A limited liability company (LLC) is a hybrid business structure that integrates the limited-liability quality of a corporation and the feature of a partnership that allows LLC profits to be taxed as the owners’ personal income (Fernando, 2022). In the United States, about 21.6 million businesses are LLCs (Fitzpatrick, Lentz, & Bubba, 2021). The prevalence of the company structure may be due to the separation between LLCs’ assets and liabilities and those of the owners’ as well as the ability to select the preferred tax treatment of the owners.
Since building a business has many requirements—including being financially literate, training for leadership, and gaining experience with operations management—the Research.com team wrote this guide on how to start an LLC in just a few simple steps to help entrepreneurs aspiring to successfully establish their own. Additionally, this article discusses the advantages, disadvantages, and costs of starting an LLC.
The COVID-19 pandemic sparked the spirit of entrepreneurship in many individuals in the U.S. In 2020, 4.35 million businesses in the country were registered—a 24.29% increase from the 3.5 million businesses that applied in 2019. In 2021, another 5.38 million entities were established, which is almost a 54% growth from 2019. Although 2022 saw a drop in business applications, 5.04 million new entities were still registered (U.S. Census Bureau, 2022).
Business success may involve important elements that are controllable by entrepreneurs, but some experts recommend strategically including the power of luck in the mix. Taking notes and inspiration from recently popular businesses may help you improve in one way or another. However, recognizing the role of chance situations and encounters in the growth of your business may also be beneficial to you, aside from, for instance, taking traditional or online business degree programs, developing grit, and modeling areas of your operations and long-term strategy after veterans in the game.
Additionally, learning about different company structures, their benefits, and their downsides may also help start your journey toward entrepreneurial success and answer crucial questions that you may have, such as “Is owning an LLC worth it?” Below, our research team has outlined six easy steps that you can follow to establish your own LLC-structured business.
Source: US Census Bureau, 2022
The first step on our list on how to start an LLC is deciding on and registering your business name. The owners, called members, who may be an individual, corporation, partnership, another LLC, or any legal entity, must come up with a unique business name that encapsulates their business type and purpose, among other identifying elements. Then, the individuals authorized to select new business names register them at the appropriate government agencies.
To choose and to check LLC name availability understandably take time and effort, considering that naming mistakes may result in unwanted financial expenses brought about by rebranding and legal challenges. Spending a significant amount of resources to get your branding right the first time may still cost you less and may help make your company more profitable in the long run. Relevant branding and effective marketing strategies raise awareness, establish positive recognition, and build consumer trust and credibility.
Fortunately, business name generator applications may support users in producing distinct, relevant, and available company names. Afterward, you may register your business name for trademark and service-mark rights as business-name registration does not automatically provide you with these rights. Trademarks and service marks are words, phrases, symbols, designs, or a mixture of these elements identifying and differentiating the different business entities that produce and distribute the goods and services (U.S. Patent and Trademark Office, 2020).
Due to the business boom during the pandemic, the number of registered trademarks in the U.S. reached 2.8 million in 2021 (World Intellectual Property Organization, 2022) from 836,496 trademarks in 2020 and 303,073 trademarks in 2003 (Duffin, 2022). With the surge in registered company names, you may take inspiration from small business name ideas provided by experts.
LLCs are required by law to hire a registered agent, which is an individual or organization that receives service of process and government documents on behalf of LLCs. Registered agents, then, forward these documents to the owners of the LLCs.
Your selected agents must meet the following requirements to qualify for the job (Registered Agents, Inc., n.d.):
Individuals that are in charge of registering LLCs are required to submit Articles of Organization and pay a filing fee to their Department of State in compliance with the Limited Liability Company Law. Members of the LLC may organize and file the Articles of Organization themselves, but they may also authorize any person or entity to perform the task for them.
When filing, you must ensure that the words “Limited Liability Company” or its abbreviation—”LLC” or “L.L.C.”—is included in the name of the business. Refer to the Limited Liability Company Law for the list of restricted words and words that need approval from other government agencies. You may also check your state government’s website to confirm if online filing is available.
Sources: World Intellectual Property Organization, 2022; Duffin, 2022
LLC operating agreements detail the financial and functional framework of the business. They include company regulations and policies that manage internal operations as envisioned and necessitated by the LLC members. While some states do not require them, they are crucial as they enable members to manage their own operations. The signatures of members bind them to the terms and conditions of their LLC operating agreement (Nwatu, 2016).
