LLCs are one of the most popular business structures. But How much does it cost to start one?
If you’re interested in learning all about the formation costs and fees of forming an LLC, then our article is for you.
Apart from going over every step required to form an LLC and giving you an estimation of the costs, we have also included a section where we go over some of the ongoing fees you have to keep in mind, like taxation.
At the end of our article, you’ll find a detailed FAQ section where we answer some pressing questions, as well as some of our best tips when it comes to budgeting an LLC.
What Is an LLC?
First things first, let’s briefly define what LLCs are before we explore some of the costs associated with this business structure.
An LLC (Limited Liability Company) is a type of corporate structure that protects its owners from any personal liability. In other words, in case of a claim, debt, or lawsuit, the owners’ personal belongings and assets will remain protected.
In case the abovementioned negative turns occur, the owners can lose only the money they’ve invested in the LLC. The regulations regarding forming LLCs vary from state to state.
There are not many limits as to who can be a member of an LLC, but certain rules regarding international members apply to most states, so make sure you research those in your state if you’re thinking of having international members.
One of the ways LLCs differ from other business structures is regarding taxation policies.
LLCs qualify for pass-through taxation, which means that both the profits and losses of the LLC are reported on the owners’ personal tax returns.
In addition, they can also qualify for a tax deduction (up to 20%).
What Are the Benefits of Forming an LLC?
Here are some of the most enticing benefits of forming an LLC.
Limited Liability
As we mentioned earlier, the biggest selling point of LLCs is that they offer limited liability to their owners. The members won’t be liable for any of the company’s actions, which offers invaluable protection of their assets.
Flexible Management
Another important benefit of LLCs is that they offer flexible managing opportunities. Multiple members can manage an LLC or the owner can hire managers from outside the company to manage all the intricacies of the business.
Flexible Ownership
Apart from flexible management, LLCs also boast flexible ownership opportunities. There are no maximum or minimum limits on the number of owners an LLC can have, giving entrepreneurs a lot of flexibility.
LLCs Are Seen as More Credible
Compared to sole proprietorships or partnerships, LLCs are seen as more credible by potential collaborators and customers alike. Your customers will rest assured knowing they’re trusting a real business.
Some Cons Associated With Forming an LLC
Just like with any other business structure, LLCs have some cons you should be aware of.
LLCs Can Be Expensive to Form
Unlike sole proprietorships, LLCs can be quite expensive to form and maintain. It requires more legal upkeep than less complex structures and there are various ongoing fees you need to account for, such as filing annual reports. The fees can cost up to hundreds of dollars depending on the state.
Finding Investors for LLCs Can Be a Tedious Task
Since LLCs don’t issue stock, seeking outside investors won’t be a walk in the park. While investors have the right to invest in your company despite the lack of stock, most investors are more attracted to structures that offer stocks in exchange for capital, so the funding opportunities might be low.
Ownership Transfer
Another disadvantage of LLCs that’s a direct consequence of the lack of stock is hard ownership transfer. The ownership of an LLC is harder to transfer due to potential disagreements among members. When stocks are in play, the owners are free to share their shares with whomever they want.
Costs of Forming an LLC
In this section of our article, we’ll elaborate on the costs associated with each step of forming and maintaining an LLC to give you an estimation of how much money the upkeep of LLC requires.
Filing Fees
To start off, we’ll discuss all the mandatory fees at the startup stage.
The filing fee is the fee you pay initially to get to the next stage of forming your company. The LLC filing fee is a one-time fee that varies from state to state. Currently, there are no states that don’t require the payment of filing fees. Luckily, you don’t need a lawyer for this step or to go through with any other startup fees, so there are no additional expenses.
While the cost of the filing fee varies, the average filing fee will cost you around $100. In some states, like Nevada, the price of the filing fee is much higher ($425), while in other states, it can be even cheaper than $100, such as Iowa ($50).
Registering Services
While this step is optional, many entrepreneurs decide to hire an LLC formation service that will help them in the process of forming an LLC. A service will help you speed up the process of creating an LLC, making it much easier and less time-consuming, which will allow you to focus on other things. Additionally, it’ll ensure that your application won’t be rejected on account of wrong or missing information.
So, if hiring an LLC formation service sounds exactly like what you need, where should you start?
There are several highly reputable and experienced LLC formation services you can hire.
For instance, Northwest helps you form a new LLC or incorporate an existing business and it offers to manage your legal documents on your behalf. Their rates might be slightly pricier than other options (they charge $225 plus state fees), but they do a precise and thorough job, protect your privacy, and offer many additional services, like initial resolutions and LLC Membership Certificates. When you take all of that into account, their fee doesn’t seem so high.
Another LLC formation service we recommend is Rocket Lawyer – they do all the necessary paperwork for you and provide a subscription-based service which allows you access to legal consultations and ensures that you have met all the legal requirements to form an LLC. Additionally, by purchasing the subscription service, you’ll get discounts on their other services, which is always a plus. The subscription costs $39.99 a month and they offer a free seven-day trial. This option is amazing for those who have a limited budget and only intend to use the service for a short period of time.
