LLC formation is a crucial first step for anyone who wants to start a business. Forming an LLC provides additional legal protection, gives you more credibility, and offers a few different tax options that other business structures cannot offer. It is important to understand LLC formation, especially if you are a first-time business owner, a freelancer going full-time, or a non-resident looking to start a business in the USA. This guide will help you understand the entire process.
What Is LLC Formation and Why Is It Important?
LLC formation is the process of registering your LLC with the state. When the state approves your registration, your LLC becomes a separate legal entity distinct from you. Because of this division, your personal belongings, such as your home, savings, and other personal accounts, are protected from your business debts and lawsuits.
If you do not have a business structure, it means you are the sole proprietor of the business, and you will be held liable for everything that the business owes. There is no other business structure that protects you from this risk and is as flexible as an LLC. Moreover, you will have fewer compliance requirements than you would with a corporation.
Key Benefits of LLC Formation for Business Owners
The LLC is the most common form of business organization in the US for a number of reasons:
- Personal asset protection. If a creditor or lawsuit comes after your business, your personal assets are safe.
- Tax flexibility. An LLC can be taxed in several different ways, allowing for less taxes. An LLC can be taxed like a sole proprietorship, partnership, S-Corp, or C-Corp.
- Operational simplicity. An LLC does not require a board of directors, shareholder meetings, or extensive record-keeping.
- Credibility. The “LLC” in your business name makes it appear more credible and professional to clients, vendors, and banks.
- Flexible profit sharing. Members can agree on a profit distribution in any ratio they choose, regardless of their ownership percentages.
Who Should Form an LLC?
LLC formation serves a broad spectrum of business owners, not just one type:
- Independent contractors and freelancers want to protect their personal assets
- Online sellers of any sort, including those using Amazon or Shopify
- Investors in rental property
- Founders of new startups
- Entrepreneurs not residing in the US but wanting to access the US marketplace
- Hobbyists wanting to convert a hobby into a legal business and make money
Any business that faces financial risk or direct customer exposure should consider forming an LLC.
Considerations Prior to LLC Formation
Before anything is filed, several decisions should be made:
- Business name. Choose 2 or 3 suggestions in case one is already taken.
- State of formation. Choose to register in your home state or a business-friendly state like Wyoming or Delaware.
- Management structure. Will the LLC be member-managed or manager-managed?
- Single or multi-member. This impacts your tax classification and operating agreement.
- Registered agent. You will need one before you can file, so set this up early.
Completing these decisions before you file will speed up the LLC formation process considerably.
Which State Is Best for Forming an LLC?
Where you form your LLC is important. Each state has differences in filing fees, annual costs, and regulations. The most popular options are:
| State | Filing Fee | Annual Fee | Key Advantage |
| Wyoming | $100 | $60 | No state income tax, strong privacy |
| Delaware | $90 | $300 | Business-friendly courts, strong legal precedent |
| New Mexico | $50 | $0 | Lowest cost, no annual reporting |
| Florida | $125 | $138.75 | Large market, no personal income tax |
If your business is primarily operating in one state, forming your LLC in that state will avoid having to register in another, which is called a foreign qualification. Wyoming and New Mexico are the better options if your concern is privacy and low fees.
Step-by-Step LLC Formation Process
This is the standard order of steps you will need to take to form your LLC:
Choose a unique business name. You can use your state’s Secretary of State database to check. Your name must contain “LLC” or “Limited Liability Company,” and you cannot use certain restricted words like “Bank” without special approval. In most states, you can reserve a name for 60 to 120 days.
Choose a registered agent. A registered agent will accept legal papers for your LLC. They must be physically present in the state where you are forming the LLC and must be present during normal business hours.
Prepare and submit the Articles of Organization. The Articles of Organization are the most important documents in the LLC formation process. This is a document submitted to the Secretary of State that contains the name of the LLC’s registered agent, the business address, and the current members or organizers. The filing fee is state-dependent and ranges from $50 to $500.
Prepare an operating agreement. This document is very important even though states do not require them to be included in the formation process. It explains the members’ duties in managing the LLC, how profits will be shared or distributed among the members, and how to add or remove members from the LLC. In a single-member LLC, the operating agreement is particularly important, as it helps to support the claim that the business is separate from the owner.
File for an EIN with the IRS. An Employer Identification Number is your business’s tax ID provided by the IRS and is needed to open a business bank account, hire employees, and file taxes. This can be done free of charge for U.S. residents, though the process is more complicated for non-residents, as it involves either faxing or mailing the application, or obtaining a tax ID through a professional formation service.
Open a business bank account. Once you have your EIN and formation documents, you can open a business bank account. Keeping business and personal accounts separate is made easier with a business bank account. This is especially important when it comes to protecting your personal assets from liability.
LLC Formation Costs: A State-by-State Breakdown
| Expense | Estimated Cost |
| State filing fee | $50 to $500 |
| Registered agent service | $100 to $300 per year |
| Operating agreement | $0 to $200 |
| EIN application | $0 (IRS) |
| Business licenses and permits | Varies by industry and location |
Most business owners can expect total costs to range from $150 to $800, depending on the state and whether they self-service the process or pay a service to do it.
Single-Member vs Multi-Member LLC Formation: What Is the Difference?
| Feature | Single-Member LLC | Multi-Member LLC |
| Ownership | One individual or entity | Two or more members |
| Default tax treatment | Taxed as a sole proprietorship | Taxed as a partnership |
| Operating agreement | Recommended | Essential |
| Management | The owner manages directly | Member-managed or manager-managed |
| Profit distribution | All profits go to the owner | Split per the operating agreement |
Whether you start with partners or by yourself will dictate what structures you will need to put in place. Liability protection is the same for both types of LLCs. Multi-member LLCs do require more extensive agreements to address the potential for future disagreements.
LLC Formation for Non-Residents: What You Should Know
An LLC can be formed by non-residents in any U.S. state without a visa, Social Security Number, or physical presence. Nonetheless, some extra considerations must be made, including:
- A registered agent with a US address is required
- For EIN applications, unless a professional service is used, they will have to be submitted via fax or mail
- Filing taxes may require an ITIN
- The most preferred states to form an LLC by non-residents are Wyoming, Delaware, and New Mexico, as there is more privacy and lower costs
Post-Formation Compliance: How to Keep Your LLC Active
Please note, to keep the LLC in good standing, it is a requirement by the state to maintain compliance, as follows:
- An active registered agent must be maintained
- If applicable, franchise taxes and renewal fees must be paid
- Reports of Beneficial Ownership Information must be submitted to the federal government
- Operating agreements must be updated as the company ages
Your LLC can be dissolved by the government if you do not comply with the state rules and regulations, and you will also be subject to any applicable fees or penalties for non-compliance.
Top Mistakes That Derail the LLC Formation Process
New business owners tend to make the following mistakes:
- Selecting a state only because it has cheap LLC formation fees, without considering where they actually do business
- Neglecting to draft an LLC operating agreement because state laws do not require it
- Increasing personal liability by mixing personal and business bank accounts
- Running afoul of the state’s LLC maintenance obligations, resulting in the loss of good standing for the LLC
- Not having the required business licenses and permits
Simplify Your LLC Formation with EasyFiling
Beginning the process of forming an LLC should not be daunting. With a little guidance, you can legally establish your business and get it up and running in no time. EasyFiling offers LLC formation services, including registered agent services, EIN filing, and compliance services for U.S. residents and non-resident entrepreneurs.
