This article is not intended to be financial advice.
If you’re over your day job and dreaming about finally creating that candle company, jewelry line, or radical new seltzer brand, launching a small business may be your ticket out of the 9-to-5. There are a few different tracks you can take to get started, but whichever one you choose, you’ll need to put in some upfront legwork. Getting a business off the ground requires a little bit of bureaucracy (we know, we know—your favorite way to spend an afternoon). Luckily, forming a Limited Liability Company (LLC) is one of the least headache-inducing ways to get your small business up and running quickly. Read on to learn more about the advantages and disadvantages of an LLC, the steps for creating one, and some of the logistical and financial considerations involved.
What Is an LLC?
An LLC is a Limited Liability Company, which is a type of business entity. Entrepreneurs may consider an LLC small business when first starting out, as it’s a relatively easy, flexible, and low-cost way to start a company.
The definition of an LLC is a business structure that combines the liability protections of a corporation with the tax advantages of a partnership. Owners are called “members.” It’s possible to have a single- or multi-member LLC.
Is an LLC a Company?
In a word, yes. An LLC is a legally recognized business entity in the U.S. (members don’t need to be U.S. citizens or permanent residents to register one, either). The rules for LLC formation, fees, and taxes vary on a state-by-state basis, so it’s particularly important that members put in the time to research state-specific requirements before filing.
Example of an LLC
LLCs aren’t just for mom-and-pop shops—some major brands like eBay, Sony, and Nike either started as LLCs or still operate at least partially as LLCs today. Many sources call LLCs the most popular business structure in the United States.
Advantages of an LLC
There are several benefits, including legal protection for members’ personal assets, ease and cost of creation, and improved professional credibility.
Limited Liability (It’s in the Name!)
One of the core advantages is that it protects members’ personal assets from company-related debts. In fact, this is part of the very definition of an LLC—it’s literally in the name.
Let’s say that seltzer brand you were so confident about tanks—as long as you’ve kept your business and personal expenses separate (this is critical), you won’t lose your house if the company goes bankrupt. An LLC also provides a degree of protection for members if a business partner or employee is accused of wrongdoing.
As with anything in the business world, there are murky areas here. The assurance of no “personal liability” exists in shades of gray, and there are things members can do to void it. For instance, if a member injures someone at work or commits fraud, they may be held personally accountable.
LLCs are less complex and more flexible than most other business structures. Forming a corporation, for example, requires a vast amount of paperwork, including a plethora of annual and quarterly reports. There are also more restrictions on who can be an “owner” of a corporation, whereas there’s no limit on how many members can be involved with an LLC.
Corporations also pay greater taxes on their profits. One of the benefits of an LLC is that they pay “pass-through taxes,” which means members simply report profits on a personal income tax return. The company itself is not taxed, as would be the case for a corporation.
Creating an LLC can also help with optics—prospective clients may find it more impressive or appealing to work with one versus an individual. If you’ve been operating as a sole proprietor for a freelance business, you may find that creating an LLC complete with a creative name, business cards, a professional-looking website, and polished marketing collateral gives you a leg up for scoring top-tier clients.
Disadvantages of an LLC
While there are certainly benefits of an LLC business structure, there are also a few disadvantages. It’s a bigger lift than operating as a sole proprietor, it can require some research on state-specific nuances, and while it’s cheaper than other business entities, there are still upfront and sometimes ongoing costs to consider.
You Must Register as a Business
Registering as a business is how you’ll tell the powers that be that you’re opening an LLC. This means following all the procedural and filing instructions, which requires a little bit of time and effort.
One of the main disadvantages is that there’s no one-size-fits-all process for forming them—it’s state-specific. It may be more advantageous to launch an LLC in one state versus another, so if you split residency, consider your options before moving forward. Some states also require extra steps beyond the ones listed in this article. New York, for example, requires a notice of LLC formation in two newspapers within 120 days of creating your company.
There Are Some Costs Involved
Answering the question, “How much does it cost to form an LLC?” depends on a few factors, including the state in which you live and pay taxes. On top of the upfront costs—like the state filing fee, which typically ranges from $40-$500—there may be periodic fees, usually due annually or every two years, to keep the business in good standing. You’ll also need to pay self-employment taxes, which is an obligation of 15.3% federally (state taxes vary).
LLC members should turn to a certified financial professional when determining tax responsibilities, including the need to pay both federal and state estimated taxes on a quarterly basis.
There’s a Ceiling on Growth Potential
Unlike corporations, LLCs don’t issue shares of stock in order to attract investors. LLCs may also have limited lifespans. Creating a perpetual LLC (i.e. one that does not automatically dissolve after a set time period) may be possible depending on your state’s policies, but the default LLC lasts around 30 years.
Launch Your Own LLC!
Limited Liability Company (LLC): Easily Form Your Own LLC
How to Form an LLC
Getting this type of business up and running is relatively simple, although you may want to seek legal or tax advice first (the bloggers here at Skillshare are not lawyers or tax professionals!). There are also LLC formation services that will take care of the entire process for you—but be wary and look into these carefully, as some of them can be a little scammy.
Plenty of people who create LLCs do so entirely on their own to save money. Here’s a quick step-by-step guide for how to start an LLC.
