7 Things to Know Before Starting an LLC
Starting an LLC can protect your personal assets and help you grow your business. And, LLCs are easy to start and run— making LLCs the most popular business structure for small businesses in the US.
In this article, we’ll go over the 7 most important things to know before starting an LLC.
Recommended: Northwest will form an LLC for you for $29 (plus state fees).
Things to Know Before Starting an LLC
Forming an LLC is easy. But, what should you know beforehand?
We’ve put together a list of things many entrepreneurs say they wish they knew before they started their first LLC:
1. Your LLC Will Need a Distinguishable Name
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.
2. You'll Need a Registered Agent
Most states require LLCs to have a registered agent. A registered agent is a person or entity that agrees to be available to accept service of process (legal summons) on behalf of the LLC. A registered agent must be a resident of the LLC's state.
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.
Get a free year of registered agent services when you form an LLC with Northwest for $29 (plus state fees).
3. All LLCs Should Have an Operating Agreeement
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 or you're the only member, 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.
4. You Should Establish Business Credit Right Away
Business credit gives a business owner access to funds that can be leveraged for growth. When a business is just starting out, it has to establish credit so that it can get approved for small business loans down the road.
In a National Small Business Association survey, one-quarter of small business owners reported that a lack of funding prevented them from growing their business. And not surprisingly, it was found that 20% of small business loans are denied due to business credit.
Luckily, it's not hard to establish business credit— but it IS urgent.
You can get started by applying for a net 30 account and a secured business credit card with a lender like Divvy.
These are easy approval credit-building opportunities that will help you grow your business.
Recommended: Learn more about establishing business credit fast.
5. You’ll Need An EIN for Your Bank Account
All multi-member LLCs, along with single-member LLCs with employees, are required to have a free Employer Identification Number (EIN) from the IRS.
While single-member LLCs without employees are not technically required to have an EIN, it's still a good idea to get one as soon as the LLC has been registered by the state. This is because most banks require you to have an EIN to open a business bank account.
Need help choosing the best bank for your business? Learn more with our Best Bank for Small Business guide.
6. You'll Have Tax Options
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.
7. Having an LLC Won't Attract Investors and/or Venture Capital
If you plan on attracting investors to your small business, an LLC isn't the best choice. This is because an LLC investor would have to pay taxes on LLC profit regardless of whether or not they were paid a distribution.
Starting a corporation is the best choice for businesses that require venture capital or other types of investors. Corporations are taxed once at the business level and once at the investor/ shareholder level. When investors aren't in the picture, this form of double taxation can be bad for business. LLCs were created to lessen this burden.
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 Northwest 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.
Our business name generator and our How to Name a Business guide are free tools available to entrepreneurs that need help naming their business.
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.