Forming an LLC is an important step in starting a business. In this guide, we’ll cover the LLC fundamentals, to help you easily complete this process and shift your focus to growing your business.
What Is an LLC and How to Create One: An Introduction
n every entrepreneur’s journey, there comes a time when you start considering what it could mean to “level up” as a business. Maybe you started out as a freelancer, with one or two clients as a side hustle, and after a few months you’re getting more projects, raising your rates, and taking the whole thing more seriously. You graduate from a mindset of scarcity to one of abundance and recognize you’re capable of generating enough income to sustain yourself full-time.
Whether you’ve reached that point or are just wondering about what lies ahead, you start to hear things about forming an LLC – usually as tax season rolls around.
Congratulations! If you’ve made it this far – as a freelancer, and someone reading this article – it means you’ve reached the point of establishing your business, formally. There are many benefits to doing so, and this guide will take you through the basics of what is an LLC, who should form one, and how to start.
What is an LLC?
Let’s start at the beginning!
An LLC is a legal designation given to a company that stands for Limited Liability Company. It’s a flexible type of business entity that separates you as a person from your business, legally and financially. In practical terms, it’s a business structure that shields your personal assets (like your house, car, savings) from any debt your business may incur, for whatever reason.
There are a few types of business structures, including:
- LLC
- Corporation
- Limited liability partnership
- Sole proprietorship
- General partnership
Most small businesses choose to register an LLC entity, as LLCs are simpler to manage when compared to a corporation. As well, LLCs provide more freedom and flexibility in terms of how the business should be run. For instance, rather than requiring annual shareholder meetings or a board of directors, you can decide how often to meet, and how else to operate the administrative aspects of the business. There may be one or more members of an LLC.
For just a bit of context, the concept of an LLC is relatively new in the history of American business. In the past, companies were either general partnerships or corporations, and the main difference dealt with how ownership and responsibility was divided. Over the last thirty years, the rise of startups, small businesses and entrepreneurs created a need for new ways to organize businesses with greater flexibility in terms of management structure, operations, and financing.
What is a DBA?
A DBA is not the same thing as an LLC. Learn about the difference between a DBA and an LLC.
Many freelancers wonder about the difference between an LLC and a DBA, which stands for “doing business as”. Having a DBA allows you to operate your business under a name other than your personal name. It’s like having an official nickname. It’s a way to separate yourself from your business in terms of marketing and brand perception. This is helpful when opening business bank accounts, or changing the name of your business from what it was called when you first opened. But DBAs are not business structures, and don’t provide any asset or liability protection, as is the case with LLCs.
Why Start an LLC?
There are many reasons to form an LLC as a small business owner:
- Protection against liabilities – As noted above, an LLC creates separation between yourself and your business in terms of your finances and legal liability. If your business gets sued, or falls into debt, you as a person are not financially or legally responsible and your assets are protected. This is especially relevant if you have employees, a retail location where people are coming and going, or you provide a service that inherently carries a certain amount of risk, like personal training.
- Formalizing the business – Part of forming an LLC means taking the time to plan the future for your business in a way that’s more structured and formal than you might have otherwise done on your own. For instance, drafting a business plan may feel intimidating, or even unnecessary if you’re not in this for the long term. It’s also easy to keep information like this in your head, or scattered across various pieces of paper that never see the light of day for anyone besides yourself. When you write “Articles of Organization” (more on this below), it forces you to think about how the business will be run, and what to do if you have partners in case things don’t go as planned. At first, this might sound intense but it’s actually about taking responsibility as a business owner and setting things up for success from the start.
- Flexible ownership – As noted above, the flexibility of an LLC makes it an attractive option over a corporation. You can write your own operating agreement, which includes the way you divide ownership and responsibilities. You can designate yourself as the owner and manager, or you can choose to have someone else run certain aspects of the business for you, along with their percent ownership. It’s up to you to set those rules in place, plan how managerial decisions are made, and how they’re compensated.
- Access to business loans and credit – Your business may need funding in order to get running, or expand to new markets. Just like an individual, your business will start to build a credit history once you establish it as an LLC. This makes it easier to apply for and receive loans should you need them later. You’re also more likely to gain access to loans simply due to the credibility that comes along with the letters “LLC” after your name. This sends a signal to banks that you’re registered with the state, and are therefore more likely to pay back a loan. In general, approval for loans depends on your revenue, how long you’ve been in business, your collateral and your credit score.
