varies slightly from state to state, but there are six basic steps you’ll need to follow. 

1. Choose a Business Name

For marketing purposes, you’ll want to choose a name for your LLC that’s snappy, memorable, and clearly conveys the products or services your business offers.

Make sure your name is available

Legally, you’re not allowed to use a name that is already registered to another business in your state. Some states will even reject a business name for being too similar to a name that’s already registered. 

Check the naming guidelines in your state. Small differences in spelling or punctuation may not be considered enough to distinguish one name from another. For instance, “La-Z Daze Movers” may be rejected for being too close to “Lazy Days Movers.” 

You can find out if your desired name is available through your state’s business name database (for example, the Wyoming Secretary of State’s Business Name Search).

Follow naming rules

You’ll need to use a business entity designator and steer clear of restricted terms. 

Entity designators include “LLC,” “Ltd.,” and “limited liability company” and are typically placed at the end of your name. 

Restricted terms vary by state but often include words and phrases such as “bank” or “insurance” (unless your business actually is a bank or insurance agency) and anything that suggests your business is connected to the government.

Find out if you can get a matching domain

There’s a strong chance you’ll create a website for your business, so you’ll want a domain (also called a web address or URL) that matches your business name. 

Having a domain that’s simple and similar to your business name makes it easier to find your business online. For example, my domain is Erika.com — it’s not hard to remember and supports my branding!

2. Designate a Registered Agent

Many people are confused about the concept of a registered agent, especially if they’ve never started a business before and encounter the term for the first time while completing their formation paperwork.

A registered agent is a representative you appoint to accept legal documents (like subpoenas) on behalf of your LLC. You can serve as your own registered agent or designate someone else, such as an employee or your attorney. 

Your registered agent must:

• Be at least 18 years old
• Reside in the state where you plan to register your LLC
• Be available to receive documents during regular business hours

You can also hire a company that provides registered agent services. This is more expensive than serving as your own agent but also more convenient. You don’t have to worry about being available at your registered address during normal business hours Monday to Friday every week of the year — or being served in front of your clients or at home. 

Plus, you can trust that your documents will always be received in a timely manner so you won’t miss any important legal notices.

3. File Your Articles of Organization 

To form your LLC, you'll have to submit Articles of Organization (also called Articles of Formation or a Certificate of Formation in some states) to the agency in charge of registering businesses in your state. In most states, this is the secretary of state’s office.

While the specific requirements vary from state to state, you’ll typically need to provide the following information:

• Your LLC’s name
• Your LLC’s principal business address
• The name and address of your registered agent
• A signature from one or more of your LLC’s organizers

In some states, you also need to include a brief description of your LLC’s purpose and/or information about your management structure (and sometimes the names and addresses of your LLC members or managers).

When you submit your articles, you’ll need to pay a filing fee. The average fee across all 50 states is about $130, but it can cost much less ($35 in Montana) or much more ($500 in Massachusetts).

In all states except Maine, you can file online. Many states will approve online filings immediately or within a couple of business days. You can also file by mail in the majority of states. Colorado, Mississippi, and Montana only accept online filings.

If you’re not sure about filing on your own, you can hire a business formation service like LegalZoom to do the heavy lifting for you. A formation service can make sure that your paperwork is filled out properly so that there’s a smaller chance of having your Articles rejected and having to pay to re-file.

4. Write an operating agreement

An operating agreement is an internal legal document that outlines the governing rules of your LLC, including the roles and responsibilities of all LLC members. 

Your operating agreement is important because having these rules in writing can help you avoid potential conflicts and protect your interests in the company if your relationship with other LLC members goes south (or if you just decide to move on to other projects!).

A good operating agreement generally covers the following:

• Ownership percentages of each member
• How your profits and losses will be distributed
• Meeting regulations
• Voting procedures and rights
• Powers and duties of LLC members and managers
• Plan of action for selling or dissolving your LLC
• Protocol for resolving member disputes

It’s a good idea to have your operating agreement reviewed by an attorney before you make it official to ensure you’ve got all your bases covered and that your document will hold up in court.  

