Things to Know Before Starting an LLC
Forming an LLC is easy, and you might feel ready to jump in and get started, but it’s always best to be informed and prepared before you begin any new venture.
We’ve put together a list of things many entrepreneurs say they wish they knew when they were starting their first LLC. We’ll dive into each of these in more detail:
- What will your LLC’s name be?
- Who will be your registered agent?
- Who will draft your operating agreement?
- Why liability protection is crucial for most businesses
- Why maintaining the corporate veil is critical
- What will your tax options be?
- You’ll need an EIN right away for your bank account
What Will You Name Your LLC?
Most states require registered businesses to have names that are “distinguishable” from any other business name in the state. This basically means that there should be a clear difference between one business name and another.
For this reason, it's best to start thinking about a name for your LLC as soon as possible — before someone else can claim it. Even if you aren’t yet ready to form your LLC, most states offer an option to reserve a business name for a period of time and at a low cost (usually under $50).
Recommended: Not sure what to name your business? Check out our LLC Name Generator.
You'll need to complete a business name search online to make sure your LLC name is unique, and you'll need to meet your state's naming guidelines.
Once you’ve settled on a name, it’s a good idea to register a web domain for your business. Our top choice in web hosting and domain registrars is GoDaddy. We like their domain search tool — you can search for the exact name you want or make suggestions based on keywords and available names.
Who Will Be Your Registered Agent?
Most states require LLCs to have a registered agent.
While it's possible for a business owner to be the registered agent, this can be a big inconvenience (registered agents are required to be available in the registered office from 9 a.m. to 5 p.m., Monday through Friday) and potentially increase your risk of compliance issues.
So, we generally recommend hiring a registered agent service. There are several benefits of using a registered agent service, including:
- Compliance with the law
- Peace of mind
One thing to keep in mind is that some LLC formation services offer free registered agent service as part of their package. Hiring an LLC formation service could be a good option if you’re pressed for time or even just a little unsure about the process.
Who Will Draft Your Operating Agreement?
Most states don’t require LLCs to have an operating agreement, but it's always a good idea to have one. Even if it isn’t legally required in your state, there are a few good reasons to have an operating agreement, including to:
- Protect your business’s limited liability status
- Solidify member agreements
- Prevent the state from managing your agreements
Creating an operating template can be intimidating, and you may be tempted to hire an attorney to help you with the process. However, there are free operating agreement templates that you can use to create one yourself without adding any additional expense to your startup costs.
Why Liability Protection Is Crucial For Most Businesses
The biggest benefit of starting an LLC is the limited liability protection that it offers. Some people start an LLC thinking that it will act as some sort of tax shelter, but the truth is that the default tax structure of an LLC is the same as a sole proprietorship or partnership. But, personal liability protection really sets it apart as the best option for most small businesses.
With an LLC, an owner’s personal assets are not at risk if the company goes into debt or has to pay out a legal settlement or judgment — as long as they don’t pierce the corporate veil.
Why Maintaining The Corporate Veil Is Critical
While personal liability protection is one of the best reasons to start an LLC, you can lose that protection if you pierce the company’s corporate veil. The corporate veil is another name for the legal separation between a business and its owner. An LLC owner’s personal assets are generally safe if the company goes into debt or is sued, but you can lose this protection if you aren’t careful.
The most common way that LLC owners put their personal assets at risk is by mixing their personal accounts with the company’s accounts. it's absolutely critical that you create separate business bank and credit accounts for your LLC and use them for all of your business-related expenses and billings.
Learn more about business banking in our Best Banks for Small Business review.
Other ways to potentially pierce an LLC’s corporate veil include committing fraud or starting operations with insufficient capital.
What Will Your Tax Options Be?
Another benefit of an LLC is that you have some flexibility with the company’s tax structure.
By default, a single-member LLC is classified as a “disregarded entity,” and a multi-member LLC is treated as a partnership. In both of these, the LLC is subject to pass-through taxation, where the company’s profits are not taxed at the corporate level and instead pass through to the owners’ personal tax returns.
LLCs also have the option to be taxed as either a C corporation (C corp) or an S corporation (S corp). Each of these classifications offers its own potential advantages and disadvantages, depending on your business.
Knowing your options ahead of time can help make sure that you pick the best one for your business which will save you time and money down the road. Check out our How to Choose Your LLC Tax Status guide for more information.
