How to Form an LLC:
What is an LLC, Advantages, Disadvantages & More

limited liability company (LLC) is a popular choice among small business owners for the liability protection, management flexibility, and tax advantages this form of business entity often provides. Understanding the benefits and disadvantages of an LLC, how to start an LLC, where to form your LLC and other key topics is essential for business success.

This article will cover:

What is an LLC?

A Limited liability company (LLC) is a business structure that offers limited liability protection and pass-through taxation. As with corporations, the LLC legally exists as a separate entity from its owners. Therefore, owners cannot typically be held personally responsible for the business debts and liabilities.

The LLC allows for pass-through taxation, as its income is not taxed at the entity level; however, a tax return for the LLC must be completed if the LLC has more than one owner. Any LLC income or loss as shown on this return is passed through to the owner(s). The owners, also called members, must then report the income or loss on their personal tax returns and pay any necessary tax.

Benefits of Forming an LLC

The benefits of creating an LLC—as opposed to operating as a sole proprietorship or general partnership, or forming a corporation—typically outweigh any perceived disadvantages.

  • Limited liability: Members (which is what the owners of an LLC are called) are shielded from personal liability for acts of the LLC and its other members. Creditors cannot pursue the personal assets (house, savings accounts, etc.) of the owners to pay business debts. The personal assets of sole proprietors and general partners, on the other hand, can be pursued against the business’ debts. Note: It is possible for an LLC (as well as a corporation) to lose its limited liability. This is known as “piercing the veil”. For more information, see How to Avoid Piercing the Corporate Veil.
  • Flexible membership: Members can be individuals, partnerships, trusts, or corporations, and there is no limit on the number of members. S corporations (which is a corporation that has elected to be taxed as a pass-through entity under Subchapter S of the Internal Revenue Code) are much more restricted in who can be a shareholder, and there is a maximum limit on the number.
  • Management: Members can manage the LLC or elect a management group to do so. Corporations, on the other hand, are managed by a board of directors, not shareholders.
  • Pass-through taxation: LLCs typically do not pay taxes at the business entity level. Any business income or loss is "passed-through" to owners and reported on their personal income tax returns. Any tax due is paid at the individual level. Corporations that cannot or choose not to be taxed as an S corporation (these are known as C corporations because they are taxed under Subchapter C of the IRC) are taxed at the business entity level and their shareholders are taxed on the income distributed to them.
  • Heightened credibility: Starting an LLC may help a new business establish credibility more so than if the business is operated as a sole proprietorship or partnership.
  • Limited compliance requirements: LLCs face fewer state-imposed compliance requirements and ongoing formalities than sole proprietorships, general partnerships, or corporations (whether taxed as S corporations or C corporations).

Disadvantages of Creating an LLC

There are a few disadvantages to creating an LLC too, although in many cases the advantages outweigh the drawbacks.

  • Cost: An LLC usually costs more to form and maintain than a sole proprietorship or general partnership. States charge an initial formation fee. Many states also impose ongoing fees, such as annual report and/or franchise tax fees. Check with your Secretary of State's office.
  • Transferable ownership. Ownership in an LLC is often harder to transfer than with a corporation. With corporations, shares of stock can be sold by the corporation to increase ownership and, unless there is a shareholder agreement to the contrary, the shareholders can sell their shares to someone else. Typically, with LLCs, unless the members agree otherwise, all members must approve adding new members or altering the ownership percentages of existing members.

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How to Form an LLC

Although generally easier to form than a corporation, there are some administrative and compliance tasks to be done. To help you form an LLC successfully and in compliance with state law, follow these eight steps.

Steps to form an LLC

Step 1: Choose a State in Which to Form Your LLC

Although you can choose to form an LLC in any state—even if the LLC won’t be doing any business there —most LLC owners choose to form an LLC in the state in which they plan to do business—which in many cases is the state they live in. One reason for that is that if the LLC is formed in a state where it is not doing business—Delaware is the usual choice for these LLCs—the LLC will have to register as a foreign LLC (aka foreign qualify) to do business in the state where it is doing business, which can increase formation and administrative costs.

