What an LLC Is and What It Is Not
A limited liability company is a business structure created under state law that provides liability protection to its owners, who are called members. When properly formed and maintained, an LLC separates the personal assets of its members from business debts and legal claims.
This protection is not absolute. Courts can disregard the LLC structure if owners mix personal and business funds, commit fraud, or fail to follow basic compliance requirements. Starting an LLC is not just about filing paperwork. It requires ongoing operational discipline.
An LLC is not a tax classification by itself. For federal tax purposes, the Internal Revenue Service allows LLCs to be taxed as sole proprietorships, partnerships, S corporations, or C corporations depending on elections and ownership structure.
Understanding these distinctions early prevents confusion later.
Step One: Decide Where to Form the LLC
The first decision is jurisdiction. Many online sources promote states such as Delaware, Nevada, or Wyoming. In practice, most small businesses should form in the state where they physically operate.
If you form in one state but conduct business in another, you will likely need to register as a foreign LLC in the state where you actually operate. This creates dual filing obligations, dual annual fees, and additional compliance complexity.
Form outside your home state only if:
- You have investors who require it
- You operate in multiple states from inception
- You are seeking legal advantages specific to a jurisdiction
For most local service businesses, consultants, ecommerce sellers, and property owners, forming in the home state is the most practical approach.
Visit your state Secretary of State website to review filing procedures and fee schedules.
Step Two: Confirm Your LLC Name Is Legally Acceptable
Your LLC name must comply with state naming rules. Every state requires a designator such as LLC, L.L.C., or Limited Liability Company.
The name must be distinguishable from other registered entities in the state. This usually means more than adding punctuation or changing plural forms.
Search your state’s business name database thoroughly. Check variations and similar spellings.
State approval does not protect you from trademark infringement. Conduct a federal trademark search using the United States Patent and Trademark Office database. Also search online marketplaces and search engines to identify established businesses using similar names in your industry.
If you are not ready to file immediately, many states allow name reservation for a limited period.
Avoid restricted words such as Bank, Insurance, or University unless you meet regulatory requirements.
Step Three: Determine the Management Structure
When filing, you must indicate whether the LLC will be member managed or manager managed.
Member managed means the owners directly run the business. This is common for small businesses.
Manager managed means designated managers operate the business. These managers may or may not be owners. This structure is more common when passive investors are involved.
Choose carefully because this structure affects authority, banking resolutions, and internal governance.
Step Four: Appoint a Registered Agent
Every LLC must maintain a registered agent in the state of formation. The registered agent receives legal notices, service of process, and official government correspondence.
The agent must have a physical street address in the state and be available during normal business hours.
You may serve as your own registered agent if permitted. However, doing so makes your address public record and requires consistent availability.
Professional registered agent services are commonly used to improve privacy and ensure reliability.
Failure to maintain an active registered agent can result in administrative dissolution.
Step Five: File the Articles of Organization
The Articles of Organization, sometimes called a Certificate of Formation, legally create the LLC.
Information typically required includes:
- LLC name
- Registered agent name and address
- Principal business address
- Management structure
- Names of members or managers, depending on state
Most states allow online filing. Filing fees vary significantly. Some states charge under one hundred dollars, while others charge several hundred.
After approval, the state issues a stamped confirmation or certificate. Retain this document permanently.
Step Six: Draft a Comprehensive Operating Agreement
An operating agreement defines the internal rules of the LLC. Even if your state does not require one, it is strongly recommended.
For single member LLCs, the agreement documents separation between the owner and the company. For multi member LLCs, it defines:
- Ownership percentages
- Capital contributions
- Voting rights
- Profit and loss allocation
- Procedures for admitting new members
- Exit terms and buyout procedures
- Dispute resolution mechanisms
Without an operating agreement, state default laws control disputes. These default provisions may not reflect the intentions of the members.
Invest time in drafting this document carefully. For multi member LLCs, legal review is advisable.