Recommended: Having a business-savvy accountant can save your business thousands of dollars in taxes each year. Get a free tax consultation.
You’ll Need An EIN Right Away for Your Bank Account
All multi-member LLCs, along with single-member LLCs with employees, are required to have an Employer Identification Number (EIN). While single-member LLCs without employees are not technically required to have an EIN, it's still a good idea to get one.
How to Form an LLC
Forming an LLC is easy. There are two options for forming your LLC:
- You can hire a professional LLC formation service like ZenBusiness to set up your LLC (for a small fee)
- Or, choose your state from the list below to start an LLC yourself
Step 1: Select Your State
For most new business owners, the best option is to form your LLC in the state where you live and where you plan to conduct your business.
Visit our Best State to Form an LLC guide to learn more.
- Alabama LLC
- Alaska LLC
- Arizona LLC
- Arkansas LLC
- California LLC
- Colorado LLC
- Connecticut LLC
- Delaware LLC
- Florida LLC
- Georgia LLC
- Hawaii LLC
- Idaho LLC
- Illinois LLC
- Indiana LLC
- Iowa LLC
- Kansas LLC
- Kentucky LLC
- Louisiana LLC
- Maine LLC
- Maryland LLC
- Massachusetts LLC
- Michigan LLC
- Minnesota LLC
- Mississippi LLC
- Missouri LLC
- Montana LLC
- Nebraska LLC
- Nevada LLC
- New Hampshire LLC
- New Jersey LLC
- New Mexico LLC
- New York LLC
- North Carolina LLC
- North Dakota LLC
- Ohio LLC
- Oklahoma LLC
- Oregon LLC
- Pennsylvania LLC
- Rhode Island LLC
- South Carolina LLC
- South Dakota LLC
- Tennessee LLC
- Texas LLC
- Utah LLC
- Vermont LLC
- Virginia LLC
- Washington LLC
- Washington D.C. LLC
- West Virginia LLC
- Wisconsin LLC
- Wyoming LLC
Step 2: Name Your LLC
You will need to provide your state with a unique name that is distinguishable from all registered names when you file your LLCs formation documents.
Step 3: Choose an LLC Registered Agent
Your LLC registered agent will accept legal documents and tax notices on your LLC's behalf. You will list your registered agent when you file your LLC's Articles of Organization.
Hiring a registered agent service offers a number of benefits, including privacy and peace of mind.
Step 4: File Your LLC's Articles of Organization
The Articles of Organization, also known as a Certificate of Formation or a Certificate of Organization in some states, is the document you will file to officially register an LLC with the state.
Step 5: Create an LLC Operating Agreement
An LLC operating agreement is a legal document that outlines the ownership and member duties of your LLC.
Step 6: Get an EIN
An EIN is a number that is used by the US Internal Revenue Service (IRS) to identify and tax businesses. it's essentially a Social Security number for a business.
LLC Frequently Asked Questions
What should I know before starting an LLC?
Above we’ve detailed seven things you should know before starting an LLC, including topics related to your LLC’s name, registered agent, operating agreement, tax options, and EIN, as well as its limited liability protection and how to maintain its corporate veil.
Is it worth starting an LLC?
Starting an LLC is usually worth the time, money, and effort. Check out our article about the 7 Benefits of Starting an LLC.
How difficult is it to start an LLC?
Starting an LLC is not difficult, and you can generally do it on your own without hiring any professional help. Our How to Form an LLC state guides provide step-by-step instructions.
How do LLC owners get paid?
How LLC owners get paid depends on how the LLC is taxed, the number of members, and any agreements regarding profit sharing and sweat equity. In a single-member LLC or multi-member LLC you can pay yourself:
- a distribution that passes through to your individual tax return, or
- a reasonable salary and distribution as an S corporation (S corp)
What is the downside of an LLC?
One downside of an LLC is that it can be more difficult to attract investors compared to a corporation. If you think you may need outside investors someday down the road, this is worth keeping in mind.
Is owning an LLC considered self employed?
Yes, unless an LLC elects a corporate tax structure, LLC owners are considered self employed. Under the default tax structure, LLC owners must pay self-employment tax.
Does having an LLC help with taxes?
Forming an LLC gives business owners more tax options, but it does not necessarily mean they will pay less taxes. In fact, single-member LLCs that are taxed as pass-through entities pay the same amount of taxes as a sole proprietorship.