5. Get an EIN

After creating your LLC, you’ll probably need to get an employee identification number (EIN) from the IRS. 

Like a Social Security number, an EIN is used to identify your business when you file taxes. You may also be asked to provide your EIN for business licenses and banking transactions.  

Having an EIN is required if:

• You form a multi-member LLC
• You hire any employees
• You want to change your tax election (from pass-through to S-Corp, for example)

If you own a single-member LLC, you can use your Social Security number when filing taxes. But using an EIN can help protect your personal information, so getting an EIN is often recommended.

You can get an EIN for free through the IRS, and there are multiple ways to apply, including online.

6. Submit a BOI Report

Filing a Beneficial Ownership Information (BOI) Report with the federal Financial Crimes Enforcement Network (FinCEN) is a fairly new requirement under the Corporate Transparency Act. BOI Reports are intended to help limit fraud and other financial crimes in the U.S.

On your BOI Report, you’ll have to disclose details about your LLC and LLC members. This includes:

• Your LLC’s and owners’ names and addresses
• Your LLC’s EIN
• Your owners’ birthdates and copies of their photo IDs
• The jurisdiction of formation for your LLC

This information does not go on the public record and is only accessible by authorized agencies and individuals.

You can file your report online at no cost. Until 2025, BOI Reports must be filed within 90 days of LLC formation. Starting in 2025, you’ll have only 30 days to file.

What To Do After You’ve Started Your LLC

So, your paperwork’s been filed and it’s official: You have an LLC! 

To keep on top of your finances and stay in compliance, you'll need to get a business bank account and stay up-to-date with your annual reports.

Get a business bank account

It’s easy to accidentally let your personal and business funds commingle, especially if you’re the only one involved with running your business. 

To avoid possible negative tax consequences — and keep yourself organized — open a business bank account for your LLC.

Aim for a business checking account with low fees and, if possible, a high-interest savings account. If you think you’ll need funding, you’ll also want to look for a bank that offers low-interest business loans.

READ MORE: Do I Need a Business Bank Account?

File your annual report 

To keep your LLC registration current, most states require that you file an annual or biennial report. In some states, this is called an annual certificate, statement, or franchise tax report. 

If you fail to submit your annual report, you could owe late fees — or even end up with your LLC administratively dissolved by the state.

Many states offer convenient online annual report filing. Report requirements and fees vary widely by state. For example, Arizona doesn’t have a report requirement or fee, but California requires both a report and a yearly franchise tax of at least $800. 

The average annual report fee is about $90, but some states charge every year and some only every other year.

FAQs

How long does it take to get an LLC?

This depends on where and how you file. For example, if you file online in Wyoming, your Articles of Organization are processed immediately. By contrast, it could take up to eight weeks to get your formation documents approved if you file by mail in Texas.

You'll need to check with the agency in charge of business registration in your state (usually the Secretary of State's office) to find out exactly how long it will take for your LLC.

How much does it cost to get an LLC?

This varies by state, with filing fees currently ranging from $35 in Montana to $500 in Massachusetts. The average LLC filing fee is about $130.

Additionally, in most states, you must file an annual or biennial report to keep your LLC in good standing, and most of these reports require an accompanying fee. 

Many states have fairly affordable fees, ranging from $10 to $125. However, several states have rather high fees: The cost to file an annual report is $300 in Tennessee and $800 in California.

TL;DR: Is Forming an LLC Worth It?

Having an LLC provides you with legal benefits you won’t get with a sole proprietorship or general partnership.

As the owner of an LLC, you have limited liability for your LLC’s debts. Your personal assets cannot be seized to satisfy any financial obligations beyond your investment in the business.

However, if you live in a state where forming or maintaining an LLC is rather costly, your line of work doesn’t put you at risk of being sued, and you don’t foresee your business taking on large debts, you may prefer not to form an LLC. 

Consult with a legal or financial professional to see if forming an LLC is in your best interests.

For more tips on managing your business, check out these episodes of the Erika Taught Me podcast:

• 99% of Business Owners Make This Mistake
• Brutally Honest Business Advice to Get To $1B
• The 4 Simple Steps to Becoming a Multi-Millionaire

. . .