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How to Start an LLC
An LLC is formed at the state level by filing a single form called the Articles of Organization (some states have other names for the form: Certificate of Formation or Certificate of Organization). The Articles of Organization are filed with a state’s Secretary of State or similar agency (some states like Delaware have Corporations Divisions). No matter what your state calls the LLC creation form or the agency you file with, starting an LLC is a simple process.
Steps To Start An LLC
CHOOSE THE LLC’S NAME
When you begin the task of starting an LLC, you’ll need to decide on a name. Fortunately, every state has an online database where you can search for available names. In every state, except for Alabama, you do not need to reserve the LLC name prior to filing the Articles of Organization.
DESIGNATE A REGISTERED AGENT
Every state requires LLCs to have a designated registered agent to receive service of process (lawsuits) and official mail on a business’ behalf. A registered agent must be a business or individual residing in the state where the LLC is being formed. Registered agents must also be available during normal business hours and have a physical address where they can receive service of process (known as a registered office).
COMPLETE THE ARTICLES OF ORGANIZATION
Once an LLC name and registered agent have been selected, you are ready to complete the LLC’s Articles of Organization. Although state requirements vary, you will need to include the following information in some form, no matter in which state you’re starting an LLC:
- LLC Name and physical/mailing address
- The LLC’s registered agent and registered office address
- The purpose of the LLC
- The organizer’s name and signature (the LLC’s organizer is the person authorized by the LLC to complete the Articles of Organization.)
SUBMIT THE ARTICLES OF ORGANIZATION
Most states allow filers to complete and submit the Articles of Organization online. In other states, filers are required to complete paper filings and submit them by mail or fax. When you do submit your Articles of Organization, your LLC will become active once the state completes the filing. The state will send you confirmation (sometimes a pretty certificate, sometimes a bland piece of paper—depends on the state) that your LLC has been created.
Online filings invariably have the fastest filing times. Paper filings take longer unless you physically walk them in. Each state has different filing times. Some states take a few days; some states will take months if you don’t pay for expedite fees. (If you’re curious how long your state takes to file Articles of Organization, click on the name of your state below.)
After you’ve submitted your Articles of Organization and received confirmation from the state, that’s it! You’ve successfully formed your LLC.
What to Do After You Start an LLC:
GET AN EIN
An Employer Identification Number (EIN) is like an LLC’s social security number. Every LLC that will pay taxes or hire employees needs an EIN. Apply for an EIN with the IRS by filing Form SS-4. You can apply online on the IRS’ website. It should only take a few minutes. To learn more about Tax IDs for your LLC, see our EIN page.
WRITE AN OPERATING AGREEMENT
Operating agreements are the documents that outline how an LLC operates. How the LLC distributes its profits and losses, who owns what percentage of the company, reinforces limited liability, defines management structure, everything—it’s all in the operating agreement. An LLC’s operating agreement is not filed with any state agency, it is an internal document. However, it’s not something you want to operate an LLC without.
If you don’t know how or where to start creating an operating agreement, Northwest has a free LLC operating agreement template you can download.
FUND THE LLC
Typically, you would start a bank account with the LLC Articles of Organization, a Limited Liability Company operating agreement, and a Tax ID number from the IRS. The ownership of an LLC is given with a certificate. This “certificate” does not actually have to be printed out or have a physical form of any sort. It can be simply jotted down on paper or exist in a single member’s head. Let’s say the business needs $10,000 to start. The member would put $10,000 of his or her personal money into the new business checking account and for that money consideration, they would have a percent of the membership interest. If it’s only one person it would be 100%. If there are multiple people, everyone would have a membership interest according to the amount of money they initially funded the company with. You can change the percentages at any time if people want to contribute more. You can physically print out a membership certificate and document this with our Limited Liability Company membership certificates.
FILE ANY REPORTS DUE TO THE STATE
Every state has annual, biennial, or periodic reporting requirements; however, some states require that you file an initial report after starting an LLC. You can visit our annual reports page to find out what requirements your state has.
OBTAIN BUSINESS LICENSES AND PERMITS
Each state, and sometimes municipality, has specific business license requirements for certain trades. Depending upon the type of business you’re operating, you may need obtain certain licenses and permits. See our state resources page to find out what licenses and permits your LLC needs.
What Is A Limited Liability Company?
A Limited Liability Company (LLC) is a business entity that combines characteristics of both corporations and partnerships. Specifically, an LLC has the same limited liability protections afforded to corporations and, by default, the LLC is taxed as a partnership. When someone forms an LLC, they are essentially creating an entity separate from themselves. Should this separate entity (the LLC) be sued, it is the entity—not the individual who created the entity—that is being sued (this is what it means to have limited liability). The advantage to limited liability is that—with few exceptions—should the LLC be sued, the LLC’s assets are at stake, not the individual’s.
A corporation, by default, is first taxed on its net income, then taxed again at a personal level when that net income is distributed to an owner. An LLC, like a partnership, is not taxed. The profits of an LLC are passed to the owners (called members) and taxed as personal income. This is referred to as pass-through taxation.
Limited liability and pass-through taxation are the two main defining characteristics of the LLC.
What Is Required To Keep An LLC Up And Running?
The beauty of the limited liability company is the lack of annual meetings. Corporations are usually required to have them. Granted, no one really is out there checking if a private corporation is holding annual meetings, but there are no annual meeting requirements with an LLC. A multi member Limited Liability Company may choose to hold annual meetings to go over the specifics of the LLC, but it is not required. You can call a meeting at any time with the other members. If you’re a single member Limited Liability Company, it’s basically you just documenting changes if you need to. It’s really not as complicated as it may sound. The big reason why single owners choose an LLC is that there aren’t really voting requirements for decisions, and there aren’t officer roles that you would have to fill out on paper, as with a corporation.
