Some people contemplate starting a business for decades. Others are struck with a great business idea during their two-hour commute to work. Either way, forming a limited liability corporation (LLC) can help you clarify the vision of entrepreneurship. Wherever you are on your new business journey, turning a brilliant idea into a thriving organization is relatively simple by using a business structure known as an LLC.
LLCs offer flexibility and protection to their members—and creating one is relatively straightforward. This guide covers important information about how to start an LLC, including important setup steps, a list of pros and cons of creating an LLC and the different types of LLCs to consider.
Ready to get your business off the ground? Build your business website with Wix today.
What is an LLC?
Shylene D’Addario, VP and associate general counsel at LegalZoom, sheds some light on defining this popular business structure.
“A limited liability company—or LLC—is a type of business entity that offers some of the benefits of a corporation with less formality. One key benefit of an LLC is that it can protect a small business owner’s personal assets—like homes, cars and personal bank accounts—from lawsuits against the business.”
In other words, when you start a business as an LLC, the business becomes its own legal entity, separate from you as an individual. This means that the business can acquire assets, sign leases and enter into contracts. The LLC is responsible for its own debts, so your personal assets (and the assets of all members) are kept separate and protected.
“Additionally,” says Shylene, “LLCs offer the flexibility of filing taxes as a sole proprietorship, partnership or corporation. Also, you won’t need to worry about some of the same formalities as corporations, such as keeping minutes at shareholder meetings.”
How to start an LLC in 7 steps
Once you’re ready to get the ball rolling, you can create an LLC in seven simple steps:
01. Decide on a business name
Select a name for your LLC that reflects your business's essence and is easy to distinguish from existing businesses. It should also be memorable and unique. Wix’s Business Name Generator can help with the brainstorming process here. In most states, you’re required to include some variation of the term "Limited Liability Company" in your business name (e.g., "Blue Widgets, LLC" or "Blue Widgets, a Limited Liability Company").
Once you’ve landed on some good business name ideas, check the business registration office in your state to make sure the name is available. It’s also worth mentioning that you should check domain name availability to make sure that your business name is available as a domain name. Keep in mind that you don’t need to go with a .net or .com domain—there are almost 1,600 domain extensions available, some of which are location-specific (e.g., .uk or .nz), or industry- or category-specific (e.g., .coffee or .tv). You can also go for .llc domain to really make your business stand out in the LLC world.
Learn more: Name a business
02. Designate a registered agent for your LLC
A registered agent, also called an “agent for service of process,” is a person or entity responsible for receiving legal and tax documents on behalf of your LLC. If you’re the sole proprietor, then this person is you. The registered agent needs to be in the state where the LLC is registered. This requires having a physical address in that state versus a P.O. Box.
Some business owners choose to be their own registered agents, while others work with registered agent service providers who take on the task of receiving, tracking and managing legal and other business-related documents.
Dig deeper: Learn more about how to register a business in the U.S., including the benefits, costs and steps required for launch.
03. File articles of organization
Articles of organization are required for creating an LLC and serve a similar purpose as the articles of incorporation in a C Corporation. The articles of organization are basically a list of important information about your LLC, including:
Business name
Mailing address
Purpose of the business
Members or business manager
Registered agent(s)
Relevant signatures (yours and those of your LLC’s organizers).
This foundational document for your LLC includes basic but critical information about your business. Think of it as your LLC’s birth certificate. It should be submitted to your state's business registration office, along with the required filing fees. Filing fees are generally nominal and range from about $50 to $200 depending on the state.
04. Create an operating agreement
While not always mandatory, an operating agreement is important because it helps clarify how you plan to run your business, including providing details about financing. According to the U.S. Small Business Administration, LLC operating agreements are typically between five and 20 pages long and should contain the following information:
Members’ ownership percentages
Voting rights and responsibilities
An outline of your management structure
Roles and responsibilities of all members
How profits and losses are distributed
Member voting rights
Procedures for adding or removing members
Procedures for dissolutions and buyouts
The most obvious benefit of creating an operating agreement is that it helps you avoid potential conflicts with members of the LLC. It also ensures you get started on the right foot by clarifying details like financing and the distribution of profits.
05. Obtain an Employer Identification Number (EIN)
If the articles of incorporation are your LLC’s birth certificate, then the Employer Identification Number (EIN), also known as a Federal Tax Identification Number, is akin to the LLC’s Social Security number. An EIN is a nine-digit number that is required for tax purposes, to open a business bank account and if you have more than one member in your LLC.
If you’re a single-member LLC, an EIN isn’t required. You can use your Social Security number, but this may make it difficult to open a business bank account since many banks require an EIN number. Having an EIN number also adds a layer of protection against fraud by keeping your personal Social Security number separate from your business. It’s free to get an EIN number from the IRS. You can apply online via the IRS’s website.