It’s important to note that the cost, taxation, and LLC laws vary from state to state, making some states more advantageous for certain small business owners. Read more about how to select a state for LLC formation.

Step 2: Choose a Name for Your LLC

In order to form an LLC, you’ll have to choose a name that is not already on the Secretary of State’s records as being the name of another domestic or qualified LLC or other business entity. Many sole proprietors operate under a registered “doing business as” (DBA) name or trade name and may want to use that as their LLC’s legal name. To ensure the availability of the name you want for your LLC, whether it’s registered as your DBA name or not, you should conduct an LLC name search on your formation state’s website to determine whether your desired name is available. If you’re not ready to file your LLC formation document quite yet, it is a very good idea to reserve the name. Many states allow you to do that for a small fee and short time period.

It’s also a good idea to conduct a trademark search of the name you want to avoid intellectual property infringement or confusing your customers.

Step 3: Choose a Registered Agent

In forming an LLC or registering an existing LLC to transact business in a foreign state, you are required to have a registered agent in the state of formation or qualification. Many new business owners are either unfamiliar with the term registered agent or do not know the purpose of a registered agent.

A registered agent, also known as an agent for service of process, receives important legal notices and tax documents on behalf of an LLC. These include important legal documents, notices, and communications mailed by the Secretary of State (such as annual reports or statements) and tax documents sent by the state’s department of taxation. A registered agent also must be available to receive service of process (sometimes called Notice of Litigation), which are legal documents—typically a summons and complaint, that provide notice that a lawsuit has been filed against the LLC. Other court documents such as garnishment orders and subpoenas are also served on the registered agent.

While the owner of an LLC can choose to serve as the LLC’s registered agent, there are a number of compelling reasons why business owners—even the smallest ones—choose a registered agent service provider to assist with this important requirement. Among other things, if the registered agent is not available when these time-sensitive documents are delivered, or if the person receiving them mishandles them, it can cause the LLC serious problems. The registered agent must also have a physical address in the state, and cannot use a PO Box.

Step 4: Prepare an LLC Operating Agreement

An LLC operating agreement is required in nearly every state. And although in most states it can be oral, it is highly recommended that every LLC have a written operating agreement. As the name implies it is an agreement among the members and between the LLC and the member or members as to how the LLC will be operated. Even if you are the only member it is important to have an operating agreement. It shows you respect the LLC’s separate existence (and can help avoid piercing the veil), it gives you a chance to put in writing what you want to happen in certain circumstances such as if you can no longer manage the business, and allows you to opt out of certain default provisions of the LLC statute that you might not want the LLC to be governed by.

It is particularly important for multi-member LLCs to have a well-drafted operating agreement. This document will clearly spell out the division of ownership, labor and profits, and often heads off disputes among the owners. It should detail, among things, who has authority to do what, what vote is required to approve certain transactions, how membership interests can be transferred, how new members can be added, how distributions, profits and losses will be split, and more. It is recommended that the operating agreement be reviewed by your attorney to be sure that all the bases are covered. Read more about the issues an operating agreement can address.

Step 5: File Your LLC with Your State

To make your new LLC officially exist you must file LLC formation documents (also known as a Certificate of Organization, Certificate of Formation, or Articles of Organization) with the Secretary of State’s office or whichever department handles business filings in the state in which you are forming. Filing fees vary across the U.S.

Did You Know? 

What about LLC Articles of Organization?

Although it may be common to hear of an LLC being “incorporated”, the correct way to describe the creation of an LLC (or any entity type other than a corporation) is to say that it has been “formed” or “organized”. “Incorporation” and “Articles of Incorporation” are terms that apply to a corporation (regardless of whether it is taxed as a C corporation or S corporation).

While each state’s LLC formation document is different to some extent, there are several common elements. These include the following:

  • Name, principal location and purpose of the business
  • Registered agent’s name and physical address
  • Whether the LLC will be member-managed or manager-managed

Standard forms for the articles of organization for an LLC are generally available from each state. The person who formed the LLC must sign the paperwork. In most cases that does not have to be a member or manager. In some states, the registered agent’s consent to act as registered agent is also required.