Step 1: Name Your LLC
Your name has to follow a few rules: It must be completely unique from any other LLC in your state, it can’t be misleading or deceptive, and it must indicate “LLC” or “Limited Liability Company.” Often, it can’t include certain words—these may be phrases like “Corp,” “Inc.,” or “Trustee.” Check your state’s LLC naming guidelines and Secretary of State website for full instructions.
While many members simply file under their own name (e.g. John Doe, LLC), you should consider if this tactic makes sense for your business model. You want your name to be memorable, easily searchable, and reflective of your brand identity. You may also want to think about how the name will look on a website URL, logo, or in print, and whether it projects the right level of professionalism.
Step 2: Register DBA Names
There’s another concept that’s important to note when it comes to naming: “Doing Business As,” or DBA. Think of this as your business’s nickname. If you plan to operate as something other than your legal personal name or official LLC name, you’ll need to register that moniker with the proper authorities.
For instance, if you, Jane Doe, set up one named “Jane Doe, LLC,” but open a shop called “Jane’s Jewels,” you should register the shop name as a “DBA.” “Jane’s Jewels” is not a separate legal entity; rather, filing a DBA lets local and federal agencies know all the names under which your company operates. You should still include “Jane Doe, LLC” on all invoices, contracts, and transactional documents in order to keep the liability protections of your LLC intact.
Step 3: File Articles of Organization
Now for the fun part: paperwork and payment. Luckily, one of the biggest LLC advantages is that this process is relatively simple.
An Articles of Organization form (sometimes called a Certificate of Organization or Certificate of Formation) is the first official document you’ll need to file when bringing your LLC to life. This document includes basic information like your business’s name, address, and members. You’ll also need to determine a “registered agent” to receive any legal communications (this can be yourself, another member, or a for-hire third party). This person must live in the state in which you’re filing, and they’ll need to list a physical address—not a P.O. box—on the form.
In most states, you’ll find and file this document online with the Secretary of State—but again, you should double-check the requirements for wherever you’re located. A quick search for “[Your state] LLC Articles of Organization” should give you the information you need.
This is also the stage at which you’ll pay any necessary filing fees. Usually, you can mail a paper check to your state’s Secretary of State.
Step 4: Create an Operating Agreement
Not every state requires LLCs to have written Operating Agreements, but you’ll want one in place—even if you’re the sole owner. This document, similar to a Partnership Agreement in a partnership or bylaws for a corporation, outlines the core tenets of an LLC’s business and puts members’ financial and managerial obligations in writing. It establishes each members’ percentage of ownership, share of profits and losses, and rights and responsibilities. It also includes instructions for what happens to the LLC should a member leave. If you’re the sole member, this agreement serves as a declaration of your company’s structure.
Each business has different needs, and each Operating Agreement looks a little different. You can find sample templates online and tailor them to your own business model, or you can use a digital service or have a business lawyer create one for you.
Step 5: Get Your EIN
Once you’ve registered your LLC, the IRS can assign your company a Federal Tax Identification Number (FEIN) or Employer Identification Number (EIN). If you have a Social Security Number (SSN), applying for an EIN is simple—just head to the IRS’ website and follow the instructions. The process should take around 15 minutes.
Total LLC Cost
As we’ve already covered, you’ll need to fork over at least a little bit of cash in order to create your LLC. How much depends on your state, as well as if you’ll be filing yourself or hiring a professional. Your expenses go up significantly if you hire a registered agent, or if you engage a lawyer to file your LLC for you.
Here’s a quick breakdown if you choose the DIY route: The average cost of filing for an LLC was $132 in 2020. Fees for purchasing an operating agreement online typically land between $50-200. Obtaining an EIN is free. Annual fees for your LLC may be nothing at all in your state—but they could be as high as $800, so it’s important to be aware of this number before filing.
Does an LLC Need an EIN?
According to the IRS, most new, single-members LLCs classified as disregarded entities need an EIN. LLCs with employees also require this number for tax purposes. You’ll need to include this number on your tax returns, when opening a bank account, or when applying for a business license.
Can an LLC Have Employees?
Your LLC can have an unlimited number of employees, defined as “individuals hired for salary or wages”), as long as you’ve received an EIN. You can find a thorough breakdown of the considerations for hiring employees as an LLC online or by chatting with a small business lawyer.
Does an LLC Need a Business License?
According to LegalZoom, you don’t typically need a business license for LLC formation—but once again, this depends on the state. Your specific type of business may also impact the answer to this question. Some kinds of businesses, including agriculture, alcohol manufacturing, radio and television, and transportation companies, need a federal license.
Let’s Get Down to Business
The SBA definition of a small business varies by industry, but typically refers to companies that have fewer employees and less revenue than a corporation. An LLC small business tends to be less of a hassle than other types of business structures.
If you’re ready to finally bring that genius small business idea to life, there are plenty of benefits. Invest the time and research into how to start an LLC—including general requirements, the cost to form an LLC, and the advantages and disadvantages in your particular state—before starting that paperwork, and you’ll help guard against any unpleasant surprises come tax time.
Start Your Own Small Business!
Laying the Foundation for a Great Business
This article is not intended to be financial advice.