06. Understand your state’s tax obligations
Depending on your business activities and where your LLC is located, you may need to register with your state's tax department. Understanding your state tax obligations is an important part of running your business. Tax obligations vary from state to state and your specific tax responsibilities depend on the type of business you’re starting.
For example, if you sell goods, you’ll need to collect sales tax and remit this to the state. That requires registering for a sales tax permit or license with your state's Department of Revenue or Taxation. On the other hand, if you plan to hire employees, you’ll need to pay employment taxes which include unemployment insurance tax and workers’ compensation insurance. In this case, you’ll need to register with your state’s labor or employment department.
Other types of state taxes to consider include franchise or privilege taxes, state income tax, estimated tax payments and property tax (if your LLC owns real estate), plus any specialized taxes if you sell products like tobacco or alcohol. It's always a good idea to find a reliable local tax professional or accountant to help you navigate your state's tax laws.
07. Comply with licensing and permit requirements
Certain business types require specific licenses or permits to operate legally. As with tax obligations, it’s important to fully understand which permits are required based on your business type and the state or states where you operate. Here’s a list of various permits, though this isn’t exhaustive:
Seller's permit or sales tax license: Allows you to collect sales tax for taxable goods or services.
General business license: Not required by most states with a few exceptions (Alabama, Alaska and Delaware, among others).
Industry-specific licenses: Liquor licenses, occupancy permits and commercial fishing licenses are examples of industry-specific licenses you may need.
We can’t stress this enough: you must thoroughly research your state’s requirements around the specific business type you plan to create.
Kickstart your LLC
Ready to launch your LLC, but need a little nudge in the right direction? Or perhaps you need an experienced business attorney to offer hands-on guidance? Wix has partnered with LegalZoom to help business owners simplify the process of starting an LLC. With free and premium packages available, LegalZoom has options for every entrepreneur.
Pros of starting an LLC
There are lots of great reasons to launch an LLC, from asset protection to tax benefits. Here are some pros of starting an LLC to consider:
Asset protection: Personal asset protection is a top reason new business owners opt for an LLC structure. If your business incurs debt, faces a lawsuit or is hit by a financial emergency, your personal assets—and the assets of any of the LLC’s members—are typically shielded from any claims.
Tax flexibility: LLCs benefit from "pass-through" taxation, which means the business itself isn't taxed. Instead, you report the business profits and losses on your individual tax return, potentially saving money on taxes versus corporations that face double taxation (e.g., when the same source of income is taxed at a corporate and personal level). Note, however, that LLCs can choose how they’re taxed: “LLCs can file as a sole proprietorship, partnership or corporation, depending on what works best for their particular situation,” says D’Addario.
Simplified management: Corporations require a board of directors, annual meetings and other formalities whereas LLCs have a more relaxed management structure. Members can decide how they want to run the business, like whether it's member-managed or manager-managed.
Credibility: Creating an official LLC adds a level of professionalism to your business. It should be part of your business startup to-do list along with figuring out how to make a website and creating an operating budget. Many service providers, suppliers, vendors and customers prefer working with formal business entities.
Membership flexibility: LLCs offer flexibility since members can be individuals, other LLCs, trusts, corporations and other types of entities. There's also no limit to the number of members an LLC can have.
Compliance flexibility: LLCs aren’t subject to the level of rigorous state-imposed compliance requirements as other business entities, including sole proprietorships, corporations, c corporations and partnerships.
Cons of starting an LLC
While LLCs offer many benefits, you should understand the potential challenges and drawbacks so you can avoid unpleasant surprises. Here are some cons of starting an LLC:
Self-employment tax: Members of an LLC are considered self-employed and must pay their own self-employment tax contributions towards Medicare and Social Security. This can be a significant amount of money, especially for profitable LLCs.
Varying state rules: The fact that each state has its own LLC-related rules and regulations can make compliance challenging, particularly if your business operates in multiple states. For example, the process of how to get a business license varies from one state to another.
Limited growth potential: “Unlike corporations,” Shylene notes, “LLCs are unable to offer stock options, which may make them less attractive to investors.” This has obvious implications when it comes to growth potential and investment opportunities.
Cost: Creating an LLC is typically cheaper than setting up a corporation, but it costs more than creating a DBA (doing business as) if you’re the sole proprietor. “In addition to taxes, just about every LLC is required to file an annual report, which includes basic legal information and activities from the previous year. You may owe filing and renewal fees along with your report,” says Shylene. You may also need to hire an accountant and lawyer to ensure you’re complying with state regulations and tax requirements.
Personal assets might not be protected: “Piercing the corporate veil” is a legal term that happens when a court puts aside limited liability and holds LLC members personally liable for the LLC’s actions or debts. The good news is that courts are generally reluctant to pierce the corporate veil and only do so when serious misconduct is suspected (e.g., fraud, concealment of members, etc.)