Once approved and filed, the state will issue a certificate or other confirmation document. The certificate serves as legal proof of the LLC’s status and can be used to open a business bank account, obtain an EIN, and so on. Some states may also require that you publish a notice, often in a local newspaper, confirming the formation of the LLC.

Step 6: Obtain an EIN

After establishing the business entity, you must apply to the Internal Revenue Service for an employer identification number (EIN). This is the identification number your LLC will use on all its bank accounts, as well as income and employment tax filings. In addition, in each state in which the LLC will be doing business, you must apply to the state's tax department for a sales tax identification number and register with the state's labor department.

Step 7: Open a Business Bank Account

This step is not a legal requirement but is a key best practice for anyone who is creating an LLC and is one of the steps outlined in our guide: 10 Steps to Starting a Business. It is crucial to separate business finances from personal ones. This is one of the main factors courts consider when deciding whether to pierce an LLC’s veil and hold the member liable for the LLC’s debts. Most banks require company details, such as formation date, business type, and owner names and addresses. Contact your bank about requirements prior to opening an account.

Step 8: Register to Do Business in Other States (If Necessary)

If the LLC you formed is going to be doing business in more than just the formation state, you will have to register—or foreign qualify—in each “foreign” state. That generally requires filing an application for authority with the Secretary of State. A Certificate of Good Standing is often required as well. The LLC will also have to appoint and maintain a registered agent.

Many factors are used to determine whether a company is transacting business in a state, and therefore needs to foreign qualify. Some of the common criteria include whether your company -

  • has a physical presence in the state
  • has employees in the state
  • accepts orders in the state

Note that different states have different criteria. To determine whether your LLC needs to foreign qualify in a certain state, it is best to seek the legal advice of an attorney.


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Comparing LLCs with Other Entity Types

When forming a business, one of the most important steps is deciding on the business structure. There are several business entity options available that each present different advantages and disadvantages.

LLCs versus C Corps, S Corps, and DBAs

Understand the key benefits of LLCs, C Corporations, S Corporations and DBAs before deciding which entity type is right for you. Read our article on Comparing Company Types: Understanding C Corp, S Corp, LLC and DBA Business Structures

LLCs versus S Corps

While the S corporation and LLC both have pass-through taxation, the S corporation lacks the flexibility of an LLC in allocating income to the owners. Additionally, an LLC may offer several classes of membership interest while an S corporation may only have one class of stock. Visit our article on LLCs versus S corporations to learn about other key differences.

LLCs versus Partnerships and Sole Proprietorships

Learn about the advantages and disadvantages related to taxation, asset protection and other key criteria faced by LLC owners, sole proprietors and partners, whether general or limited partnerships in our article Sole Proprietorships, Partnerships and LLCs are Commonly Used Entities.

 

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LLC State Guides

When forming a business, one of the most important steps is deciding on the business structure. There are several business entity options available that each present different advantages and disadvantages.

Select your state to view detailed information:

LouisianaOhio
ArizonaOklahoma
MarylandOregon
MassachusettsPennsylvania
Minnesota
Tennessee
Texas
Utah
HawaiiVermont
IdahoVirginia
IllinoisWashington
IndianaNew Mexico
Iowa
KansasWyoming


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LLC Resource Center

See our list of LLC articles, covering topics from formation state to tax implications.

Key Issues in Selecting Formation State

Selecting a state in which to form your business is a significant decision. Read more about key considerations to evaluate when deciding where to form your business.

Overview of Tax Implications of LLCs and Corporations

There are significant differences in the way LLC s and Corporations are charged state fees, operated under state law and taxed by federal and state governments. These factors need to be considered when choosing the organizational form for your business.

LLC Electing S Corp Tax Status: An Option You May Not Know You Have

If you think you can benefit from the combined features of using an LLC to own and operate your small business and then having it be taxed like an S corporation, evaluate the election of S Corp tax status for your LLC. From double taxation to self-employment tax, this article will identify the key considerations.

How to Move Your LLC or Corporation to Another State

Considering moving your business to another state? Learn about the key considerations and steps involved.

Your LLC and Spring Cleaning: Which Records to Keep or Toss?

Get guidance on which documents you need to retain and which can be discarded in order to keep your LLC in compliance.


