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Forming an LLC is an important step in starting a business. In this guide, we’ll cover the LLC fundamentals, to help you easily complete this process and shift your focus to growing your business.
In every entrepreneur’s journey, there comes a time when you start considering what it could mean to “level up” as a business. Maybe you started out as a freelancer, with one or two clients as a side hustle, and after a few months you’re getting more projects, raising your rates, and taking the whole thing more seriously. You graduate from a mindset of scarcity to one of abundance, and recognize you’re capable of generating enough income to sustain yourself full-time.
Whether you’ve reached that point or are just wondering about what lies ahead, you start to hear things about forming an LLC – usually as tax season rolls around.
Congratulations! If you’ve made it this far – as a freelancer, and someone reading this article – it means you’ve reached the point of establishing your business, formally. There are many benefits to doing so, and this guide will take you through the basics of what is an LLC, who should form one, and how to start.
Let’s start at the beginning!
An LLC is a legal designation given to a company that stands for Limited Liability Company. It’s a flexible type of business entity that separates you as a person from your business, legally and financially. In practical terms, it’s a business structure that shields your personal assets (like your house, car, savings) from any debt your business may incur, for whatever reason.
There are a few types of business structures, including:
Most small businesses choose to register an LLC entity, as LLCs are simpler to manage when compared to a corporation. As well, LLCs provide more freedom and flexibility in terms of how the business should be run. For instance, rather than requiring annual shareholder meetings or a board of directors, you can decide how often to meet, and how else to operate the administrative aspects of the business. There may be one or more members of an LLC.
For just a bit of context, the concept of an LLC is relatively new in the history of American business. In the past, companies were either general partnerships or corporations, and the main difference dealt with how ownership and responsibility was divided. Over the last thirty years, the rise of startups, small businesses and entrepreneurs created a need for new ways to organize businesses with greater flexibility in terms of management structure, operations and financing.
A DBA is not the same thing as an LLC. Learn about the difference between a DBA and an LLC.
Many freelancers wonder about the difference between an LLC and a DBA, which stands for “doing business as”. Having a DBA allows you to operate your business under a name other than your personal name. It’s like having an official nickname. It’s a way to separate yourself from your business in terms of marketing and brand perception. This is helpful when opening business bank accounts, or changing the name of your business from what it was called when you first opened. But DBAs are not business structures, and don’t provide any asset or liability protection, as is the case with LLCs.
Is it worth the paperwork? Short answer: yes!
Below is a detailed breakdown of the primary reasons for forming an LLC.
There are many reasons to form an LLC as a small business owner:
It’s easier than you think. And, it doesn’t take more than a few minutes when registering online.
Below is a detailed overview of the LLC registration process.
You have two options: do it yourself, or hire a professional to take care of the entire process, start to finish. If you’re reading this on Lili, you’re probably the type who enjoys figuring things out on your own. Plus, it’s empowering to take the future of your business into your own hands! It’s much less complicated than you might think, doesn’t take more than a few weeks, and the total cost is between $50-$500, depending on your state.
That’s the one major caveat: your LLC must be registered in the state in which you are conducting and/or transacting business. And each state has its own rules and requirements surrounding LLC formation. So, you must check your state’s guidelines for specific, accurate information. A quick Google search for your state’s Secretary of State website will point you in the right direction.
But before you go down a rabbit hole, here’s a breakdown of the key steps to take, no matter where you live:
1. Name your business. Believe it or not, this is actually the hardest step of all! It requires a bit of creativity, and some online research. It’s also the most common reason why applications get rejected, so it’s worth spending the time to get it right.
2. Appoint a Registered Agent. Most states require you to name an official representative of your company for the purpose of receiving legal documents. Some states let you appoint yourself, but there are also services offering this for a fee, which may be the best route depending on your situation, and how much is at stake. Note: these services can be somewhat costly, but may be a convenient option.
3. Write an LLC Operating Agreement. This is more of an internal exercise than anything else. You may not be required by your state to file it anywhere, but it’s good to have a plan for how the business will be operated in terms of how you’ll run meetings, how profits and losses are shared, voting rights, and what to do if the business fails and needs to be dissolved. Especially if you plan on having more than one member of your LLC, this is a helpful tool.
