How to Start an LLC and the Different Steps to Take

By Dr. Jarrod Sadulski  |  04/16/2024

Starting a business such as a Limited Liability Company (LLC) can be an exciting venture. It requires a great deal of planning, however, before the business comes to fruition.

Developing the Initial Business Idea and Performing Research

Typically, starting a business begins with a business idea that targets a specific market. Conducting market research can help a prospective business owner obtain valuable insight into competitors, opportunities, and obstacles.

Understanding the market is necessary to be successful in business. Presenting the wrong product to a specific market or presenting the right product to the wrong market can cause financial losses, aggravation, and even bankruptcy. As a result, taking the time to fully understand the needs of the market and how a prospective business owner can meet those needs is essential.

Creating a Business Plan

The next step is to create a business plan, which should address every anticipated opportunity and obstacle within the market. It should include a plan to maximize opportunities and overcome obstacles.

The components of a successful business plan include:

• Funding sources
• Licensing
• Market research
• Product details
• The management and employee organizational structure
• A description of the company’s goals
• Scalability plan
• Projections of financial growth
• Sales and marketing plan

A good business plan should address scalability, which involves a company’s ability to grow to meet increased demand. Often, companies will have a rapid expansion. If the company is not scalable, opportunities can be missed.

Choosing a Business Structure

Whether you’re creating a business as a general partnership or as a sole owner, determining the type of business structure that will meet your needs is essential. There are major differences in the ways businesses can be created.

Sole Proprietorship

For a business structure where the owner is the only employee, a sole proprietorship may be appropriate. A sole proprietorship typically requires minimal paperwork to start the business and is relatively inexpensive to start.

In a sole proprietorship, the sole owner retains all of the profit, which is another advantage. A sole proprietorship offers the opportunity for the owner to make decisions without needing to consult with a board of directors or anyone else. Additionally, someone who is self-employed as a sole proprietor may benefit from having self-employment taxes.

However, the disadvantage of a sole proprietorship is liability. The owner's personal assets may be at risk if debts arise and the business can't pay its obligations.

There are also personal liability implications with a sole proprietorship. Personal liability may result from lawsuits related to the business.

S Corporation

Many business structures are set up as a separate entity from the owner. For example, a business could be set up as an S Corporation (also known as an S Corp). An S Corporation passes its business income, losses, deductions, and credits to shareholders for federal tax purposes.

In other words, the Internal Revenue Service permits an S Corp to serve as a pass-through taxation entity, enabling owners to use business losses on their personal tax returns. It is similar to a self-proprietorship in that business expenses can be deducted on the owner's taxes. It can be beneficial for the owner's personal tax return if business losses are realized through the S Corp.

C Corporation

Another option is to register a business as a C Corporation (C Corp). A C Corporation separates the owner's assets from the business assets, and the owner or shareholders are taxed separately from the business.

A C Corp prohibits business losses from being written off on a personal tax return. Advantages of a C Corp include personal liability protection and keeping corporate income tax off the owner's personal taxes.

Protecting personal assets is a matter that should be important to every business owner. While personal assets may be used as operating capital to start a business, there should be protections in place.

Keeping business debts separate from personal assets can be helpful, especially when business debts are managed through a business bank account. Ideally, a business bank account should be separate from the owner's personal assets.

Limited Liability Company

A limited liability company is another popular business entity. It provides some liability protection, has a flexible management structure, and is a pass-through taxation entity.

Limited liability companies may include a single-member LLC or multiple LLC member-owners. Establishing a limited liability company typically involves an LLC operating agreement, legal documents, and other paperwork to get the business started.

When a limited liability company is a multi-member LLC, the role of everyone involved should be clearly established in the LLC operating agreement. An LLC does not have shares like a corporation does, but in a S Corp, different owners have shares assigned to them that determine the amount of the company that each individual owns. When an LLC is set up as a limited liability partnership, the question of how much each person owns within the LLC is determined by a partnership agreement.

Under American corporate law, a foreign LLC may be established. A foreign LLC conducts business in a different state than where it was established. The term may be misleading because a foreign LLC does not refer to a company based in a foreign country.

The process for how to form an LLC may vary by state. Some states, but not all, require that an operating agreement be prepared to establish the business entity.

Since an LLC involves a pass-through taxation, LLC owners pay taxes based on their share of the profits through the operating agreement. Double taxation does not occur because the company itself does not pay taxes as an LLC.

Creating the LLC

To form an LLC is not a complicated process. The steps include:

• Choosing a business name
• Paying a filing fee
• Completing documents to ensure limited liability protection
• Hiring an attorney
• Obtaining a business license
• Hiring a registered agent

Choosing a Business Name

Before any LLC paperwork is completed, a business name must be selected. The name becomes part of the brand, and it should be used to write legal documents and to obtain business licenses.

