In 1977, Wyoming became the first state to enact a law that enabled the formation of the LLC (Limited Liability Company). Eventually, the LLC business structure was adopted across all 50 state statutes by 1996.
Now millions of LLCs are formed each year and many people are wanting to know how to start an LLC business. Whether single-member or multi-member, regardless of the nomenclature, the LLC is considered to be one of the most common and accessible business structures.
Small business owners across the U.S. often gravitate towards LLCs because they offer a hybrid solution. Businesses can get the tax advantages that partnerships enjoy while also receiving the limited liability protection that corporations are privy to.
An LLC has some major advantages when comparing to a sole proprietorship. As a business owner, you enjoy more asset protection. Additionally, the requirements to form an LLC are less complicated and more flexible in terms of defining the business structure. Hence, more than 2.4 million businesses across the United States have chosen to form an LLC.
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Take The Hassle Out Of Forming Your LLC. Compare The Best LLC Formation Services.
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| Filing Fees | $49 + state fee | $49 + state fee | $49 + state fee | Free + state fee | $49 + state fee | $225 + state fee |
| Unlimited Name Availability Search | ✔ | ✔ | ✔ | ✔ | ✔ | ✔ |
| Articles Of Organization | ✔ | ✔ | ✔ | ✔ | ✔ | ✔ |
| Expected Delivery Time | 1-2 weeks | 24-hour processing, Free Express Shipping | 1-2 weeks | 1-2 weeks | Within 1 week | 3 days |
| Registered Agent (included for first year) | ✔ | ✔ | ✘ ($159/year) | ✔ | ✘ ($149/year) | ✔ |
| Operating Agreement | ✔ | ✘ | ✘ ($99/year) | ✔ | ✘ (+$35) | ✔ |
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Who Can Start an LLC Business?
LLCs are formed at the state level. For the most part, people in good standing can form an LLC. Most states have similar eligibility criteria for who can be LLC members.
U.S. and non-U.S. residents, 18 years of age or older can incorporate their businesses as an LLC. In addition to individuals, organizations and other LLCs can form an LLC.
The following individuals and entities are able to form an LLC:
- US citizen of legal age
- Non-US citizen
- Non-resident US citizen
- Legal Immigrant
- US foreigner
- Other LLC, S-corps, and C-corps
- Legal entity besides a corporation
- IRA, trust, pension plan, etc.
Both single and multiple-member LLCs can file Form 2553 to be taxed as an S-corporation. If they do so, certain limitations are imposed.
According to the IRS, these limitations are as follows:
- Multi-member LLCs that choose to be taxed as an S-corporation cannot have more than 100 members
- They can only have one class of stock
- Individuals, certain trusts and estates can also be shareholders
- S-Corps cannot have partnerships, corporations or non-US alien shareholders
What Kind of Businesses Can Form LLCs?
As explained above, most individuals and a wide range of businesses can form LLCs. However, that does not mean all types of businesses can do so. The regulations vary from state to state.
Most types of small businesses can operate as an LLC. For example, real estate businesses, marketing agencies, clothing brands, drop-shipping businesses, construction companies, suppliers, independent contractors, online retailers and consulting agencies that don’t require special licensure that, for instance, a doctor or dentist might need can form an LLC.
When it comes to businesses that can’t form an LLC, the limitations are similar across all states. For the most part, licensed professionals such as dentists, lawyers, doctors, architects, therapists, accountants (CPAs) etc. cannot form an LLC.
Businesses offering professional services are required to submit proof of their relevant licensure along with the Articles of Organization to instead form a PLLC or Professional Limited Liability Company.
The requirements and regulations for PLLC formation vary between states. Some are more forgiving while others have more stringent rules. For example, the state of California remains the strictest of all 50 states. In fact, the state does not even identify the PLLC as a business structure pursuant to Section 1770.04(e).
In states that do allow PLLC formation, the filing and taxation process are similar to that of regular LLCs; as long as proper licenses/certifications are submitted and state requirements are met.
Where to Start an LLC Business
Many landscaping businesses choose the LLC as a business structure for the ease of operation.
An entrepreneur might wonder whether their home state is the best location to form an LLC.