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LLC FAQs

  • What LLC Forms are required to start a limited liability company?
    Articles of Organization, sometimes also called a Certificate of Organization, must be prepared and filed with the state. Filing fees along with any applicable initial franchise taxes or other initial fees must also be paid. If your LLC is formed through BizFilings, all you need to do is complete our simple LLC forms and we will do the rest. We will prepare and file your Articles of Organization and LLC forms and pay the initial filing fees on your behalf.
  • Who can form an LLC?
    Typically, there are no residency or legal restrictions as to who can start an LLC. However, a few states impose requirements that members and/or managers must be at least 18 years of age, or the age of consent. For more information regarding the requirements of each state, view the LLC Formation Requirements page of our state guides.
  • Do I need an attorney to form an LLC? No, you can prepare and file the Articles of Organization – one of the most important LLC forms needed – yourself. Be sure you understand the requirements of your intended state of incorporation. You can use BizFilings' service to form your LLC, completed your LLC forms and save money on attorney's fees. If you are unsure of what business type is best for you, review our Types of Business Comparison Table and/or try our Incorporation Wizard. If you still have questions, consult an attorney or accountant.
  • What should I name my LLC? Choosing the name of a new company is an important decision. It is typically advisable to select a name that projects the image you want for your new company. Selecting a name that is easy for customers to remember and spell also has benefits. Legally, the name you select for your LLC must not be "deceptively similar" to any existing company in that state or must be "distinguishable on the record" of your state. Check your business name using our business name availability checker. It is possible that the name you select will not be available in your state of incorporation—that’s why BizFilings asks for a second choice on our LLC order form. Additionally, most states require that the name you select shows your business is an LLC by including the words "Limited Liability Company" or the abbreviation of "LLC."
  • How many people are needed to form an LLC?
    There is no requirement specifying the maximum number of members (owners) an LLC can have. The IRS does allow one-member LLCs to qualify for pass-through tax treatment. Taxation of the one-member LLCs at the state level may be different.
  • How is a limited liability company (LLC) taxed?
    Typically LLCs are taxed like partnerships, with pass-through taxation. While multi-member LLCs must file an informational tax return, single member LLCs do not. In both cases, the profits or losses are “passed-through” the business and reported on the owners’ tax returns. Any tax due is then paid by the owners at the individual tax level.

    LLCs can also elect to be taxed like corporations, where the profits of the LLC are taxed at the business level. The state income tax treatment of LLC profits and losses may or may not mirror the IRS tax treatment depending on the state.

    LLCs are also subject to any franchise taxes imposed by the state of incorporation. A franchise tax is a tax imposed for the mere privilege of being an LLC incorporated or registered to transact business (through a process called foreign qualification) in that state. Franchise taxes are typically due annually, and the amounts differ by state. Note: California LLCs are subject to an annual minimum franchise tax of $800 per year. The first payment must be made within 3 months of forming your LLC. The state will send a bill to remind you to make this payment.
  • What is the organizational structure of an LLC? An LLC is owned by its members. They are analogous to partners in a partnership or shareholders in a corporation, depending on how the LLC is managed. A member will more closely resemble shareholders if the LLC utilizes managers, because then the members will not participate in management. If the LLC does not utilize managers, then the members will closely resemble partners because they will have a direct say in company decision-making. A member's ownership of an LLC is represented by membership interest, just as partners have interest in a partnership and shareholders have stock in a corporation.
  • How is an LLC managed?
    An LLC may be managed by its members (owners) or by selected managers. If the LLC is to be managed by its members, it operates much like a partnership. Each member has an equal say in the company decision-making process. If the members choose, they may elect a manager or managers to act in a capacity similar to a corporation's board of directors. These managers are in charge of the affairs of the LLC.

    Member-management is the normal default rule of state law. This means that if managers are not selected in the Articles of Organization LLC forms, the members will direct the affairs of the LLC.
  • What is a publication requirement? A few states require notice to be published in a newspaper that an LLC has been formed. States with this requirement for LLCs include: Arizona, Nebraska and New York. The Published Notice of Formation Service can be added to a BizFilings LLC Formation Service order in each of these states. For New York limited liability entities (Limited Liability Company, Limited Partnership, Limited Liability Partnership), the New York Published Notice of Formation Service can also be purchased independently from BizFilings.