The business name should be creative and appeal to customers. Many times, the business name listed on a business license reflects the company’s products or the services.

Market research can assist with developing a strong business name. Ideally, an effective name should stand out among competitors, be unique, and should not be already in use.

Paying a Filing Fee and Completing Limited Liability Protection Documents

When LLC formation begins, business owners should plan to pay a filing fee and complete paperwork correctly to ensure limited liability protection. By providing limited liability protection, personal exposure to financial risk is based solely on the amount an investor puts into a company.

Liability protection can help when a business owner wants to raise investment money. People may be more willing to invest their funds if they only risk losing the money they invest in the company and not their other assets.

An LLC owner may provide various professional services, but it should be noted that an LLC offers limited liability protection. Unlimited personal liability protection is often at the forefront of the minds of business owners.

Small business owners often form an LLC once they develop their business plan. Since the LLC exists separately from the owners, the owners are typically protected from being held personally responsible for the business's debts and liabilities.

Hiring an Attorney

Since LLC formation can prevent double taxation and has other benefits, working with an attorney to ensure the business is set up correctly can be helpful. Ideally, a business owner should consult an experienced lawyer and obtain recommendations for legal assistance.

Obtaining a Business License

To form an LLC, it is necessary to obtain a business license and pay the business license filing fee. Filing fees typically vary by state.

Establishing an operating agreement among partners is important and there are filing fees associated with establishing the LLC as a legal entity. To form an LLC, business owners will need to obtain an employer identification number (EIN).

Hiring a Registered Agent

Owners also may wish to use a registered agent service. A registered agent is required to be designated by law and can be an employee, attorney, or anyone who can be trusted to manage important correspondence associated with the business.

By using a registered agent service, owners can be assured that government, tax, and legal correspondence on behalf of the LLC is properly handled by the registered agent. In the case of a single-member LLC, owners can serve their own registered agent.

Filing with the state's office that manages corporations will be necessary, and a registered agent can assist with this process.

The registered agent may be in charge of obtaining the EIN, checking to see when franchise taxes and filing fees are paid, and registering the business entity with the IRS. The registered agent may be assigned in the operating agreement.

The operating agreement is part of the process of LLC formation and the company's own registered agent may establish the operating agreement. When preparing LLC documents, business owners often seek legal and tax advice. The registered agent may be tasked with preparing formation documents, establishing a business account at a bank, and taking care of the other paperwork necessary to form an LLC.

The registered agent will need to be able to receive correspondence at the physical address listed for the business entity and must be aware of specific state laws. Receiving correspondence at the physical address of the business is essential because if the business is ever subpoenaed or named in a lawsuit, the registered agent will be the contact person designated to receive the related correspondence.

Good registered agents will be available to immediately process documents when they arrive. Failing to have a reliable registered agent can increase liability and can result in financial consequences.

Reliable registered agents may work with a business attorney when filing LLC paperwork.

Articles of Organization

When it is time to start an LLC, LLC formation begins with articles of organization. These articles of organization are part of a formal legal document that establishes the LLC at the state level.

Articles of organization establish the business as a legal entity that can conduct business. They also establish the rights, duties, and responsibilities in a multi-member limited liability company. A filing fee is also required when a business owner files articles of organization.

There are services available to create a limited partnership through an LLC formation and to take care of items such as the creation of articles of organization. For example, LegalZoom® offers services that help someone start a business structure such as an LLC.

Financial Considerations

During LLC formation, obtaining an employer identification number is necessary before the business owner files for a business license. An EIN is used for sales tax purposes and is a unique number given to a business for IRS identification and tax purposes. Also, the employer identification number will be needed when opening a business bank account.

When calculating the LLC cost to start the business, business owners will want to consider state filing fees. Determining the impact of sales tax is also necessary.

Once the business is established, obtaining a business credit card is common. Business credit cards can help manager-managed LLC members and others involved in the business keep business expenses separate from personal expenses.

Business Ownership Can Be Both Satisfying and Challenging

Business ownership can be very satisfying, as I can personally attest. It can also be challenging at times when business owners must deal with paperwork such as business licenses, difficult customers, government regulations, market changes, and other obstacles. But with proper planning and perseverance, these challenges can be overcome.

Business Degrees at American Public University

American Public University (APU) offers several business-oriented degrees for students wanting to understand how to start an LLC or who are interested in what can be done with a business management degree. These degrees include:

• An online bachelor's degree in business
• An online bachelor's degree in business administration
• An online bachelor's degree in entrepreneurship
• An online master's degree in business administration

Our courses start monthly and are taught by experienced faculty members. In addition, our online learning environment enables students to learn at their own pace. For more information, visit our business and management program page.

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