How to Start an LLC

Why Many New Businesses Choose an LLC

An LLC is a separate legal entity from its owners, which means that, in most circumstances, the owners aren't personally liable for the LLC's debts or a lawsuit against the business beyond what they invested. A sole proprietorship offers no such separation: the owner's personal assets, like a home or savings, can be used to satisfy a business debt or judgment. That difference is why many new business owners who could legally operate as a simpler sole proprietorship choose to form an LLC instead, accepting a modest filing cost and ongoing compliance in exchange for that protection.

The Core Steps at a Glance

Forming an LLC follows a consistent sequence regardless of state: choose a name that meets your state's naming rules and is distinguishable from existing registered businesses, appoint a registered agent with a physical address in your state, file Articles of Organization with the state's filing fee, get a free EIN from the IRS once the state approves your filing, write an operating agreement, open a dedicated business bank account, and register for any state taxes or local licenses your business needs. Each of these steps depends on the one before it, so working through them in order avoids common delays, like trying to open a bank account before you have an EIN.

What It Costs

The one-time state filing fee for Articles of Organization varies significantly: Montana charges $35 at the low end, while Massachusetts charges $500 at the high end, according to each state's filing agency. Beyond that fee, an EIN from the IRS is always free directly from the agency, and a registered agent, if you don't serve as your own, is typically billed annually rather than as a one-time cost. Most states also require a recurring annual report or similar filing to keep the LLC in good standing, with fees ranging from $0 in several states up to $500 a year in Massachusetts.

How It Compares to Other Structures

A sole proprietorship skips the state filing and fee entirely but offers no liability protection, which is the main reason owners with any meaningful liability exposure choose an LLC instead. A corporation offers similar liability protection but adds more required formalities, like bylaws, a board of directors, and annual shareholder meetings, than most small LLCs need, which is why a corporation tends to suit a business planning to raise outside investment rather than a straightforward small business. An LLC sits between the two: more protection and structure than a sole proprietorship, less required formality than a corporation.

Tax Treatment

By default, a single-member LLC is taxed like a sole proprietorship and a multi-member LLC like a partnership, with profits passing through to the owners' personal tax returns rather than being taxed at the entity level. An LLC can elect corporate or S corporation tax treatment instead by filing the appropriate IRS form if that lowers the owners' overall tax bill, which is worth discussing with a tax professional once the business is consistently profitable, rather than assuming the default treatment is always best.

What Happens After You File

State approval of your Articles of Organization isn't the end of the process. Apply for a free EIN from the IRS using your LLC's exact approved name and formation date, write an operating agreement even if you're the only member, and open a business bank account to keep LLC funds separate from personal funds, since commingled finances are one of the more common reasons a court disregards an LLC's liability protection in a dispute.

Ongoing Compliance Doesn't Stop at Formation

Most states require a recurring annual report, biennial statement, or franchise tax filing, and every state requires maintaining a registered agent for as long as the LLC exists. Mark your specific state's deadline as soon as your LLC is formed, since missing it is one of the most common ways a new LLC runs into state compliance trouble, sometimes leading to administrative dissolution.

For the full step-by-step walkthrough, including registered agent selection, naming rules, and tax registration in more detail, see how to start an LLC: step-by-step guide.

An LLC Isn't Automatically the Right Choice

A very low-risk, early-stage business testing an idea may not need an LLC's protection yet, and a sole proprietorship can be a reasonable starting point before converting later. Weigh the filing cost and ongoing compliance against your actual liability exposure rather than assuming an LLC is always necessary.

Formation Fees Are Only Part of the Real Cost

The one-time state filing fee often isn't the largest cost over the life of the LLC; a registered agent, annual report fees, and any state franchise tax recur every year. Budget for the ongoing costs from the start, not just the initial filing.

Liability Protection Isn't Automatic Just From Filing

An LLC's protection depends on actually running it as a separate entity: keeping finances separate, following your own operating agreement, and meeting state compliance requirements. A court can disregard the protection if the LLC isn't run that way, regardless of how properly it was formed.

Converting From a Sole Proprietorship Is Common

Many businesses start as a sole proprietorship and convert to an LLC once revenue grows or liability exposure increases. The conversion generally means filing Articles of Organization and transferring business assets and contracts to the new entity, which a tax professional can help structure correctly.

This Is Not Legal or Tax Advice

Whether an LLC fits your specific business, and which state to form it in, depends on your industry, liability exposure, and tax situation. Talk to a tax professional or attorney before finalizing your structure, especially if your business has multiple owners or significant assets.