Setting up an LLC in America is an excellent way for business owners and entrepreneurs alike to limit their liability for any company debts.
A lot of small business owners prefer to create an LLC for the liability protection it offers. An LLC (limited liability company) exists separately from its owners (members). Thus, the owners aren’t personally accountable for business debts.
Generally, as LLCGuys advises — LLCs are simpler to set up and more flexible than corporations. On top of that, they are more likely to have fewer ongoing reporting prerequisites.
Keep in mind that LLCs in the USA can be one of the best legal entities for non-American entrepreneurs. They allow access to every benefit of a first-world jurisdiction, like a good reputation, payment processing, and banking, while keeping a relatively low tax rate and reasonable levels of compliance requirements.
This article will dig deeper and will tell you everything you should know when forming an LLC in America. It will also help you understand if an LLC is an excellent choice for you, how you can open it quickly and compliant, and everything you should pay attention to when running it.
In the following pages, we will show you the detailed steps on how to set up an LLC, get your EIN from the IRS in record time, how open bank accounts remotely, and how get payment processing so you can begin billing your clients.
What is an LLC?
Most small business owners start as sole proprietors. However, as their businesses grow and staff is employed, they may need an entity that could change with them. This is where an LLC comes into play.
One of the most typical forms of business structures for small businesses in America, LLCs provide simplicity, ease, and more perks than other forms of entities.
Are you a self-employed sole proprietor, part of a partnership, or a small business owner? Then building an LLC is the next step for your business. An LLC is also an excellent option, especially if you are seeking to start a business for the first time.
How to Form an LLC in the USA?
The process of creating an LLC differs a bit from one state to another. However, you can follow the steps above. Just make sure you check the guidance from your state’s government office, which handles LLCs. Below are the important steps you need to do to start an LLC in America.
Step 1 – Choose a state
The first step you need to do if you want to form an LLC is to pick the state you wish to begin your business in. Typically, your LLC is better situated in the state where you live or where you wish to do business. Nonetheless, if your business prefers to operate in various states, you must register a foreign LLC in other states where you like to do business.
What about if your LLC doesn’t have a physical storefront or office? You may select to file your LLC in the state with lower filing fees, or that is more tax-friendly. Other local governments or states even provide special tax credits for state-specific business loans.
Either way, you will need to pick a particular state to file your LLC in because every state has its own regulations and guidelines. Does your LLC have multiple locations spanning across state lines? As mentioned earlier, you should register a foreign LLC.
Step 2 – Select a business name for your LLC
Many states in the US do not enable two different business entities to have identical names. For example, you cannot have Ian’s Donut, Inc. and Ian’s Donuts LLC. That’s especially true even when they are located in different states.
But before you name your business or LLC, you should learn first whether the name you want to use is available for use or not. You can check out the LLC name search and availability before starting your LLC.
Make sure you visit the Secretary of State’s website to look and register the name of your LLC. On the other hand, below are the general naming guidelines for LLCs:
- The company name must include abbreviations like LLC or L.L.C. or Limited Liability Company
- Your company name must not include words that might confuse your business name with any government agency such as Treasury, State Department, or FBI, among others
- Words such as University, Attorney, Bank, and other words are also not allowed. They may need further paperwork on top of a licensed professional like a lawyer or doctor as part of the company
Above are some of the most typical points you need to remember while naming your LLC. It’s highly suggested to go through the entire naming guidelines before naming your LLC.
Now that you have chosen and reserved your LLC name, you can get your business domain from Bluehost. The platform provides a plethora of services, including a free domain at a reasonable price. On to of that, they are ranked as the top web hosting provider.
Step 3 – Pick a registered agent
Every LLC in America should have a registered agent, also referred to as the agent for service of process. This organization or individual agrees to accept legal documents on behalf of the LLC should it be litigated. The official documents would normally involve correspondences such as legal summons and state filing notices.
An LC can’t be its own registered agent. Nonetheless, an officer, manager, or member of the LLC or an attorney can act as a registered agent. You may prefer to become your own registered agent. Nonetheless, you should be extra cautious that the information of registered agents is in the public record. That means your home address will be available in the public record, as you cannot use the business address.
Take note that registered agents should always be accessible during regular business hours. If you decide to self-appoint, you should be accessible every business day of the year, or else, you risk missing important legal advice.
Your registered agent should be somebody who is more than eighteen years old and has a physical address in the state where your LLC is filed.
