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There are many ways to structure a business. You’re likely familiar with the most common business formations, such as sole proprietorships, partnerships, and corporations. A limited liability company, or LLC, sits somewhere between a sole proprietorship and a corporation. But what exactly is it, and how much does it cost to start an LLC?
Table of Contents
What Is an LLC?
An LLC offers business owners a simple, low-cost way to establish their businesses as distinct legal entities. That distinction is more than cosmetic. Once you establish an LLC for your business, you are also legally separated from it. That means you are not legally responsible for the liabilities and obligations of your business entity.
In most cases, an individual or organization cannot come after you personally in a lawsuit.
There are a couple of exceptions to the liability protections an LLC provides. The first is when an owner provides a personal guarantee on a debt or other obligation of the LLC. If the LLC fails to pay, the individual owner can be held personally responsible. The second is when an individual owner in an LLC engages in fraud or other illegal or intentionally deceptive activity.
In addition to legal liability and the separation of assets, another advantage of registering an LLC is income tax liability. LLCs are established as pass-through entities, in which the income of the LLC is taxed not to the business but passed through to the owners, who will be taxed at the individual level.
This is unlike C Corporations, where income earned by the business is subject to the federal corporate income tax rate of 21% (plus state income taxes that can be as high as 9.8%). Then, dividends are paid to shareholders with a personal tax liability on the income received. This is a tax phenomenon frequently referred to as “double taxation.”
Many states impose an annual franchise fee on LLCs, representing a different kind of tax based mainly on the LLC’s existence.
✨ Related: How to Start a Business
LLC Pros and Cons
Pros:
- Provides personal legal and liability protection for LLC owners
- No revenue or business size requirements to start an LLC
- Avoids the double taxation conundrum faced by C Corporations
- Establishes the business as a separate legal entity from its owner(s)
- Easier to set up and manage than a corporation, generally with much less paperwork and fewer reporting burdens.
Cons:
- Unlike a corporation, an LLC cannot sell stock to raise capital
- More complicated and expensive to start than a sole proprietorship. More ongoing reporting and fee obligations
- Unless an LLC is set up to be taxed like a corporation, net income from the business will be subject to the self-employment tax, a 15.3% tax imposed on income from self-employment.
- Regulations regarding LLCs vary from state to state. Different fee levels are one example, but a handful of states do not recognize the pass-through tax treatment of LLCs the way the federal tax code does.
- Legal and liability protections, while extensive, are not absolute guarantees against personal liability.
How Much Does It Cost to Start an LLC?
It would be ideal if a single flat fee could cover all the costs of starting an LLC. However, starting an LLC involves multiple costs—including those paid once your LLC has been established—and since those costs vary by state, it is impossible to establish a concrete figure.
With that in mind, here are the primary fees you can expect to pay when starting an LLC:
State Filing Fees
The cost to start an LLC varies by state, and that variation is considerable. State filing fees range from a low of $35 in Montana to a high of $500 in Massachusetts. However, most states sit somewhere between $100 and $200.
Annual or Ongoing Fees
To maintain your LLC in your state, you must pay annual fees and certain taxes in most states. These can range from zero in Idaho, Mississippi, and Minnesota to as much as $820 or more in California.
Income taxes will also be assessed on the income you earn from your LLC, whether taxed as a corporation or a sole proprietorship.
Legal Fees
You can file for an LLC on your own, but legal fees will be involved if you engage an attorney’s services. These will vary depending on your location and on the attorney you hire.
Name Reservation Fee
Choosing a name for an LLC isn’t always that simple. You may choose a name and find out if it’s similar or identical to another business in your state. In that case, you may have to choose a different name. You can avoid this problem by reserving a name in advance. There is a fee associated with a name reservation. It will vary by state, but you can expect it to be between $10 and $200.
✨ Related: How to Open a Business Checking Account
Other Costs Associated with Getting an LLC
There are other costs associated with getting an LLC that, while not usually required, may make sense.
Registered Agent
When you set up an LLC, you must name a registered agent. That’s the person or organization who will act as the main contact for your LLC. You can choose to be the registered agent yourself or nominate someone else for the job if you feel that’s necessary. Often, the registered agent is an attorney who files the LLC paperwork. He or she will charge an upfront cost and an annual fee for this service, which may be in the $100 to $200 range.
A more affordable option is to hire an online service, such as Northwest Registered Agent, to act as your registered agent. I’ll cover them in more detail later.
Federal Employee Identification Number (EIN)
While an EIN isn’t absolutely necessary with an LLC, it is recommended. After all, part of the reason for forming an LLC is to separate yourself personally from your business. The LLC creates a separate entity, which is partially substantiated by getting a dedicated EIN. If you have an attorney or an accountant file for this, there will be a charge for their services. You can also apply for an EIN online through the IRS, free of charge.
Operating Agreement
This is another optional step in the LLC process, but it may be a requirement in some states. The agreement is a document spelling out the nature of the business, its ownership, and dissolution or/transfer processes. It may be worth it to have this document created when you form your LLC since it can be added for a very low fee – usually below $100.
Where to Find Help Setting Up Your LLC
If you choose to file on your own, there are online services you can use to get the job done at a lower cost than hiring an attorney. For example, LegalZoom enables you to prepare the paperwork for your LLC for free, paying only state-mandated filing fees.
Another alternative is Northwest Registered Agent. By taking advantage of their $39 Business Formation Service, you can set up your LLC, obtain free registered agent services for 1 year, a business address and email, a web domain name, and a custom website. Northwest also provides mail forwarding service from the registered agent, complete privacy, and access to trained specialists through their Corporate Guide Service.
Get Started With Northwest Registered Agent
Note that while affordable, online services such as Northwest Registered Agent and LegalZoom don’t offer the legal advice that a lawyer can provide.
FAQs
Unfortunately, this is impossible, even if you handle the entire filing process yourself. Virtually every state in the country charges an LLC filing fee, which cannot be avoided. However, as discussed in this article, some states are cheaper than others. But that will depend on the location of your business more than anything else.
Montana currently has the lowest LLC startup fee in the country, at just $35. However, regulations change regularly, so you’ll need to check the most recent information in Montana or any other state where you are filing for an LLC.
You should also know that the filing fee is not the only cost. Annual fees can range from zero in some states to more than $800 (in California). The decision to create an LLC should not be based on a low filing fee alone. All other fees related to the LLC formation and on an ongoing basis must be considered.
LLC owners’ business income comes from the company’s profit. They can take regular draws from the business, similar to a salary, or even guaranteed payments for the services they provide to the LLC. But in each case, the tax liability will be determined by the business’s profit and not by the method of payment.
The $800 California Franchise Fee for LLCs is due in the second year of operation. There is currently no requirement to pay the fee during the first year of operation. The silver lining of the fee is that it is tax-deductible for federal income tax purposes.
Is Setting Up an LLC Worth the Cost?
Whatever business you’re in, the legal protection that an LLC provides can be absolutely necessary. Even if you want to keep your business informal and uncomplicated, converting it to an LLC can be preferable to incorporating, especially for a business with a single owner.
The tax advantages of an LLC are not as clear, and you should consider discussing the matter with a professional accountant to determine if forming an S Corporation is a better choice. The advantage of the S Corporation is that at least some of the income the business generates can be distributed to you without the requirement to pay the 15.3% self-employment tax. An LLC does not enjoy the same benefit.
If you are going to start an LLC, you can save yourself a lot of money by taking the DIY route and using an online service (like LegalZoom or Northwest Registered Agent) to prepare the documents. Remember that the paperwork requirements for an LLC formation are standard, regardless of how you set it up.
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