- Tax benefits – When it comes to taxes, the first benefit to having an LLC is you don’t need to pay corporate taxes. An LLC is known as a pass-through entity, meaning the profits from a business are handed over directly (and untaxed) to its owners, who then report these profits on their personal tax return (via a Schedule C for Single Owners LLC or via K1s for Multi-Member). In the case of a corporation, corporate tax would need to be paid on the profits of a business before those profits are passed on to the owners, when those profits are then taxed a second time on their personal income when filing their individual tax return. This is called “double taxation”, and is avoided when you register an LLC. With an LLC, all profit goes directly to business owners, who pay self-employment and income tax on their portion of the business’ profits.
- Boosts brand perception – Adding the letters “LLC” to the end of your business name is a way to quickly establish trust and credibility. It positions you as a serious professional to potential clients, which is especially useful if you work in a competitive market and need to build a strong brand. For instance, if you’re a graphic designer on a site like Fiverr or Upwork, having an LLC designation signals you’re more committed to your craft than others who are merely doing it for extra cash or as a side hustle. In this way, adding those three little letters to the end of your name on a website, LinkedIn profile, business cards and other marketing material can boost your bottom line.
How to Start an LLC
It’s easier than you think. And, it doesn’t take more than a few minutes when registering online.
Below is a detailed overview of the LLC registration process.
There are many reasons to form an LLC as a small business owner:
- Protection against liabilities – As noted above, an LLC creates separation between yourself and your business in terms of your finances and legal liability. If your business gets sued, or falls into debt, you as a person are not financially or legally responsible and your assets are protected. This is especially relevant if you have employees, a retail location where people are coming and going, or you provide a service that inherently carries a certain amount of risk, like personal training.
- Formalizing the business – Part of forming an LLC means taking the time to plan the future for your business in a way that’s more structured and formal than you might have otherwise done on your own. For instance, drafting a business plan may feel intimidating, or even unnecessary if you’re not in this for the long term. It’s also easy to keep information like this in your head, or scattered across various pieces of paper that never see the light of day for anyone besides yourself. When you write “Articles of Organization” (more on this below), it forces you to think about how the business will be run, and what to do if you have partners in case things don’t go as planned. At first, this might sound intense but it’s actually about taking responsibility as a business owner and setting things up for success from the start.
- Flexible ownership – As noted above, the flexibility of an LLC makes it an attractive option over a corporation. You can write your own operating agreement, which includes the way you divide ownership and responsibilities. You can designate yourself as the owner and manager, or you can choose to have someone else run certain aspects of the business for you, along with their percent ownership. It’s up to you to set those rules in place, plan how managerial decisions are made, and how they’re compensated.
- Access to business loans and credit – Your business may need funding in order to get running, or expand to new markets. Just like an individual, your business will start to build a credit history once you establish it as an LLC. This makes it easier to apply for and receive loans should you need them later. You’re also more likely to gain access to loans simply due to the credibility that comes along with the letters “LLC” after your name. This sends a signal to banks that you’re registered with the state, and are therefore more likely to pay back a loan. In general, approval for loans depends on your revenue, how long you’ve been in business, your collateral and your credit score.
- Tax benefits – When it comes to taxes, the first benefit to having an LLC is you don’t need to pay corporate taxes. An LLC is known as a pass-through entity, meaning the profits from a business are handed over directly (and untaxed) to its owners, who then report these profits on their personal tax return (via a Schedule C for Single Owners LLC or via K1s for Multi-Member). In the case of a corporation, corporate tax would need to be paid on the profits of a business before those profits are passed on to the owners, when those profits are then taxed a second time on their personal income when filing their individual tax return. This is called “double taxation”, and is avoided when you register an LLC. With an LLC, all profit goes directly to business owners, who pay self-employment and income tax on their portion of the business’ profits.
- Boosts brand perception – Adding the letters “LLC” to the end of your business name is a way to quickly establish trust and credibility. It positions you as a serious professional to potential clients, which is especially useful if you work in a competitive market and need to build a strong brand. For instance, if you’re a graphic designer on a site like Fiverr or Upwork, having an LLC designation signals you’re more committed to your craft than others who are merely doing it for extra cash or as a side hustle. In this way, adding those three little letters to the end of your name on a website, LinkedIn profile, business cards and other marketing material can boost your bottom line.
How to Start an LLC
It’s easier than you think. And, it doesn’t take more than a few minutes when registering online.
Below is a detailed overview of the LLC registration process.