    In New York, limited liability entities are required to publish notice of their formation or registration in two New York newspapers and to file proof of publication with the Department of State within 120 days. The publication is made at the county level in two newspapers. Failure to comply with the publication requirement by the deadline results in the suspension of a company's authority to do business in the State of New York.
  • Does my LLC need a registered agent?
    It is required that you appoint a registered agent when you start an LLC or register to transact business in another state (a process called foreign qualification). BizFilings includes Registered Agent Service with its incorporation service packages.

    With its Registered Agent Service BizFilings satisfies the state's legal requirement to have an individual or company receive important legal and tax documents on behalf of your company. Our service doesn't stop there, however. BizFilings provides a number of advantages at no additional charge to you, such as: access to BizComply─our online compliance management tool, electronic Service of Process delivery, online access to your account and more.
  • How do I ensure my LLC always has a registered agent?
    Our LLC formation service packages include six months of Registered Agent Service. As your registered agent, BizFilings fulfills your state’s legal requirement and provides ongoing compliance assistance for your business. You not only receive our Registered Agent Service for 6 months free with your incorporation package order, but you also avoid interruption of this valuable service with our convenient auto-renewal program. For $164 per year, your Registered Agent Service will automatically be renewed to help ensure your company remains in good standing with the state. You also have the option to renew for multiple years and save over the single year price. You can renew your Registered Agent Service at two years for $249 (save $129) or three years for $348 (save $219).
  • How do I get started setting up a limited liability company (LLC)?
    After you decide to form an LLC, Articles of Organization LLC forms must be filed, and state and initial fees must be paid. BizFilings' LLC Formation Service packages handle these steps for you. After your LLC forms are filed, it is recommended that your LLC hold an organizational meeting of the members/managers. This meeting will help to start an LLC by adopting an operating agreement, issue membership interest certificates to members, and undertake other preliminary matters such as authorizing the opening of a bank account for the LLC. View our article on Business Compliance Requirements to learn more.
  • How soon will I receive my documents when I select Rush Filing Service?
    The 24- or 48-hour filing time is for the LLC formation only. It typically takes longer for the states to produce the filed incorporation documents. Once BizFilings receives your documents from the state, we will ship them to you via FedEx Overnight delivery. This means you should have your documents in hand anywhere from just a few days to one week after your LLC filing. We will also scan them into our Online Status Center, making them available to you before you receive your original documents to help get an LLC started as quickly as possible.

    Note: some states require your signature on the incorporation documents when someone other than BizFilings is acting as registered agent. In these cases, the filing timeframe of 24 to 48 hours begins after we have received the signed documents and received any applicable prior approvals or consent.
  • What is a single-member LLC?
    A single-member limited liability company is a "disregarded entity" for federal tax purposes. It still provides protection of personal assets. You report the taxable income and the expenses of the business using Schedule C and carry that information over to your personal Form 1040.
  • What is an LLC operating agreement?
    An LLC operating agreement is a contract that outlines the guidelines and details of an LLC. The operating agreement, which is required to have in place, is written by the LLC members during the first meeting. Our Compliance Kit and Seal service provides template agreements.
  • How do I register an LLC?
    To register your LLC, follow the steps above in our How to Form an LLC section.
  • What are the benefits of an LLC?
    A limited liability company has many benefits, including tax benefits and flexibility advantages. Learn more about LLC advantages and disadvantages above.
  • What is a Professional LLC (PLLC)?
    A professional limited liability company (PLLC) is a limited liability company (LLC) organized to provide professional services in industries that require a state license in order to practice.
  • How do I get an EIN for my LLC?
    Businesses apply for an EIN (Federal Tax ID number) by preparing Internal Revenue Service (IRS) Form SS-4 and filing it with the IRS. BizFilings can assist with the obtainment of your company's EIN number from the IRS on your behalf. Simply fill out our Federal Tax ID EIN online order form.
  • How much does it cost to register an LLC?
    The LLC formation and incorporation filing fee varies by state. Our State Fees guide provides the filing fee for each state.

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