Limited Liability Companies (LLCs) are gaining traction, especially on social media, with a notable surge in growth. Explore how to start an LLC, with Delaware seeing a 40% increase in formation from 2019 to 2022.
LLCs have been broadly available for nearly 30 years. It’s important to remember that an LLC should not simply be a means to get a business loan that you wouldn’t be personally liable for if your business fails and you cannot pay back the loan. While LLCs may provide personal liability protection and a number of tax advantages, they are not “cheat codes” to free money.
Below, we’re going to dive into how to start an LLC more deeply, discuss the advantages and disadvantages of forming an LLC. As well as discuss why this isn’t a “free money hack.”
Erika Taught Me
- To create an LLC you can obtain a business tax ID from the IRS or use your Social Security number if there are no other partners in your LLC
- You'll need to choose a state to register your LLC, as well as a name and a registered agent
- Each state requires different fees and documentation to start an LLC
- It's important to consider the right tax structure for your LLC to gain tax advantages
Start an LLC Step 1: Obtain a business tax ID at the federal level with the IRS
First, if you decide to form an LLC by yourself — a single-member LLC — then you can use your personal Social Security number. An Employer Identification Number (“EIN”) is not required. In this case, the profits and losses of the company will be reflected on the owner’s personal tax returns.
If the LLC has any employees or has multiple members, then an EIN is required. Single-member LLCs may still use an EIN for separate bank accounts and to process business payments. You can apply for an EIN online directly with the IRS.
Start an LLC Step 2: Choose a state to register your company
Your LLC can be registered in any state and is not limited to your own state of residence. However, there are various trade-offs to consider when choosing the registration state. Each has a different set of initial fees and paperwork, and ongoing fees and reports. Different states also have different levels of privacy.
For example, registering an LLC in Delaware costs $110, plus an additional $50 to obtain a certified copy. There is also an annual franchise tax of $300 plus additional fees if you ever decide to terminate the company. Delaware does not currently require annual reports filed to the state.
Fees and reporting requirements
The fee and reporting requirements are different in New York, which has an initial filing fee of $200 for the Articles of Organization. Additionally, NY requires the business owner to publish a notice in two newspapers in the county where the LLC is registered; publishing costs may be substantial if the business is registered in New York City. As an added cost, you must file proof of the publications for another $50.
However, ongoing fees may be smaller in New York; low-revenue LLCs owe just $25 per year. New York also requires reporting every 2 years. Those reports have a $9 filing fee — and depending on your business, you may be required to maintain licenses by the state.
Meanwhile, California has a minimum annual franchise tax of $800, even if the company is not actively doing business.
Even comparing just these states, you can see that one state’s fee structure may be more beneficial depending on your circumstances. You may want to start an LLC with higher up-front costs and lower fees or choose to go with lower initial costs but higher ongoing fees. Consider also whether you would need to hire a registered agent or if you’d prefer to register in your own state and act as your own agent.
Costs are also not the only consideration. For example, in Delaware, the certificate of formation can be filed without your own name if you’ve hired a registered agent. That privacy may be valuable to some owners.
Start an LLC Step 3: Designate a registered agent
The business must have a registered agent who is responsible for receiving legal notices, such as court summons and complaints. The agent’s address determines the state and county of the business. That is, if you want to form an LLC in Delaware, you must choose a registered agent with an address in Delaware.
An LLC may choose one of its members to act as the registered agent, which would then restrict the business to being registered in that member’s state of residence. If you want to register in a state where an LLC member does not reside, then you’ll need to hire a registered agent service to provide services in that state. In some states, using a registered agent may increase privacy by keeping your name off of legal documents.
Start an LLC Step 4: Select a unique business name
To start an LLC you need a unique business name within the state. You can often search a business registry for names already taken. Some states, including New York, require the name to have a limited liability indicator (e.g. Company Name LLC, or Company Name Limited Liability Company).
However, you’ll likely want to spend more time researching a business name than only searching a single state’s directory. For example, checking whether you can obtain a memorable domain matching the business name, or whether that business name already has a presence on major social media platforms but is unrelated to your company.
Note that you may have to also pay fees if you do business under a name that is separate from the registered LLC name. For example, some real estate investors may want to have an LLC for each building owned but do business under a single umbrella name.
Related: Do I need an LLC?