Step Seven: Apply for an Employer Identification Number
An Employer Identification Number is issued by the Internal Revenue Service. It functions as the business tax identification number.
An EIN is required if the LLC:
- Has more than one member
- Has employees
- Elects corporate taxation
- Needs to open a business bank account
Single member LLCs without employees may not be legally required to obtain an EIN for tax filing, but most banks require one.
Apply directly through the IRS website. The online application is free and usually provides immediate issuance.
Avoid third party services that charge unnecessary fees for EIN filing.
Step Eight: Register for State and Local Taxes
Beyond federal taxation, many states require additional registrations.
Depending on your activity, you may need:
- State income tax registration
- Sales tax permit
- Employer withholding account
- Unemployment insurance registration
Some states impose annual franchise taxes or minimum business taxes regardless of profit.
Check your state department of revenue website to confirm obligations.
Step Nine: Obtain Required Business Licenses and Permits
Forming an LLC does not automatically authorize you to operate.
Licensing requirements vary by industry and location. You may need:
- Local city or county business licenses
- Professional licenses
- Health department permits
- Zoning approvals
Operating without required permits can result in fines or forced closure.
Check state, county, and city government websites for accurate requirements.
Step Ten: Open a Business Bank Account
Maintaining separate finances is critical for preserving liability protection.
To open a business account, banks typically require:
- Approved Articles of Organization
- EIN confirmation letter
- Operating agreement
- Government identification
Deposit initial capital contributions into this account and use it exclusively for business transactions.
Avoid paying personal expenses from the business account or depositing personal funds without proper documentation.
Step Eleven: Understand Federal Tax Classification Options
By default:
- A single member LLC is treated as a disregarded entity
- A multi member LLC is treated as a partnership
An LLC may elect S corporation or C corporation taxation by filing appropriate forms with the IRS.
S corporation taxation can reduce self employment taxes in some cases, but it introduces payroll requirements and compliance complexity.
Consult a qualified tax professional before making this election.
Step Twelve: Maintain Ongoing Compliance
Starting an LLC is only the beginning. Ongoing obligations include:
- Filing annual or biennial reports
- Paying required state fees
- Maintaining a registered agent
- Keeping accurate financial records
- Filing federal and state tax returns
Failure to file required reports can result in administrative dissolution, which removes your legal protection.
Mark compliance deadlines on a calendar and monitor state correspondence carefully.
Addressing Common Concerns and Misunderstandings
Many assume that forming an LLC eliminates all personal liability. This is incorrect. Personal guarantees, improper conduct, or failure to maintain separation can expose personal assets.
Another misconception is that forming an LLC automatically lowers taxes. The LLC structure itself does not create tax savings. Tax treatment depends on elections and income level.
Some believe forming in a popular state automatically provides benefits. If you operate locally, forming out of state often increases costs without meaningful advantage.
When Professional Assistance May Be Necessary
You may consider legal or tax advice if:
- You have multiple owners with unequal contributions
- You expect outside investors
- You operate in a regulated industry
- You plan to elect corporate taxation
- You hold significant assets such as real estate portfolios
While many straightforward LLC formations can be handled independently, complex ownership or tax planning justifies professional review.
A Practical Timeline for Starting an LLC
A realistic sequence often looks like this:
Week one
Research structure, confirm state of formation, check name availability
Week two
File Articles of Organization and draft operating agreement
Week three
Receive approval, obtain EIN, open bank account
Week four
Register for state taxes and obtain necessary licenses
Processing times vary by state, but many LLCs can be fully operational within one month.
Referenced Resources
U.S. Small Business Administration Starting a Business
https://www.sba.gov/business-guide/launch-your-business
Internal Revenue Service Limited Liability Company Information
https://www.irs.gov/businesses/small-businesses-self-employed/limited-liability-company-llc
Internal Revenue Service Apply for an Employer Identification Number
https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-number-ein-online
National Association of Secretaries of State Business Services Directory
https://www.nass.org/business-services