Creating an Operating Agreement
Another crucial step in forming an LLC is creating an operating agreement for the company, which is a legal document that details the company’s ownership and management. When forming an LLC, all the members must sign the document. In case any changes in ownership or management occur, they need to be listed in the document.
An operating agreement also covers the taxation, distribution of profits, the tasks of each member, and other intricacies of the business affairs.
Any member of the LLC can write an operating agreement for free, and you can even find free templates online that you could use. On most sites, the templates are free. For instance, Rocket Lawyer offer a free template where they ask you several questions which are then inserted into the template. If at any point you want to consult a legal expert on a matter, you can always contact them through the website.
However, if you want to cover some more complex matters in your operating agreement, such as division of profits, then you might want to hire a legal consultant. If you decide that you need help or a consult for this step, then the service for drafting an operating agreement can cost you anywhere between $50 and $200, depending on the service and the state. Alternatively, you can also hire a lawyer, which might require less research.
Obtain a Business License
In most states, you don’t need a special license to start your business. However, there are some types of businesses, like agriculture, transportation, and alcohol manufacturing, that require a special license. There are several different licenses, including sales licenses, professional licenses, and environmental licenses.
To be sure your business doesn’t require any special licenses, we encourage you to do your own research prior to completing your LLC formation process. You should be able to find this information on the website of your secretary of state or the office that’s responsible for issuing permissions.
You can also hire a professional service that will help you determine if and the type of licenses your business needs in order to operate. Legal Zoom is a great example of a service that helps you find the right legal licenses and their prices start at just $99. Of course, this step is completely optional and you could do this research on your own, but hiring someone to do it saves you a lot of valuable time.
It’s important to note that some business licenses require to be renewed every year. The fee for the license renewal is typically cheaper than the fee to obtain the license in the first place. On average, the renewal fees can range anywhere from $20 to $100, depending on the state.
Choose a Name for Your LLC
Another crucial step in forming an LLC is choosing a name. The name you pick for your company has to be original – there can’t be any replicates with the name of an existing business. Additionally, you’ll have to avoid using certain words, which vary from state to state.
If you’re unsure about whether the name you have your eye on is used, you can always do a trademark search. You can use an online Trademark Electronic Search System for free. However, the general cost of a trademarking service is a couple of hundred dollars, whereas maintaining the trademark and paying the ongoing fees can cost you anywhere from $500 to more than a thousand dollars. Since this is quite the big expense, you should definitely factor it in when determining how much forming your LLC will cost.
If you see a name you like, you have the option of reserving the name for around $20. Alternatively, you can add the name directly to your reservation application.
Additionally, some entrepreneurs are interested in creating a fictitious name for their company. A fictitious name is a name you can use after you form your LLC, if you don’t want to use your legal name. The fees for registering a fictitious name are around $50 in most states.
Annual Reports
Another major expense you have to take into account is filing annual reports. Unfortunately, LLCs require you to fire annual reports for your company, and while they’re a relatively straightforward task, they can be quite costly.
Annual reports show the details regarding the company’s members and owners, including personal details such as addresses. They serve to ensure that your business is in good shape and can continue to operate. Annual reports are required in most states and they vary from state to state. Typically, they cost around $100 per year.
Obtaining an Employee Identification Number (EIN)
You’ll need to obtain an EIN only if you’re a multi-member LLC. EINs are essential when trying to open a business checking account and filing your tax returns. Getting an EIN is quite an easy process and luckily it’s completely free of charge. You can choose to apply online, mail your application, or even fax it. Beware of services that claim to give you an EIN for a price, as this service is completely free and it’s exclusively offered by the Internal Revenue Service (IRS).
Hiring a Registered Agent
Hiring a registered agent when forming an LLC is guaranteed to save you some time and energy, but it’s not without a price.
The role of a registered agent is to receive official papers on your behalf and act as a contact between you and the government.
Certain rules apply to hiring a registered agent, which differ from country to country, so we recommend taking a close look at your country’s requirements to make sure the registered agent you’ve chosen is suitable for the task. Most registered agents cost anywhere from $100 to $300 a year, depending on the state and the service.
If you have a tight budget, you can always choose to be your own registered agent. While states allow it, be prepared to spend a little extra time shifting through legal documents and making sure that everything is taken care of. Alternatively, you can hire a family member to be your registered agent, which might not be as costly as hiring a professional service.
Registered agents are only a state requirement if you don’t have a street address in the state in which you’re conducting your business.
Publication Fees
Some states mandate you to publish a statement of formation in a newspaper that operates in the state where you’re conducting your business. If you live in a state that has this requirement, prepare to spend anywhere from $50 to $2000 for the publication. The requirements also vary in terms of how long the state requires you to run your publication, so the longer the statement has to appear in the newspaper, the more expensive the publication fees will be.
Additional Fees
Apart from the fees we mentioned above, there’s a chance you might need to pay additional fees depending on the type of business you own.
For instance, if you own a restaurant, you might also require an additional liquor license on top of getting a professional license.
