Last Updated: February 21, 2024, 11:25 pm by TRUiC Team

7 Things to Know Before Starting an LLC

LLCs are the most popular business structure for their limited liability protection, no-hassle formation requirements, low cost, and countless other benefits.

We’ll show you how to start an LLC, but first here’s what to know about starting an LLC.

Read this guide and then visit our How to Form an LLC guide for a DIY experience.

Recommended: Northwest will form your LLC for $29 (plus state fees).

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Things to Know Before Starting an LLC

Forming a limited liability company 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.

Find a Domain Now

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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
  • Flexibility
  • Privacy

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 Free Registered Agent Services

Form an LLC with Northwest Registered Agent to get one year of registered agent services free of charge.

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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 BILL.

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.

You’ll want a business bank account to separate your personal assets from business assets. This helps ensure personal liability protection. You don’t want business debts becoming your personal responsibility. You never want to mingle personal and business finances for your business entity.

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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.

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. You’ll need to pay the state filing fees. You may also need to apply for local business licenses.

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.

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Need Help Starting Your LLC?

Check out our Best LLC Services review.

LLC Frequently Asked Questions

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.

Yes, it's generally recommended to get an LLC before starting a business. An LLC provides personal liability protection, separates business and personal finances, adds credibility, and offers potential tax advantages.

Starting an LLC is usually worth the time, money, and effort. Check out our article about the 7 Benefits of Starting 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 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)

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.

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.

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.

Related Articles

Article Sources

IRS: Limited Liability Company (LLC)
IRS: Business Structures
SBA: Choose a Business Structure