What is an LLC?
LLC stands for limited liability company. Setting up an LLC creates a business that's a separate legal entity from its owners. This structure limits the owners' liability for business debts, lawsuits, or other liabilities. LLCs can also have some say in how they’re taxed, which can help them land a tax efficient plan.
Why LLC is such a popular structure
Creating an LLC separates individual owners from the business, which can help protect their personal assets from business liabilities. That’s a massive draw for many business owners.
Owners of an LLC may also have some choice over how they’re taxed. They can stick with the simplicity of a sole proprietorship or elect to be taxed as an S corporation, which may lower tax liabilities in certain situations.
And finally, the LLC structure is handy because an LLC can be owned by a single person, multiple people, other LLCs, or even a blend of businesses and individuals. No other structure provides this flexibility.
How to start an LLC: 9 steps
It’s important to nail all the details when starting an LLC. For that reason, lots of businesses turn to specialists, such as an accountant or a business formation consultant.
1. Choose your LLC's home state
This is generally the state where you plan to do the most business.
2. Pick a name
Make sure your preferred name is available by checking the LLC database on your home state’s Secretary of State website.
3. Check for trademarks.
To make sure your name isn't trademarked, go to the US Patent and Trademark Office website and do a search in the Trademark Electronic Search System. You can search a few different ways, but a basic word search for the business name (and a few variations) should do the trick.
4. Designate a registered agent
Every LLC needs a “registered agent” who can receive legal documents on the company's behalf. You, another owner, an employee, or someone like an accountant can be the registered agent. If none of those work for you, there are registered agent services that can fill the role for you.
5. Register the LLC and file the Articles of Organization
Once you have a name and a registered agent, head to your state's Secretary of State or Department of State website, register your LLC, and file the Articles of Organization. This is typically an online form requiring basic details about the company's name, type of business, owners, and location. Some states may ask for extra information or may require you to publish the articles in a newspaper.
6. Get an Employee Identification Number (EIN) – even if you won’t be hiring
Go to the IRS website and get an EIN for your business. You only need to give a few basic details and you should get the number immediately. This nine-digit number identifies your business on tax documents, and it's required to open a business bank account.
7. Draft an operating agreement
This step is optional for single-owner LLCs, but it's critical for partnerships as it lays out the rights of each owner. It explains how profits (and losses) will be distributed, how equity is set up, how partners can leave the business, and other organizational essentials.
8. Open a business bank account
A business bank account helps you separate your business and personal finances, and it can also help your business build its credit rating.
9. Register in other states (if necessary)
You may need to repeat the above process to open an LLC in every state you plan to have a presence.
Important state by state variations
Once you're registered, make sure you understand the rules in your state – whether you're in Texas, Florida, California, or anywhere in between – the rules vary. For instance, you may need to re-register every year to keep your LLC active. If you forget, you could lose your business name or incur higher re-filing costs.
Tips for starting an LLC
So, you've got the legalese of setting up an LLC down, but what about the rest? How do you start a successful LLC? That requires a detailed plan, strong financials, and marketing designed to bring in clients.
Create a LLC business plan
A plan is always important, but it's critical when multiple parties are involved, as is often the case when creating an LLC. A plan will establish expectations and keep everyone on the same page. It’s also essential for getting finance. Neither lenders or investors will give you money until they see a thorough business plan.
Work up some financials
You’ll need some numbers for your plan, including:
- how much it will cost to start the business
- how much it will cost to keep it running for its first year
- when you expect it to break even and start paying for itself
- where the money will come from while you wait for it to break even
Pay special attention to where the money is coming from until you reach the breakeven point. Map out your cash flow (when money comes in vs when it flows out) and figure out how you're going to stay on top of expenses when revenue is slow.
To be successful, you need to be prepared for anything and everything. Don't just make one plan. Make at least two. Draft out a plan where things go as hoped. Then think about everything that can go wrong and make sure you've got a plan that works in those situations too.
Write a marketing plan
Finally, you need customers to bring it all together. Craft a marketing plan designed to deliver the sales and revenue you need. Do some market research and check in with your target customers so that you have a realistic assessment of consumer demand and expectations.
You don't have to do this alone — and you shouldn't. When starting an LLC, check in with an accountant, industry peers, or a mentor. They'll be able to help you spot vulnerabilities or oversights in your plans and help you create the most successful LLC possible.
Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.
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