Who Are The Members And Managers Of The LLC?
The owners of the Limited Liability Company are the members. Usually single-member LLCs would be member managed, but on the public documents in almost every state you have to list the members or managers. So you might want to list just the manager, even if you’re a single-member LLC, so that on the public records, it’s not technically giving away who owns the limited liability company. We like to make all LLCs manager managed just for this reason. On the back end, the members control the managers, so if you’re the same person it doesn’t really mean anything to you.
Managers for a multi member Limited Liability Company can be an important distinction. Let’s say 10 different families invest $1,000 each in a ski-in, ski-out vacation rental property. Each family would make up the members, but none of them live at the ski resort, so they might hire a property manager to rent it out when they aren’t using it, and maintain it. It would be smart to designate one or two of the members and the property manager as the managers of the Limited Liability Company for day-to-day operations of the vacation rental.
Members can always vote out the manager(s) of the limited liability company.
Where Is The Best Place To Form An LLC?
If you’re doing business in your home state, the best place to start a Limited Liability Company will always be where you live. If you’re doing things on the internet or using the company as a holding company for assets, forming an LLC in a tax-friendly state like South Dakota, Wyoming, Nevada, Montana, or Delaware are nice options. You don’t even have to get a Tax ID number, and you can just report the income, if any, on your personal 1040 tax return.
Forming a company in a tax-free state like Wyoming usually won’t be of benefit to you if you live in a normal taxing place like New Mexico or anywhere with a normal tax burden. Living in a place like California, New York, New Jersey, or any location with high fees and high taxes, can present some nice options of forming an LLC out of state and trying to run some of the income through it that way. Electing the LLC as a C corporation keeps the money from getting down onto you personally where you might need to pay a high personal income tax rate in a highly taxed state. At the end of the day, it’s always simplest, and sometimes cheapest in the long run, to incorporate or form an LLC in your home state rather than playing the tax hide-and-seek game. We’ll be glad to help you no matter what you decide.
How Will I Pay My Taxes To The IRS?
The IRS charges a percentage of your NET taxable income after you take your deductions off the money you made for the year. The Internal Revenue Service charges the percentages on a sliding scale, meaning you pay the percentage for each bracket. So if you made $20,000 net taxable income for the year, the first $8,350 would be taxed at the lowest bracket of 10% and the next $10,000 would be taxed at the 15% bracket, and up and up and up with more money.
IRS individual tax rates:
$0 – $8,350: 10%
$8350 – $33,950: 15%
$33,950 – $82,250: 25%
$82,250 – $171,550: 28%
$171,550 – $372,950: 33%
$372,950 and up: 35%
0 – $16,700: 10%
$16,700 – $67,900: 15%
$67,900 – $137,050: 25%
$137,050 – $208,850: 28%
$208,850 – $372,950: 33%
$372,950 and up: 35%
As you can see, the middle class is who pays most of the taxes in America. The single person making a good wage over $34,000 a year gets stuck with a huge 25% tax and the married couple making over $68,000 a year also gets a big 25% tax. If the government really wants to limit the burden on the middle class they should drop both brackets down to 15%.
Corporate income tax rate:
0 – $50,000: 15%
$50,000 – $75,000: 25%
$75,000 – $100,000: 34%
$100,000 – $335,000: 39%
$335,000 – $10,000,000: 34%
$10,000,000 – $15,000,000: 35%
$15,000,000 – $18,333,333: 38%
$18,333,333 and up: 35%
How Will I Pay My Tax To The State?
If you don’t elect anything with an LLC, you’ll automatically be taxed either as a sole proprietor and a disregarded entity if you’re a single member, or as a partnership if there are multiple members. This is generally speaking the easiest option for new businesses just starting out. Once you start having net taxable income around $30-40,000 a year, it would be cheaper for you to elect the S corporation status with the IRS, and take some of that net taxable income as a dividend to avoid the Medicare and social security tax, otherwise known as self-employment tax.
With this option, you’re just going to be filing an additional schedule for the income on your 1040 return and paying the state personal income tax at the rate and bracket you’re in. To see the personal income tax rates and brackets for your state, please see the links at the bottom of this page.
If you elect to have the Limited Liability Company be treated as a C corporation, you’ll be paying the state’s corporate income tax. You can keep some of the money in the company that way and not be stuck paying personal income tax, but once you pull the money out of the C corporation election, you’ll be paying tax again on the personal level. Electing C corporation status is a great option for holding companies that just want to accrue wealth in their LLC holding company.
Should I Start An LLC or A Corporation?
I would suggest looking at our annual report page. A lot of states have different annual fees for LLCs and corporations. That is just the first step, though. The annual reports are with the Secretary of State or corporation commission of your state. The Department of Revenue is also a consideration. Some states charge higher fees for an LLC, but you avoid the corporation or franchise tax. Usually a limited liability company is cheaper to maintain in fees and taxes because—in my humble opinion—they haven’t been around long enough for legislators to figure out to tax them the same as corporations. For instance, a lot of states might have a minimum fee to file a zero return for a corporation of $20 to $50, or some states are super expensive like Connecticut, California, or Massachusetts, but the Limited Liability Company might not have a minimum zero return fee. The growing trend is to make these minimum fees the same, and eventually they probably will be the same, as most new businesses are forming LLCs instead of corporations.
For more information, see our page on How to Choose Between an LLC and a Corporation.