Step 4 – File the necessary articles of organization with your Secretary of State
LLC formation documents are the most crucial thing you need to have while forming an LLC. Those documents are typically referred to as Certificates of Formation. Nonetheless, depending on the state, you will find various names like Certificate of Organization, Articles of Organization, and so on.
Furthermore, you must fill in the form (PDF or online) and send it to your Sectary of State after making the formation state fee. The typical filing fee is at least $100. It’s worth mentioning as well that the cost of an LLC involves other costs. You can file the Certificate of Formation through email, fax, mail, by phone, or even online, depending on the state rules.
If you prefer to file your articles of incorporation on your own, you should have the following information ready:
- your registered agent’s name and information
- your LLC’s name and the name of the owner/s
- information about whether your LLC will be manager-managed or member-managed
(A member-managed LLC indicates that the company owner is accountable for regular business operations. Meanwhile, a manager-managed indicates a third party is accountable for business affairs, and the owner takes a passive role.)
Step 5 – Create an operating agreement
The LLC operating agreement isn’t mandatory, but it is highly encouraged. That legal document presents the organizational structure and the members’ roles of your LLC. Keep in mind that you must have already chosen whether your LLC will be manager-managed or member-managed.
Below are the important sections of an operating agreement:
- organization
- membership changes
- management and voting
- distributions
- dissolution
- capital contributions
Only a few states need an operating agreement. Still, it is an excellent idea for each business to have. That document also details other crucial information about your company, like how profits will be distributed and even how the business would be disbanded if that situation should come.
After the operating agreement is signed by the LLC members, it will serve as an official and binding contract.
Step 6 – Get an EIN (Employer Identification Number)
You need a tax ID for your company, also referred to as EIN (Employer Identification Number). Keep in mind that this is a 9-digit number assigned to your business by the IRS. It is also utilized to determine a business for tax purposes. You can think of it as a Social Security Number for your startup.
You’ll need that number to fulfil your LLC’s filing requirements. Having an EIN is non-negotiable when opening up a bank account or if you’re applying for merchant accounts with payment processors such as PayPal or Stripe.
Would you like to apply for an EIN? You need to fill out the Form SS-4 Application for Employer Identification Number. However, you get an EIN. You should have the following:
- a business name
- an American business address
- a short explanation of the principal business activity as well as the principal service or product the business will sell or provide
Step 7 – Get a bank account
Remember that a company without a bank account isn’t considered a real company. Apart from getting wire transfers and paying invoices and bills, you’ll need a bank account to utilize for your payment processors and merchant accounts.
Thus, one of the essential concerns you need to consider is how and where to get good bank accounts. You will find two categories in this matter:
- neo-banks such as TransferWise
- traditional banks such as Chase, Bank of America, and more
The traditional banks normally have internal compliance guidelines and higher requirements. Normally, it is not possible to open those accounts remotely. The company manager or owner should appear in person at the bank.
Keep in mind that opening an account with neo banks and fintech companies is normally easier. Their KYC requirements are lower, not to mention there are various options you can do remotely. Also, the available options change regularly, and that’s why we have not included them here.
Step 8 – Apply for permits and licenses
The last step to beginning your LLC is to apply for other necessary permits, such as a business license. The type of permits and licenses needed (and the fees involved for each) will vary on the type of business you are opening as well as the local, state, and federal requirements of your business’s location.
Also, a business license could cost at least $150 to $100 or even more. The cost will depend on where you are filing and what you do.
Other Important Things You Need to Do After Starting an LLC in the US
In addition to the helpful steps mentioned above, there is more to creating an LLC for a business owner. Keep in mind that you should deal with your taxes and assets depending on the management structure. Here are other crucial things you need to address when forming an LLC.
- Set up your business accounting
It is essential that you have a business accountant who can help you maximize tax benefits. It will save you a huge amount of time and your business tons of money every year.
- Separate your personal assets from your business
Your LLC provides limited liability protection. It’s crucial that you utilize dedicated to credit and banking accounts to prevent mixing them with your personal accounts. Or else, your personal assets such as your car and home would be at risk if your LLC gets sued.
- Get business insurance
Normally, businesses with employees should get workers’ compensation insurance. Alternatively, liability insurance is not often a legal requirement, but it is highly suggested to safeguard your business assets from potential lawsuits.
- Register your LLC for state taxes
You will find numerous taxes you might need based on the location and nature of your business.
- Are you selling a physical product? You will register your company for sales and use tax.
- Do you have employees? You need unemployment insurance tax and employee withholding tax.