4. File a Certificate of Formation / Articles of Organization. Here’s where things start to get official. You must submit a legal document (either a Certificate of Formation or an Articles of Organization, depending on your state) and pay a filing fee to your Secretary of State. This document includes basic information like:
This is also the moment of truth for the name you chose, which is why it’s important to take that step seriously and do your background research, as mentioned in Step 1.
5. Obtain a Certificate. This is like getting a birth certificate for your business. Depending on how busy your secretary of state office is, it can take a few weeks to receive this type of official documentation. But once you have it, you’re officially recognized as a business entity!
6. Apply for an EIN. This is a 9-digit number assigned by the IRS, which registers your business with the federal government. It’s also known as a Federal Tax ID Number, and serves as a Social Security number for your business. Technically, your LLC doesn’t require an EIN to open a business bank account, but it increases your options if you have one – and it doesn’t cost anything. And it’s required if your LLC has more than one member, or you plan to hire employees.
The IRS website has an EIN application form, and you receive your number immediately upon completion, making this the ideal method. Note the hours of operation are Monday – Friday, 7AM – 10PM eastern time.
You may also fax your completed Form SS-4 according to the instructions on “Where to File Your Taxes” (for Form SS-4). This method is available 24/7, and you receive your EIN within 4 business days.
7. Update marketing materials. Last but not least, time to start reaping the benefits of your new status! Update your name on any touchpoint where you interact with potential customers and clients: directory listings, your LinkedIn profile, your website, business cards, and your email signature. You’re the real deal now; own it!
Still not sure forming an LLC is right for you? Here are some important questions to ask yourself.
1. How much are your personal assets worth?
Do you own property such as a house or a car? Savings accounts? Family heirlooms such as jewelry or artwork? If a client or customer decides to sue you for one reason or another, you’re legally required to disclose whatever form of wealth you own. If you lose the lawsuit, those items can be used to pay the debt. Ask yourself, is this worth it?
2. Are you a parent or caretaker, responsible for other people?
Many people decide to form an LLC to separate their personal and business finances when they start a family, and need to protect the well-being and future of other people besides themselves.
3. Will you scale and hire employees or subcontractors?
When you hire employees or subcontractors, this comes with extra responsibility in terms of taxes as well as coverage. To save yourself a headache later, if you see your business growing enough to bring on more people, becoming an LLC could be a smart practical decision to get over with.
4. How much liability is baked into the type of service you provide?
Not all businesses incur the same amount of risk. For example, content writers and photographers for instance aren’t as vulnerable to lawsuits as handymen or fitness instructors, for example. It’s more important to consider your assets versus your liabilities, and the other benefits that come with forming an LLC from a tax standpoint, but it’s still worth understanding that you may be sufficiently protected by the nature of the services you provide.
Whether you’re starting your own business or scaling up an existing one, forming an LLC is an empowering step and a signal of commitment. Setting up an LLC means taking action to progress your business forward, for all the reasons outlined above. You receive many benefits such as protecting your personal assets against any future debt, avoiding double taxation, formalizing your business ownership and operational management, increasing access to business loans and enhancing your credibility as a business owner.
These are all compelling reasons to establish an LLC, and it’s never too late to decide to take things to the next level.
Depending on your situation, the benefits probably outweigh the costs of getting an LLC set up. It doesn’t take very long nor cost very much (depending on the state). If you’re at least curious about it, do a little research and get more specific about your state’s requirements and procedures.
Before you file your LLC formation documents with your state, you’ll need to do some work beforehand, including:
After you’ve gathered all the information you need to start your LLC, you’re ready to register your business with your state’s Secretary of State. That’s the office responsible for maintaining a registry of companies operating within its borders.
Getting your LLC application processed will depend on the time of year, filing method, and how fast you state processes business filings.
Once the Secretary of State receives your LLC formation application, on average, expect it to be processed within 10-15 business days. However, some states may approve your LLC formation within three business days or immediately if you file online. Check with your Secretary of State for specifics.
If you need your LLC faster, you may opt for expedited processing—if your state provides it—and pay an additional fee.
For example, New York charges the following fees per document*:
*Figures current as of November 2023