LLC operating agreements have three important objectives:
The following key pieces of information, among others, must be included in an LLC operating agreement (Nwatu, 2016):
Certain licenses are required by the government depending on the business type of your LLC. While some industries, including aviation, agriculture, and transportation, need to register for federal licenses, all businesses need a license or permit registered in their county, city, or state to be able to legally operate. You may contact your local government office to confirm the type of licenses that your business may need.
The following are additional licenses that particular businesses must acquire (DeLoe, 2022):
The last step on our list on how to start an LLC is registering for an employer identification number (EIN). LLCs must secure their own EIN for tax administration. Applicants are provided with the option to register online and will receive their EIN after validation. To apply, you must first verify if your business meets the following qualifications for an EIN:
Many global companies are LLCs, including Google, Nike, and PepsiCo, and may have benefitted from the features of their business structure to be able to succeed and achieve billions of dollars in revenue today. In 2022, Google’s revenue reached $279.8 billion (Bianchi, 2023) and Nike’s revenue was $46.71 billion (Tighe, 2022). Meanwhile, PepsiCo’s revenue in 2021 was $79.47 billion (Ridder, 2022).
Sources: Bianchi, 2023; Tighe, 2022; Ridder, 2022
Considering that the LLC company structure is common in the U.S., you may wonder, “What are the benefits of an LLC?” As the owner of an LLC, you may enjoy the following advantages once your business is registered:
However, individuals that are new to the business may also ask, “What is the downside of an LLC?” Among its disadvantages include the possible dissolution due to the death or bankruptcy of a member and the payment of self-employment taxes and annual fees for LLC benefits.
Business success mainly relies on the efficiency of the LLC’s management, systems, and employees, if any. In the study titled “Target organizational structure and human potential” published in SHS Web of Conferences in 2021, Santalova et al. evaluated business success in terms of the effectiveness of human resources and management structure.
Santalova et al. recommended that company leaders must “implement a comprehensive program [that must] include the following areas: changing the management structure, where job responsibilities are clearly reallocated; reviewing job descriptions in order to regulate employee responsibilities, support the most effective technology; and building organizational commitment of staff. The organizational structure of the studied trading firms should be made problem-oriented…The proposed problem-oriented management structure…provides a high level of specialization of employees, performing a specific function; it is combined with the structure of the management system, is easy to form and operate, and is adaptive to changes. We suggest evaluating the effectiveness of human resource management when changing the organizational structure of management by the level of management decisions of organizations.”
As you establish your own LLC, analyze and consider implementing applicable elements of the above-mentioned problem-oriented management structure. Thoroughly understanding business principles, tools, and evidence-based strategies may help you long term as the survival rate of businesses decreases over time. According to Knaup and Piazza (2006), only 44% are still up and running after four years in operation and 31% remain after seven years.
More positively, 2022 data from the U.S. Bureau of Labor and Statistics (BLS) revealed that U.S. establishments founded from 1994 to 2019 have had survival rates between 55.5% and 63.6% after four years in operation. After seven years in business, between 42.3% and 47.2% of U.S. establishments founded from 1994 to 2016 remain (US BLS, 2022). The highest failure rates are witnessed in the first and second years in business, and the number of surviving companies continues to decline slowly after the fourth year.
|Number of Years Since Founding||Survival Rates Since Birth||Foundation Years|
|Source: US BLS, 2022|
The financial expenses that come with establishing an LLC may vary depending on the state where you plan to operate your business in. Before LLC registration, you must first register your legal name, or fictitious name if your state only allows business name application after you attain your LLC status, and pay for the name registration fee, which may cost about $50 (Patel, 2022).
Additionally, filing your Articles of Organization may cost you about $100, while you may be charged between $50 and $500 for hiring a registered agent, who may also be required to pay a registration fee of around $25. Annual reports to keep your active status must also be submitted with a fee of about $140 (Patel, 2022).
Aside from the effectiveness of your management, the longevity of your business also depends on meeting government requirements. Ensure that your LLC keeps its active status by submitting the necessary yearly reports to the federal government, your state government, and your local government. Different states may enforce different regulations for businesses, so contact your state and local government agencies to stay updated.