Start an LLC Step 5: Submit paperwork and pay fees
Filing your company’s Articles of Organization and paying the required fee are the main actions required to create your LLC. Each state will have its own application and potentially its own unique quirks. Here are examples from two states of what you might expect:
In New York State, you can apply online by filling out and submitting the application. Here, the online application asks you to:
- Select a business name that includes an “LLC” or “Limited Liability Company” indicator
- Select the registered county
- Choose a name and address to receive “service of process” and optionally identify a registered agent
- Identify the LLC “organizer,” the person responsible for creating the LLC
- The filer attests that all information is true and electronically signs
- This creates a digital Articles of Organization, which you then submit along with payment for the fees
In New York, you must then publish at least two ads in local newspapers within 120 days announcing the formation of the company.
Delaware has a similar but somewhat different process:
- Select a business name, which you can search for and reserve here
- Select a registered agent who must reside in the state of Delaware
- Complete the Certificate of Formation for LLCs with the business name and registered agent’s information
- Submit paperwork via online upload or physical mail, which would require a separate cover letter
- Submit payments
At a minimum, it’s worth comparing your own state’s fees with Delaware, which is a popular filing state for a number of tax and privacy reasons unrelated to formation costs.
Start an LLC Step 6: Determine the LLC tax structure
For a single-owner LLC, the owner can use their Social Security number as the business tax ID, accounting for taxes in their tax return. For any other structure, the LLC requires a business EIN.
The LLC is a legal distinction, shielding members’ assets and liability from complaints and lawsuits against the business. This is distinct from the tax structure, which can still be set up as a single-member LLC, multi-member LLC, or corporation.
By default, single-member LLCs are expected to be taxed as a sole proprietorship while multi-member LLCs default to a partnership tax structure. However, LLCs may choose to file as S-Corps, which have some tax advantages, such as deducting 20% of business income. One main tradeoff is the additional burden and expense of tax preparation. As your business grows and becomes profitable, consider discussing the business tax structure with a tax professional.
How long does it take to obtain an LLC?
Once filed, processing time varies by state and current application volume. Though it’s generally expected to be within 3-10 business days. Some states offer expedited processing for an additional fee.
For example, New York suggests that processing takes an average of 7 business days. However, expedited processing is available for 24-hour and same-day processing, or even within 2 hours.
Delaware LLC processing time is about 10 business days and expedited processing is available for additional fees.
What are the costs associated with an LLC?
Costs to consider when creating an LLC include:
- Initial filing fees
- Ongoing annual fees, even if inactive or no revenue
- Late fees for missed payments, even if inactive or no revenue
- Termination fees to dissolve the LLC
- Additional state-specific requirements, such as publishing notices in New York
- Time involved submitting initial paperwork, researching name availability, and filing annual reports (if required)
There may also be additional fees such as registering additional “does business as” names, expediting processing time, and more.
Note that third-party companies advertising to start your LLC for a single low price are probably not including the filing fees required by the state. Instead are advertising the additional expense added for them to walk you through the paperwork.
What are the advantages associated with an LLC?
As described in the name, a Limited Liability Company can shield you personally from certain negative events. For example, if the business declares bankruptcy, creditors may not be able to go after the owner’s personal assets. In the case of a real estate investor, having a separate LLC for each property may allow for bankruptcy. Or a lawsuit against one property’s LLC while protecting all other properties. The same can be said for an investor with multiple business lines.
However, this isn’t foolproof and typically isn’t an opportunity to game the banking system for free money. For example, banks may not provide a loan for a new LLC or one without revenues unless the owners provide a personal guarantee. In this case, those financial protections are voluntarily given up.
Some financial influencers describe tax advantages of LLC formation including deducting some expenses you would incur anyway (e.g. cell phone bill, rent, meals). Beware, mingling personal and business expenses may let a judge “pierce the veil,” removing liability protections for your business. Note also that you do not need an LLC to make many of those same tax deductions, just a business that can be filed with an IRS Schedule C.
Is forming an LLC worth it?
There are real costs in terms of time and money in creating and maintaining an LLC. Moreover, those ongoing costs continue each year unless it is legally dissolved. Even if the company ceases to be active or bring in revenue — with fines that can accrue if not paid on time.
The LLC structure does allow for protections from personal liability in certain cases. It will be up to the owner or owners to determine whether the benefits of forming an LLC outweigh the costs. For example, a single owner may determine that it’s not worthwhile paying for the LLC. While the business is still in the idea phase and not generating any revenue, doesn’t require any business financing, and where a lawsuit against the company appears unlikely.
Owners may find LLC costs worthwhile when seeking funding for expansion or handling riskier dealings with customers in the future.