For most types of business, forming an LLC in the state where the member (owner) plans on conducting business is the best and most straightforward option. However, some states might offer benefits and some leeway that make them more “business-friendly” e.g. if you’re a chiropractor and live in California, you might not be able to form a PLLC. In this situation, moving states may offer an advantage.
A Foreign LLC is an LLC that is formed in one state but is registered in another to conduct business. The terminology that is used for navigating the legality of foreign LLCs varies from state to state.
How to Start an LLC Business
With that said, let’s take a look at how an entrepreneur can form an LLC:
Before the Process Begins: Choosing the State
Most businesses elect to form an LLC in the state they will be conducting business – Most often, this is the state in which the member (owner) of the LLC resides. Regardless, consider the costs, taxation guidelines and LLC laws of the particular when you are learning about how to start an LLC business. Refer to the section before this one to learn more about where to form an LLC business.
Step One: Give It a Name
Every business needs a name. When starting an LLC, check the Secretary of State’s website/records to make sure that the name you have chosen has not already been used by another domestic LLC or business entity.
Existing businesses (sole proprietorships) operating under a DBA or “Doing Business As” name may want to use it for their LLC. In this case, they must search for their state’s LLC formation website to check availability.
Some entrepreneurs might not be ready to form an LLC but have a name in mind. In this situation, you may be able to reserve a name with your secretary of state for a small fee.
Step Two: Choosing the Registering Agent
Statutes in most states require entrepreneurs to name a registered agent when forming an LLC business. In some states, these agents are also referred to as agents for service of process or statutory agents.
Their primary role is to receive all important documentation, legal notices, tax documents etc. on the LLC’s behalf. They also receive Notice of Litigation or service of process documents (e.g. summons, complaints, lawsuit filings, etc.).
While LLC owners can act as their own registering agents, anyone above the age of 18 can perform the duties; including another member of the LLC.
Step 3: Operating Agreements
LLCs are required to prepare and file an Operating Agreement. This requirement is ubiquitous in almost all states. While they are mostly submitted in writing, some states accept oral OAs.
This document entails the agreement between the member/members on how the LLC will operate. It explains voting rights, ownership interests, governance policies, rights of the members, regulations regarding disbanding or dissolution etc.
Step 4: Filing the LLC
Every state has different requirements on how to start an LLC business. Typically, a document called Articles of Organization is filed with the secretary of state. This document includes information such as:
- The name of the business.
- The address.
- The length of its existence – if not perpetual.
- The name & address of the registering agent.
- The purpose of LLC formation.
- Whether the LLC will be member-managed or manager-managed.
Once the Articles Of Organization document has been signed by the owner/s (and the registering agent in some states), the document is submitted to the Secretary of State. There is a filing fee, which is different in each state.
After the document is filed, the owner is given a certificate or document confirming its existence as an LLC. Some states publish a public notice to announce the formation of the LLC.
Step 5: EIN
Next, the LLC owners are required to acquire an Employer Identification Number or EIN to operate as a business identity, although this step is optional in some states. The IRS provides the EIN number, which the LLC can use to open a bank account as well as file income and employment tax.
LLCs must also apply for a sales tax identification number from the state’s Tax Department if they are selling products or services. The LLC may have to register with the state’s Labor Department depending on the type of business.
Optional Step: Registering an LLC in Other States If Necessary
Lastly, LLCs that conduct business in more than one state must register in said states. This requires the owners to submit an application with the Secretary of State while forming the LLC along with a Certificate of Good Standing.
Some states allow an out-of-state LLC to qualify as a foreign LLC, which means the LLC should have a physical presence and employees in each state. They must also accept orders for merchandise and/or the services they offer. For example, if a foreign LLC providing specialized machinery has offices in Nevada and Delaware, they must accept orders for the machinery in both states.
When forming an LLC in multiple states, you must have a registered agent in each state.
Final Thoughts
While this 6-step guide is a general explanation of how to start an LLC business, it varies from state to state. When choosing to incorporate your business, consider the benefits an LLC business structure provides. Limited liability, access to corporate loans and pass-through taxation make the LLC a great choice for small and medium-sized businesses.
