LLC setup 101: How to start your own limited liability company

Let’s start with the 8-step process.

8 steps to forming an LLC

Though there are no official “steps” to forming an LLC and some steps could be less time-consuming or skippable in some contexts, the following process is generally how an average LLC company registration goes through.
1. Name: You need a unique name for your company or brand that complies with the state’s naming conventions.
2. Articles of Organization: The basic details such as the name, address, and purpose of your business must be put together and filed with the secretary of state’s office in the state where the LLC will be formed.
3. Registered Agent: Most LLCs need an appointed registered agent. The agent is responsible for receiving any tax and legal documents for your LLC. You can appoint a company as your registered agent too.
4. Operating Agreement: An operating agreement is a legal document that outlines the ownership and management information of the LLC you’re forming. It’s basically the structure of the company put into words. Not all states require an operating agreement but we recommend you create one anyway, as it will help you avoid disputes and misunderstandings later on (you’d be surprised to learn how many misunderstandings happen because certain details weren’t finalized during incubation owing to trust).
5. Licenses and Permits: Businesses require licenses and permits to operate. This completely depends on the nature of the business and the industry it’s in. For example, some businesses need to get permits to open their offices whereas others might need to get federal, state, and local level licenses to run all aspects of the operation. Look into the location and industry.
6. EIN: An EIN or employer identification number is a unique identifier assigned to LLCs for tax purposes. Applying for an EIN is free and is done through the IRS.
7. Business Bank Account: A current account dedicated to your business is important to form an LLC. This is not 100% compulsory in all states and for all scales of businesses, but it’s highly recommended to separate your personal finances and your company finances to limit exposure and improve accounting convenience.
8. Ongoing Requirements: LLCs are the best type of company. And that brings about certain requirements that are perpetual. Meaning, the job isn’t done by just getting an LLC set up. Annual reports, paying taxes, and ensuring other aspects are ongoing maintenance costs for operating an LLC, otherwise, you might get into legal issues or incur penalties.

Too daunting? Fret not. Get a business attorney and cut through the paperwork.

What is an LLC and what sets it apart?

LLCs are different from other types of business registrations in several ways. One significant difference is that LLCs provide personal liability protection for the owners, which means that the owner's personal assets are protected from the debts and liabilities of the business. In contrast, sole proprietorships and general partnerships do not provide this level of protection, and the owners are personally liable for the business's debts and liabilities.

Another difference is the tax structure. LLCs have a pass-through tax structure, which means that the profits and losses of the business are reported on the owners' personal tax returns. This is different from corporations, which are taxed as separate entities.

 
LLCs are also relatively easy to set up and maintain, with fewer formalities and regulations than corporations. They are more complex to set up than sole proprietorships and partnerships, however. LLC lawyers will tell you how it’s so much better to start with an LLC and grow into a corporation later.

Generally suitable for small businesses and startups that want to protect their personal assets and limit their personal liability, LLCs are ideal for:
1. Service-oriented businesses such as consulting firms, law firms, and accounting firms
2. Real estate investment companies
3. Freelancers and independent contractors
4. Creative businesses such as design and marketing agencies
5. Small retail businesses
6. Technology startups

It is important to note that the decision to form an LLC should be based on individual circumstances and legal advice from an attorney.

Common mistakes & challenges

Any entrepreneur is prone to making some mistakes and facing seemingly impossible challenges when trying to set up an LLC.

The vast majority of problems and mistakes can be completely avoided with proper research. Make sure you’re updated on the state-specific regulations, tax implications, and most importantly, legal requirements you must meet.

Improper documentation and poor planning are both major hurdles for new entrepreneurs. They can severely reduce the chance of a successful application. Don’t rush into LLC formation. First, ensure adequate funding and set grounded, realistic expectations.

Although LLCs protect personal assets from business debts and obligations, some entrepreneurs may fail to understand the limitations of this protection. For example, personal liability protection does not apply to criminal acts, intentional wrongdoing, or personal guarantees.

Get an outside general counsel attorney to mitigate risks and remedy fallacies.

In conclusion

Starting an LLC can be a great option for entrepreneurs looking for liability protection and tax flexibility while maintaining a simplified business structure. While the process can be daunting and mistakes can be made, with careful planning and attention to detail, forming an LLC can be a relatively straightforward process.