Types of LLCs
There are several different types of LLCs to consider including:
Single-member LLC: The simplest form of an LLC, it’s owned by just one individual. Single-member LLCs have the same personal liability protection as other types of LLCs, but they’re treated as a disregarded entity for tax purposes (the IRS views the LLC and its owner as one entity).
Multi-member LLC: As the name suggests, a multi-member LLC has more than one member. It's like a partnership with the liability protection of an LLC. The IRS treats multi-member LLCs as partnerships unless they choose to be taxed as a corporation.
Series LLC: Only available in a few states, series LLCs allow for the creation of individual series or "cells" within the LLC. Each series can have its own assets, members and business purpose. Each series is shielded from the liabilities of the other series and each unit is taxed separately.
Professional LLC (PLLC): Designed for licensed professionals such as doctors, lawyers and accountants, a PLLC is tailored for the requirements and needs of professionals. Some states require professionals to form a PLLC rather than a standard LLC.
Low-profit LLC (L3C): L3Cs are designed for businesses that have a primary goal of performing a socially beneficial purpose, rather than maximizing profit. L3Cs bridge the gap between nonprofit and for-profit organizations by providing a structure that facilitates investments in socially beneficial, for-profit ventures.
Anonymous LLC: Recognized only in Delaware, Nevada, New Mexico and Wyoming, Anonymous LLCs keep the owner’s personal information secret, meaning your personal information is not publicly available. You may choose to form an anonymous LLC to have increased privacy and/or protection for various reasons (e.g., lawsuits, creditors). While the owner of the LLC is anonymous, the company’s financial and business information are public.
Restricted LLC: Only available in Nevada, restricted LLCs limit ownership and management of the organization to a specific group like employees or family members, though the restrictions can change over time. The primary purpose of a restricted LLC is to transfer ownership of assets like properties and businesses while limiting profit from the LLC. Restricted LLCs provide tax benefits, especially when it comes to estate planning and gift tax.
Foreign LLC's: A foreign limited liability company (LLC) refers to an LLC that is registered and operates in a jurisdiction or country other than the one in which it was originally formed. In the context of the United States, for example, an LLC formed in one state is considered a domestic LLC in that state. If the LLC wants to operate in another state, it may need to register as a foreign LLC in that state. Similarly, if an LLC is formed in one country and wants to do business in another country, it may need to register as a foreign LLC in the new country. The specific requirements and processes for registering a foreign LLC vary by jurisdiction. Registering as a foreign LLC typically involves submitting the necessary paperwork, paying fees, and complying with the regulations of the new jurisdiction. This process helps ensure that the foreign LLC can legally operate and conduct business activities within the boundaries of the new jurisdiction.
How much does an LLC cost?
The cost of forming a Limited Liability Company (LLC) can vary based on several factors, including the state in which you're registering the LLC and the method you choose for the formation process. Here are some common expenses associated with establishing an LLC:
State filing fees: Every state has a fee for filing the necessary documents to create an LLC. These fees can range from less than $100 to a few hundred dollars, depending on the state.
Registered agent fees: Many states require LLCs to designate a registered agent, a person or service responsible for receiving legal documents on behalf of the LLC. Some entrepreneurs act as their own registered agent, while others use professional registered agent services, which may have additional costs.
Operating agreement: While not required in every state, it's highly recommended to create an operating agreement for your LLC. This document outlines the ownership structure, management responsibilities and operating procedures. You can create one yourself or hire a legal professional, which may involve additional costs.
Business licenses: Depending on your location and industry, you may need to obtain business licenses or permits. The costs for these can vary widely.
Professional services: Some entrepreneurs choose to use online legal services or hire an attorney to help with the LLC formation process. These services come with associated fees that can range from a one-time payment to ongoing subscription costs.
Publication costs (if applicable): In a few states, such as New York, LLCs are required to publish information about their formation in newspapers, which can incur additional costs.
It's important to research the specific requirements and fees in the state where you plan to establish your LLC. Some states have more affordable filing fees and fewer requirements, while others may have higher fees and additional obligations. Additionally, entrepreneurs should consider consulting with legal or financial professionals to ensure that they navigate the process correctly and meet all necessary legal obligations.
LegalZoom is a partner of Wix.
For more information on how to start an LLC by state
How to start an LLC FAQ
Do I need an LLC for my business?
The decision to establish a Limited Liability Company (LLC) for your business depends on various factors, including the nature of your business, your personal liability concerns and tax considerations. An LLC provides personal liability protection for its owners (members) and offers flexibility in terms of management and taxation. It can be a suitable choice for small to medium-sized businesses, offering a balance between the simplicity of a sole proprietorship or partnership and the formal structure of a corporation.