- You may also be needed to file a biennial report or annual report.
- Understand the federal tax options of your LLC
Did you know that LLCs get taxed as pass-through entities? That suggests all of the profit of your business goes through the tax returns of LLC members. Also, the member pays income tax and self-employment taxes on their share of business income after tax.
On the other hand, LLCs could also be taxed as C corporations (C corps) or S corporations (S corps). The latter enables LLC members to be taxed as employees. It lessens the tax burden in particular situations.
- Always keep your LLC active with annual or biennial reporting
Many states need LLCs to continue sending their business to entitle filings regularly—others annual while some biennially. That report helps the Secretary of State in keeping updated on all registered LLCS within the state.
For instance, California obliges LLCs to send initial reports within ninety days of registration. That initial report has information identical to the biennial reports filed thereafter. The biennial State of Information of your business typically includes the following:
- a description of the LLC’s business activities
- a valid email address to get communications from the Secretary of State (sent electronically)
- name and complete residential or business address of CEO or managers (in none, the names and address of the members)
- physical street address
- designated registered agent
- business name and file number registered with the Secretary of State
Most states need an annual report, but there are a few that only need these filings every two years. These states include:
Why and When Should You Create an LLC?
Are you now thinking about why and when you should create an LLC in the USA and are not certain where to begin? In this section, we will consider the benefits of doing so.
The initial step in creating an LLC is to make a business plan. You see, a business plan is not necessary, but it’s useful to have an idea of what your business will look like. Make sure you also consider the availability of your business name.
A business that is created as an LLC is normally less complicated than creating a corporation. Nonetheless, it’s vital to know that an LLC is a separate entity from a corporation. It’s often costlier to create the latter, and state laws differ on how much annual reporting is needed.
On top of that, a company should have an operating agreement laying out the duties and rights of the members. Like the articles of corporation, this document should be filled with the necessary state agency. There’s normally a fee connected with this procedure, which is paid to the Secretary of State.
Another important reason to create an LLC in America is liability protection. An LLC protects the owners from any personal liability. For instance, when a bank files for bankruptcy, the bank could only sue the business and get at the business’s assets and not the personal finances of the owner.
Indeed, the LLC owner is still accountable for the money invested in the business. That’s why having an operating agreement in place is critical. For small businesses, creating an LLC is an excellent way to limit your liability.
Frequently Asked Questions When Forming an LLC
Q: How do you create an LLC for free?
You can create an LLC without spending any money. To start one, you should follow the steps mentioned above.
Q: How much does it cost to file an LLC in the US?
The cost of forming an LLC varies on how you prefer to file and which state you’re filing within. Are you filling on your own through the office of the Secretary of State? Then you must pay the filing fee of your state, which is normally at least $100. However, it may range from $50 to $450, depending on the state.
Would you like to save yourself trouble and time? You can prefer to file your LLC through an online filing service for free. All you should do is provide basic information about your company, then representatives at those platforms will handle the rest.
Q: Do I need to create the LLC in the same state where you live?
You don’t necessarily need to file your LLC in the state where you live in. For example, does your LLC not have a physical office or storefront? You may prefer to file your LLC in a state of your liking, probably one with lower filing fees or more tax-friendly.
Still, your registered agent should have a physical address in the same state where your company is legally filed.
Q: Is there a difference between a corporation and an LLC?
An LLC and a corporation both safeguard the owners from being liable for any debts or liabilities. The major difference between the two is how the companies are owned.
You see, an LLC has one or more members that own the business. On the other hand, a corporation is owned by its shareholders. On top of that, corporations have more formal record-keeping and reporting requirements than LLCs.
Final Thoughts
To sum up, there’s no doubt that an LLC can be a beneficial entity type for some businesses. That’s especially true for people who wish liability protection for their personal assets. Nonetheless, it is essential to thoroughly assess and pick taxation options.
You can definitely form an LLC yourself, but don’t forget it will take time and effort. Also, it’s not always a smooth process with new incorporations. That’s why a lot of people recommend LLC formation services like ZenBusiness to form an LLC for you. You can read a full review of ZenBusiness here if you want to know more of what they’re all about.
There are surely benefits like protection of your personal assets, but there are some trade-offs to consider as well, such as more challenging taxes and startup costs. Overall, the convenience and ease of creating an LLC in the USA make it a logical and strategic option for most business owners and entrepreneurs.
We hope you find our guide useful and informative at the same time. So, are you now ready to form your own LLC? We wish you the best of luck in your journey.