How to Start an LLC in 6 Simple Steps

A limited liability company (LLC) is one of the most common business entity types and for good reason. It provides management flexibility, tax benefits, and limited liability. Compared to corporations, LLCs are simple to form and maintain. Each state has its own requirements, and it's important to take the time to set up your business properly.

Step 1: Choose a Business Name

You should select a name for your business that's marketable and will attract customers. Before you settle on a business name, you should make sure the name is available. If another company is already using your proposed name, your state might not let you register it. Additionally, if you use another business's name, you might be infringing on that company's trademark.

The first step to choosing a business name is conducting an online search to see if another business is using the name. If a business on the other side of the country offers goods and services that are entirely different from your business, you might be able to use the same name without infringing on their trademark. However, you'll find many exceptions to this rule, and as a result, it's best to find an original name.

Many states provide an online search tool for business names, but that kind of search will show only businesses registered in your state. You should also search the United States Patent and Trademark Office database to determine if another company has national trademark protection. You can perform these searches on your own or you can ask a trademark attorney to do a clearance search for you. A trademark lawyer can also give you legal advice about the risks of moving forward with your chosen name as well as your own trademark rights in using a name for your business.

For a step-by-step guide to choosing a name for your company, read our article on making sure your proposed business name is available.

Step 2: Choose Your LLC's Management Structure

LLC owners have flexibility to split management responsibilities in a number of ways. When you form an LLC, you'll need to choose between the two broad management structures:

• member-managed LLC, and
• manager-managed LLC.

The management structure you choose will depend on how you want to run your business.

In many states, you must make a selection on your formation paperwork, and if you don't make a selection, your LLC will default to a member-managed company. You might also include your selection in your operating agreement, along with a detailed breakdown of the responsibilities of each member.

You can always change your management structure at a later date. Some states require you to file updated paperwork with the state when you modify your formation structure. If you choose a new management structure, you should also update your operating agreement to reflect the change.

Member-Managed LLCs

Many small businesses choose a member-managed LLC because there are usually only a few business owners involved. In a member-managed LLC, all LLC members (owners) are responsible for the day-to-day operations of the company. If you have a small company with only a few owners who all want to actively participate in the business, then a member-managed LLC might be the best option.

Every member is an agent of the business, meaning any and all can take actions on behalf of the LLC. For example, any member can legally bind the company to a contract and purchase property in the LLC's name. Whether the members must first get approval from the other members will depend on the operating agreement.

Under this management structure, members can split up who'll be responsible for what tasks. For example:

• one member might be responsible for handling the finances
• another member might be responsible for overseeing the company's contracts, and
• another member might handle customer interactions.

But ultimately, unless laid out otherwise in the LLC's operating agreement, all LLC members have the right to run the business. Essentially, all members are managers of the business.

Manager-Managed LLCs

In a manager-managed LLC, the company either brings in a third party or chooses one or more of the LLC members to handle the daily affairs of the business. Managers in a manager-managed LLC have the same rights and responsibilities as members in a member-managed LLC.

The non-manager owners take a more passive role as investors who make contributions but don't have the authority to make decisions or handle the daily affairs. However, even passive members can retain some authority, such as the ability to add and remove managers or dissolve the company.

Your operating agreement can specify the duties that the LLC places on management, and whether the members retain any authority or responsibility. Typically, management includes:

• entering into contracts on behalf of the LLC
• managing the LLC's financial affairs, including opening bank accounts and making investments
• hiring and firing employees and independent contractors
• buying property for the LLC, and
• other legal and financial decisions on behalf of the company.

Manager-managed LLCs are more popular with companies that have a large number of members or that want to attract investors who aren't interested in directly running a company. A manager-managed LLC allows members to avoid the administrative burden of consulting with numerous decision-makers.

Addititionally, some companies prefer this kind of management structure for privacy reasons. Some states require you to list the names of all members on the member-managed formation paperwork, which is publicly accessible. If you want to protect the identity of a member, manager-managed might provide this option.

Step 3: File LLC Formation Paperwork

To legally form an LLC, you must file the appropriate paperwork with the state. Your state might refer to the paperwork as the "articles of organization," "certificate of formation," or "certification of organization."

How much does it cost to form an LLC?

The cost to form an LLC will vary by state, with filing fees typically ranging from $50 to $450. You'll face additional costs if you hire a professional registered agent or if you apply for additional licenses, such as health permits or liquor licenses.

Can I form my LLC in a state other than the one I'll do business in?

You have the option to form your LLC in a different state than where you reside or do business. Some business owners select states that have lower filing fees and tax rates, such as Delaware and Wyoming. To do so, you need a registered agent that provides services in the selected state.

For more on which state to choose, read our article on where to form your LLC.

Who do I designate as my LLC's registered agent?

Every LLC must have a registered agent, who accepts official documents on behalf of the company, such as correspondence from the government and notices of lawsuits filed against the business. Typically, the agent must have a physical address in the state where you organize your LLC. Some areas allow a company to serve as a registered agent, as opposed to an individual.

Small business owners sometimes designate themselves or another company officer or employee as their registered agent. Some designate a third party like an attorney or CPA.

Online businesses with no physical address and companies with locations in more than one state usually must rely on third party or registered agent services. Registered agent services typically offer other services such as tracking due dates for government filings, maintaining copies of company documents and files, and helping with registration paperwork.

You'll list the agent's contact information on your articles of organization. You can typically change your registered agent by filing paperwork with the state.

Step 4: Obtain an EIN

An employer identification number (EIN) is a unique tax identification number for your business. The application is free and simple to complete. You can submit your application online on the IRS website.

If your LLC has more than one owner, or if you have employees, you need an EIN. If you have a single-member LLC and no employees, you probably don't need an EIN.

However, many business owners use an EIN to protect their own identity, so they don't have to use their Social Security numbers on their business accounts. Some banks even require businesses to have EINs to open an account.

Step 5: Draft an Operating Agreement

An operating agreement provides the guidelines for how owners will run and manage the LLC. This governing document should cover issues like:

• how owners will share profits and losses
• whether owners can transfer their interests to third parties, and
• how the owners can dissolve the business.

An LLC's operating agreement is similar to a corporation's bylaws.

Do you need an operating agreement?

States don't usually require LLCs to create an operating agreement. However, most LLCs can benefit from drafting one, as the agreement helps resolve conflicts among owners. In addition, if an LLC isn't treated as a separate business, the owners might lose their liability protection.

By forming an LLC, keeping your personal assets separate, and following business formalities, you're creating a clear line between your personal assets and the business's assets, so that you won't be personally responsible for the debts of the business. One such business formality is creating an operating agreement. When you draft and follow an operating agreement, you're demonstrating to anyone who's interested (such as a creditor of the business) that the LLC is separate from your personal assets.

Can I make my own operating agreement?

LLC owners can create their own operating agreements. You'll find a number of online tools and templates to help you create an agreement tailored to the needs of your company. If you have questions or need assistance, you can reach out to a business attorney.

Step 6: Apply for Licenses and Permits

Depending on your state and type of business, the government might require additional business licenses and permits. Some towns and counties require all businesses to obtain a general license to do business locally. Other industries, like food and alcohol, require a number of different licenses from government agencies.

You should check with your state and local government to determine your business's legal obligations. For state-specific information, check out our state guide to business licenses.