When starting a new enterprise, one of the first steps is determining the type of business entity that works best for your needs. One of the most common (and beneficial) options is a limited liability company or LLC. Before you pull the trigger and file the correct paperwork for this entity, you need to know all the costs and paperwork associated with it.
Fortunately, while it takes some money to get your business off the ground, there are a few ways to reduce costs when starting an LLC. So let’s dive in and find out how.
Benefits of Starting an LLC
There are several business entity types that can work for startups of all sizes. The most common are partnerships, LLCs, and corporations. However, for most companies, an LLC is the best option because:
- Limited Liability – You and your business are considered two separate entities, so you’re not directly responsible for everything that happens. If your company accrues debts and liabilities, your personal assets are not at risk, even if you file for bankruptcy.
- More Streamlined – Many new businesses try to decide between becoming an LLC or a corporation. One advantage of an LLC is that you don’t have to create a complicated corporate structure, meaning less paperwork to file and maintain. Also, you don’t need a board of directors as you would with a corporation.
- Pass-Through Taxation – Although you should keep your business and personal earnings separate, LLCs enjoy “pass-through” taxation, meaning the company doesn’t have to pay its own taxes before you can take your cut.
- More Flexibility – LLCs can be run by a single person or a group of people and can be structured however the owners want. This flexibility makes an LLC ideal for companies of all shapes and sizes. Plus, the ownership structure can change over time to be more rigid if necessary.
Cost Requirements for Starting an LLC
Although it’s super easy to form an LLC, multiple steps are involved, each with its own paperwork and fees. While you can save money with some of these steps (as we’ll illustrate), some of these costs are unavoidable. Here’s a complete breakdown of everything you might have to pay for when starting an LLC.
State Filing Costs
State fees are unavoidable because they’re required to establish your business within your home state. The exact price varies from state to state, so it’s hard to say how much you’ll end up paying. That said, you or one of the owners must reside within the state – you can’t form an LLC in a different location. So, if one owner lives in a cheaper state, you can set up the LLC there, even if you personally live elsewhere.
Some of the cheapest states for LLC formation include:
- Kentucky – $40
- Arkansas – $45 or $50
- Arizona – $50
- Colorado – $50
While the most expensive states are:
- Massachusetts – $500
- Tennessee – $300 to $3,000
- Texas – $300
- New York – $275
Overall, you can expect to pay around $100 to $150 for most other states, but we recommend looking into the exact price before filing, so there are no surprises.
Registered Agent
A registered agent is someone who is authorized to accept legal documents on the LLC’s behalf. The company itself cannot serve as a registered agent, but an owner of the business can. Because having a registered agent is a must, you may want to hire a lawyer or an LLC formation service to fulfill this duty.
Having a lawyer can protect your business from legal action, but attorney fees can often be the most expensive, costing upwards of $1,000 or more per year. On the other hand, an LLC formation service may charge a few hundred dollars, and you get similar protection but no official legal advice. Finally, if you’re trying to save money, you can act as your own registered agent for free.
Operating Agreement
If you live in one of these states:
- California
- Delaware
- Maine
- Missouri
- New York
You should have an operating agreement when creating your LLC. This agreement outlines your company’s organizational structure, including who is responsible for different tasks within the business. This document also discusses each owner’s capital investment and the percentage of distribution to which they’re entitled. For example, if you start an LLC with a partner, you may split the profits 50/50.
Creating this document requires a lawyer to sign off on it to make it legally binding. On average, you can expect to pay around $650 for the entire process.
Even if you don’t live in a state where an operating agreement is necessary, we recommend forming one if you’re starting a business with other owners. By putting your responsibilities, contributions, and distribution in writing, you can avoid potentially messy situations later on. However, if you’re starting a business by yourself, this document is optional since you’re the only one handling everything.
DBA or Fictitious Business Name
When forming any kind of business, you need to register the company’s name with your state. However, you can also file to use a separate, fictitious name, also known as a DBA (doing business as). There are some pros and cons to using a DBA, but you have to pay to register both names.
In some cases, the cost of filing a DBA may be as little as $10. Other times, it can balloon up to $200 in some states. If the price is relatively high, consider whether it’s necessary.
Business Licenses and Renewals
Creating a business entity is only the first step to getting your new enterprise off the ground. Depending on your business model, you may need to apply and pay for various business licenses, such as:
- Generic Business License – Some states have state-wide licenses so that you can operate anywhere. Alternatively, cities and counties may require their own permits on top of a state-wide document.
- Seller’s License – If you’re selling products (including online), you need a seller’s permit from your state.
- Food Vendor License – Most food service businesses require a separate license to sell perishable goods. There may be different requirements for pre-packaged vs. prepared food (i.e., at a restaurant).
- Alcohol License – States have strict requirements for who can sell alcohol and how they can sell it. For example, there is a big difference between serving beer and wine vs. liquor.
Overall, you should research which licenses you need to start your business. Most of these are required by the state, so they’re unavoidable. Also, remember that some permits (i.e., alcohol) may need annual renewals. Usually, renewal fees are cheaper, but not always.
Annual Reporting Fees
Most states require LLCs to file an annual report to ensure that all the business information is up-to-date. When filing this report, you must pay a fee, often between $20 and $100. Depending on your state, you may have to file every year or every other year.
Overall, many of the costs associated with forming an LLC are mandatory, so you need to budget for them when starting your business. Also, don’t forget about other operational expenses like rent, utilities, labor costs, a website, and more. While there are ways to mitigate these costs, it’s best to look at them as investments for your company’s success.