Taxes
Although not required to start an LLC, the cost of taxes is something you should definitely take into account if you want to form an LLC. There are many ongoing fees you’ll have to pay to maintain your LLC, but taxes have the biggest impact on your income.
As we mentioned earlier, LLCs qualify for pass-through taxation, meaning all the profits and losses are reported on the owners’ personal tax returns. Additionally, the owners can write off certain expenses for tax purposes. These expenses include costs of transportation, rent, and many types of equipment.
While this taxation is certainly favourable for business owners, it can certainly add up and cause a dent in your budget. The cost of pass-through taxation depends on various factors, such as the state in which your business is located and the type of business you own.
It’s also important to mention that, on top of paying your income taxes, you’ll also have to pay an annual franchise tax, or annual LLC taxes. The cost of the annual franchise tax varies from state to state, but the average price is around $500 per year.
Are LLCs Cheaper to Form Than Corporations?
If you can’t decide between forming an LLC or a corporation, you might be wondering which of the two is cheaper to set up.
LLCs and corporations share a lot of the setup costs – for instance, they both require having an operating agreement and annual reports. However, due to the more complex nature of corporations as business entities, they’re slightly more expensive to form and maintain. For smaller corporations, the cost to start will be slightly lower. The general rule of thumb is – the bigger the corporation, the more expensive it will be to form and keep up with the ongoing fees.
How to Create and Stick to a Business Budget
We covered the most impactful costs of starting an LLC, so it’s time to share some of our best tips for creating and sticking to a budget to ensure that you can manage these costs without a big dent in your budget.
Why Create a Budget in the First Place?
To start this section off, let’s explore some of the benefits you can access if you decide to create a budget.
- Creating a budget helps you save money that you can later invest in another area of your business, which leads to amazing improvement;
- Running a business comes with many ups and downs, and budgeting helps you handle those downs more efficiently, especially if they lead to a financial loss;
- Budgeting also helps you determine how much revenue you’ll require to secure the financial goals of your company;
- Last but not least, it will help the members of your LLC and any fellow owners to understand the priorities of your business;
Consider Your Revenue
The first step to budgeting is to consider how much revenue your business generates. Divide the revenue on a monthly basis to have a clear picture of how much money you’re making seasonally. If you notice a pattern, you can be more prepared to handle those slow months in the future.
Calculate All Your Costs
The next step is to calculate all your business costs – this includes office rent, equipment, employee salary, and taxes. Subtract the sum of your costs from your total revenue and you’re ready to move on to the final step.
Do the Math
Once you have a clear idea of how much money you’re making and spending each month, you can compare the total income with your fixed expenses and get a clear idea of how your business’ profitability varies from month to month. The sum you’re left with will approximate the budget you have to work with, assuming all variable expenses are taken into account. If you notice a pattern of the sum of your expenses being higher than the month’s revenue, it might be time to consider making a strategic plan, which would include finding ways to cut back on some of those expenses.
FAQs
Are LLCs Expensive to Start?
Whether or not starting an LLC would be expensive for your budget depends on the state where your business will be located and how many services and legal consultations you want to get. Some states have higher fees than others, but ultimately starting an LLC is a more budget-friendly option than some other business structures, like corporations.
Do You Have to Pay for an LLC Every Year?
Ongoing costs are a common concern for those who are thinking of forming an LLC. Some of the ongoing fees you have to pay when you start an LLC are the annual reports. It’s mandatory that owners of LLCs file these on a yearly basis, and the filing comes with a small fee. Apart from the annual report, you also have to pay taxes.
Can I Pay Myself a Salary From my LLC?
Yes, as an owner you can pay yourself a salary from your LLC.
Is It Possible to Set Up an LLC for Free?
No, it’s not possible to start an LLC for free. There are many fees that need to be paid at the start, such as registering your LLC. The registration fees vary from state to state. What you can do, however, is lower the costs of the setup by cutting out some expenses like hiring legal consultation.
Final Thoughts
We hope our article answered the question of “How much does it cost to start an LLC” in great detail and that you got a clear idea of how much you’ll need to pay during the formation stage of your LLC.
Some of the fees include filing and registering fees and getting business licenses. While it might seem like a big sum at the start, with appropriate budgeting and planning, you’ll get your LLC running in no time.
Find Out How Much It Costs To Form An LLC In Each State
- Alabama
- Alaska
- Arizona
- Arkansas
- California
- Colorado
- Connecticut
- Delaware
- Florida
- Georgia
- Hawaii
- Idaho
- Illinois
- Indiana
- Iowa
- Kansas
- Kentucky
- Louisiana
- Maine
- Maryland
- Massachusetts
- Michigan
- Minnesota
- Mississippi
- Missouri
- Montana
- Nebraska
- Nevada
- New Hampshire
- New Jersey
- New Mexico
- New York
- North Carolina
- North Dakota
- Ohio
- Oklahoma
- Oregon
- Pennsylvania
- Rhode Island
- South Carolina
- South Dakota
- Tennessee
- Texas
- Utah
- Vermont
- Virginia
- Washington
- West Virginia
- Wisconsin
- Wyoming
- U.S. Virgin Islands