Things to Know Before Starting an LLC

Most of the things to know before starting an LLC come down to decisions made before any paperwork gets filed: the business name, the registered agent, the management structure, and the tax classification. Those choices are harder to undo later than they are to get right the first time.

What is an LLC?

An LLC, or limited liability company, is a popular business structure that combines the flexibility and simplicity of a partnership or sole proprietorship with the limited liability protection of a corporation. It provides the notable benefit of personal liability protection for its owners (who are called members) while offering operational flexibility and favorable tax treatment. Read more on the limited personal liability definition.

Pros of forming an LLC include personal asset protection, pass-through taxation, and minimal paperwork (see the pass-through taxation definition). However, it’s important to consider the cons as well, such as self-employment taxes and potential difficulty in raising capital.

What to Know Before Starting an LLC

There are quite a few things for entrepreneurs to consider when starting an LLC. While every business is a little different, here are the basics to keep in mind while getting started (or check out the When to Start an LLC guide for more information).

Have a business plan

Before diving into LLC formation, it’s crucial to develop a comprehensive business plan. This plan outlines the company’s goals, target market, competition, and financial projections. It serves as a roadmap for the business’s success and can help an entrepreneur secure funding or attract potential partners.

The business needs a unique name

Choosing a unique and memorable name is essential for an LLC. A good name should reflect the brand identity, be easy to remember, and comply with state naming requirements. 

A registered agent is required

Every LLC must have a registered agent (for more information, please see the What is a registered agent? page), also known as a statutory agent, resident agent, or agent for service of process. This person or entity is responsible for receiving legal and official documents on behalf of a business. ZenBusiness offers reliable registered agent services to help ensure compliance with state registered agent regulations.

Check what licenses and permits are needed

Depending on an LLC’s industry and location, it may need specific licenses or permits to operate legally. Wise LLC owners will research the requirements in their location and industry to ensure compliance. Keep in mind that licensing may be needed on the federal, state, and local levels (or even a combination of those three. ZenBusiness provides a business license report service, helping entrepreneurs identify and obtain the necessary licenses and permits for their business.

An operating agreement is helpful (and sometimes required)

Although not mandatory in all states, having an operating agreement for an LLC is highly recommended (see the operating agreement definition guide for more information). This document outlines the ownership structure, member roles, decision-making processes, and other important aspects of the LLC. It helps prevent misunderstandings and conflicts among members.

Determine how the LLC will be managed

LLCs can be managed by their members (member-managed) or by appointed managers (manager-managed). LLC owners should consider which management structure best suits the business and clearly define roles and responsibilities within the operating agreement.

Keep business and personal finances separate

Maintaining separate bank accounts and financial records for the LLC and personal finances is crucial for legal and financial protection. It helps establish the LLC as a separate legal entity and simplifies bookkeeping. ZenBusiness offers business banking services to help entrepreneurs set up a dedicated business account conveniently.

Decide how the LLC will be taxed

LLCs have flexibility in choosing their tax structure. By default, they are taxed as either a sole proprietorship (for single-member LLCs) or a partnership (for multi-member LLCs). However, LLC owners can elect to be taxed as an S corporation or a C corporation for potential tax advantages (see the What is an S Corp? page for more information). It’s prudent for entrepreneurs to consult with a tax professional to determine the best tax option for their business. Check out the Guide to LLC Tax Filing for more information.

Start establishing business credit soon

Building business credit is essential for the long-term financial health of an LLC. It helps the business owner access funding, negotiate favorable terms with suppliers, and separate personal and business credit. ZenBusiness offers resources and tools to help entrepreneurs establish and improve their business credit profile.

LLCs are harder to raise money for than corporations

Compared to corporations, raising capital for an LLC can be more challenging. Entrepreneurs should consider their LLC funding needs and explore various financing options such as small business loans, grants, crowdfunding, or seeking investors. 

Some entrepreneurs may want professional help

Forming an LLC can be complex, and seeking professional assistance can streamline the process and ensure compliance. Engaging an attorney, accountant, or bookkeeper can provide entrepreneurs with expert advice tailored to their specific needs. Alternatively, entrepreneurs can leverage ZenBusiness’s services and platform to handle their LLC formation and ongoing compliance requirements efficiently. For guidance specific to an industry, see these LLC formation guides.

Recommended article: What to Do After Forming an LLC

ZenBusiness can help!

ZenBusiness understands the intricacies of starting an LLC. Their platform simplifies the process, allowing entrepreneurs to focus on what matters most — their business. With ZenBusiness’s LLC formation service starting at $0 plus state fees, they provide everything entrepreneurs need to form an LLC accurately and efficiently. Additionally, the business license report and registered agent services can assist entrepreneurs with meeting their compliance obligations effortlessly. ZenBusiness can be a trusted partner for anyone embarking on an entrepreneurial journey.