You have two options: do it yourself, or hire a professional to take care of the entire process, start to finish. If you’re reading this on Lili, you’re probably the type who enjoys figuring things out on your own. Plus, it’s empowering to take the future of your business into your own hands! It’s much less complicated than you might think, doesn’t take more than a few weeks, and the total cost is between $50-$500, depending on your state.
That’s the one major caveat: your LLC must be registered in the state in which you are conducting and/or transacting business. And each state has its own rules and requirements surrounding LLC formation. So, you must check your state’s guidelines for specific, accurate information. A quick Google search for your state’s Secretary of State website will point you in the right direction.
But before you go down a rabbit hole, here’s a breakdown of the key steps to take, no matter where you live:
1. Name your business. Believe it or not, this is actually the hardest step of all! It requires a bit of creativity, and some online research. It’s also the most common reason why applications get rejected, so it’s worth spending the time to get it right.
- Choose a unique name. This is the most important part, because two businesses can’t have the same name in most states. For example, “Great Minds Marketing, Inc.” and “Great Minds Marketing LLC” can’t exist in the same state – even if they’re in separate cities. So once you have a list of names, it’s vital to check they’re not already in use. Start with Google, but also run a search on your state’s Secretary of State website, and the US Patent and Trademark Office, to see if the business name you’ve decided on has been previously trademarked.
- Avoid restricted words. In some states, certain words like “bank”, “savings” and “insurance” are not allowed in LLC names. Check your state guidelines for more detailed information if you’re not sure about what’s allowed.
- Include LLC or L.L.C. at the end. Each state has different requirements for these abbreviations. Again – check your local requirements.
- Reserve it with your Secretary of State. This is an optional step if you’re not registering your LLC right away, but want to make sure the name stays available. It requires a fee, but can be worth it if you’re not completing the whole process immediately.
- Buy the domain. This is also optional but important, since a critical piece of your brand is your website URL!
2. Appoint a Registered Agent. Most states require you to name an official representative of your company for the purpose of receiving legal documents. Some states let you appoint yourself, but there are also services offering this for a fee, which may be the best route depending on your situation, and how much is at stake. Note: these services can be somewhat costly, but may be a convenient option.
3. Write an LLC Operating Agreement. This is more of an internal exercise than anything else. You may not be required by your state to file it anywhere, but it’s good to have a plan for how the business will be operated in terms of how you’ll run meetings, how profits and losses are shared, voting rights, and what to do if the business fails and needs to be dissolved. Especially if you plan on having more than one member of your LLC, this is a helpful tool.
4. File a Certificate of Formation / Articles of Organization. Here’s where things start to get official. You must submit a legal document (either a Certificate of Formation or an Articles of Organization, depending on your state) and pay a filing fee to your Secretary of State. This document includes basic information like:
- Your company name and mailing address
- Description of your company
- Your registered agent name and address
- How long you plan to be in business
This is also the moment of truth for the name you chose, which is why it’s important to take that step seriously and do your background research, as mentioned in Step 1.
5. Obtain a Certificate. This is like getting a birth certificate for your business. Depending on how busy your secretary of state office is, it can take a few weeks to receive this type of official documentation. But once you have it, you’re officially recognized as a business entity!
6. Apply for an EIN. This is a 9-digit number assigned by the IRS, which registers your business with the federal government. It’s also known as a Federal Tax ID Number, and serves as a Social Security number for your business. Technically, your LLC doesn’t require an EIN to open a business bank account, but it increases your options if you have one – and it doesn’t cost anything. And it’s required if your LLC has more than one member, or you plan to hire employees.
There are three ways to apply for your EIN:
Online
The IRS website has an EIN application form, and you receive your number immediately upon completion, making this the ideal method. Note the hours of operation are Monday – Friday, 7AM – 10PM eastern time.
You can also send a completed Form SS-4 to the IRS. This method usually takes 4 weeks for your EIN to arrive, and you can learn more about the form here.
Fax
You may also fax your completed Form SS-4 according to the instructions on “Where to File Your Taxes” (for Form SS-4). This method is available 24/7, and you receive your EIN within 4 business days.
7. Update marketing materials. Last but not least, time to start reaping the benefits of your new status! Update your name on any touchpoint where you interact with potential customers and clients: directory listings, your LinkedIn profile, your website, business cards, and your email signature. You’re the real deal now; own it!
Starting LLC is not complicated at all. Now you need Capital, Products and Services and CUSTOMERS!