An LLC is a Limited Liability Company that protects the personal assets of the company's owners in the event that the business is sued.
There's less paperwork associated with forming an LLC than there is when you develop a corporation. An LLC also prevents your company from being overtaxed. In fact, an LLC combines many of the advantages of a general partnership, sole proprietorship, and a corporation.
LLC vs sole proprietorship
If you currently run a sole proprietorship, you could be wondering how to start an LLC and whether that's the right move for your business.
You may want to register your business with the state, get certain types of insurance, and take advantage of the pass-through taxation benefits of owning an LLC. With an LLC, your personal finances aren't at risk if your business is sued. If you have a sole proprietorship, it can be difficult to establish a distinction between your business finances and your personal finances.
Starting an LLC gives your business more credibility. After setting up an LLC, you can build a business credit history separate for your personal credit history. You can get a business bank account to further distinguish your business finances from your personal finances, as well.
How to use a professional service to set up an LLC online
While you can go the DIY route, it may be easier and faster to use a reliable formation service to establishing an LLC online, although that will increase your cost to set up an LLC.
How much does it cost to start an LLC with professional help?
LegalZoom charges $79 plus your required state fees. ZenBusiness charges $49 plus your required state fees. Some other online services that walk you through the process of setting up an LLC are Rocket Lawyer, Northwest Registered Agent, and IncFile.
Before choosing a professional service provider to help you establish your LLC, research their offerings and read online reviews from their current and past customers. Your business needs are unique, so it's crucial to carefully research companies so you can get the best possible match.
Many turn-key LLC formation packages come with add-ons like CPA Assessment, business email, domain privacy, and website. Of course, premium services come with a premium price. For example, the price of LegalZoom jumps from $79 plus state fees per year (for the base price) to $289 plus state fees per year for the package with faster order processing times, a web domain, and web hosting.
Legal documents required to set up an LLC
You can find the appropriate legal forms needed to set up your LLC online.
This legal document is an outline of the operating procedures and ownership of the LLC. You'll choose a single-member LLC, a multi-member LLC managed by a member, or a multi-member LLC that's manager-managed.
Operating agreements are required if you are setting up an LLC in Delaware, Missouri, New York, California, Maine, or Nebraska. Each set of forms includes the following:
Article I: Organization
- When the company was created, who are the members, and what is the structure of ownership
Article II: Management and voting
- How the members vote, how votes are allocated, and how the company is managed
Article III: Capital contributions
- Which members have contributed money to start the LLC and how the LLC will raise additional funds
Article IV: Distributions
- How profits and losses are shared, including physical property, business assets, and money
Article V: Membership changes
- Statement of when and if members can transfer ownership of their part of the company as well as how the LLC will add or remove members
Article VI: Dissolution
- Circumstances under which the LLC will be dissolved
These forms help keep track of major decisions made with company partners, including which bank you'll use for business accounts.
If you need to hire employees or independent contractors, you may need hiring documents such as an employment contract, independent contractor service agreement (ICSA), or non-disclosure agreement (NDA).
There are also certain tax obligations that go along with hiring employees. It's important to understand how the IRS classifies workers and how having employees will affect your taxes.
Fees associated with setting up an LLC in your state
Filing costs to set up an LLC vary by state, making it difficult to give a definitive answer to the question, "How much does it cost to start an LLC?", so it's important to research this aspect of your LLC formation budget. Fees range from $40 to $500. For example, LLC state registration in Texas will cost you $500, but if you live next door in New Mexico, you'll pay just $50.
Some states also require a new LLC to publish its Statement of Formation in the local newspaper. If you live in Arizona, Nebraska, Georgia, New York, Nevada, or Pennsylvania, you could pay as much as $2,000 to meet the Statement of Formation requirement when establishing an LLC.
In Alabama, you'll also pay a $10-$28 fee to reserve the unique name of your LLC. In other states, this is optional.
After LLC registration, you'll also have to budget ongoing costs that vary by state. Many states require annual or biennial reports that include an updated name, address, and ownership status of the LLC.
Depending on how much money your LLC earns and it's location, you may also be required to pay a yearly franchise tax in addition to fees associated with LLC registration.
Include business insurance as part of the cost to set up an LLC
LLC insurance puts an additional layer of protection between an individual's personal finances and their business's finances. It covers the business's liability if there's a mistake, injury, or accident.
Some industries, such as real estate or medical, require specialized business insurance. In some towns and states, general liability insurance is a requirement. It could even be illegal to run your business without it. Certain professional organizations also require general liability insurance to keep your license in good standing. For this reason, it's smart to include business insurance premiums when addressing the question, "how much does it cost to set up an LLC?"
General liability insurance for businesses cover loss of income, personal and advertising injury, and pain and suffering. It also protects your business from having to pay damages related to defamation of character, copyright infringement, property damage, and breach of privacy. You may also be able to use this type of insurance to cover the costs of hiring an attorney to defend you in a lawsuit.