Starting a limited liability company (LLC) is a smart choice for many entrepreneurs because of the many benefits that an LLC offers. With this business structure, you get to enjoy personal liability protection and pass-through taxation. But, of course, most good things come with costs.
While an LLC offers numerous benefits, it’s essential to have a clear picture of the financial obligations you’ll encounter along the way. That will help you make a plan and not get caught up in the web. So, in this article, we will take a closer look at some of the financial implications of starting an LLC. Just keep reading!
What Are The Costs Involved In Starting An LLC?
State Filing Costs
Officially forming your LLC requires filing a formation document with your state. The filing can be done online in nearly all states, usually on the Secretary of State’s website. However, these fees aren’t the same for all states – they vary from state to state.
Filling fees can be as low as $40 in Kentucky to as much as $500 in Massachusetts. To know how much this will cost you when thinking of starting an LLC, you should check with your Secretary of State. They will have that information.
Business Formation Service
Many new entrepreneurs turn to a business formation service to handle the state filing process for them. A business formation service can ensure that the process is done correctly and take the burden off your shoulders. Business formation services usually offer packages of services that include filing, plus other services such as an operating agreement template and an EIN application service.
Several of these business formation services offer a free starter plan that includes a business name search, the LLC filing, and sometimes a few extras. They also offer higher tier service packages that include additional services such as the operating agreement. These packages are generally priced in the $200 to $300 range, but you’ll get a lot of value for the cost.
If you decide to use a business formation service and start shopping around for one, you don’t necessarily want to choose the cheapest LLC filing service. You should also check customer reviews to make sure that you’re going to get what you pay for and receive excellent customer support.
Registered Agent Service
When you form an LLC, you need to appoint a registered agent. That’s a person or company that will receive your LLC’s official correspondence, such as legal or financial documents. Each state has its own requirements regarding who can be a registered agent, but all require that the appointed registered agent be available at their registered agent address during normal business hours to accept correspondence.
You can choose to be your own registered agent, but you are held to that rule and must be personally available during business hours, which can be difficult for a new business owner. That’s why many entrepreneurs choose to hire a registered agent service.
Most of the business formation services discussed above also offer registered agent services, which usually cost between $100 and $300 annually.
Operating Agreement
Creating an operating agreement for your LLC may not be a legal requirement in most states, but it’s a crucial step that many entrepreneurs overlook. This agreement defines ownership, profit sharing, management structure, and member rights, while also providing a framework for dispute resolution.
While some business formation services offer templated agreements, it’s wise to consider having an attorney draft a custom agreement to safeguard everyone’s interests. Although the cost may range from several hundred to a few thousand dollars, the investment is worthwhile.
Without a robust agreement in place, default state laws may not cover all situations, potentially leading to costly court battles. If you opt for a template, it’s still advisable to have a lawyer review the final version, a more affordable option than starting from scratch.
DBA Name Registration
DBA stands for “doing business as” and is a name that you can register to do business under. Many entrepreneurs choose to register a DBA rather than do business under their LLC name. Your LLC name must contain either the words “limited liability company” or LLC.
So if you name your LLC “Smith’s Shoe Company, LLC” you might instead want to do business under the name “Smith’s Shoes”. Registering a DBA comes with a fee that most often is $100 or less, although, depending on the state, it may need to be renewed periodically for an additional fee.
Business Licenses and Permits
Depending on your industry and location, you may need various business licenses and permits at the federal, state, and local levels. Federal licensing may be required if your industry is regulated by a federal government agency.
State and local licenses and permits, however, are more likely to be required for most businesses. Examples include sales tax permits, health-related permits, liquor licenses, and sign permits.
Be sure to check with your state and local governments for specific requirements. Some business formation services offer a business license guide or service that can help you.
Annual Reports
Most states have an annual reporting requirement for LLCs, which comes with a fee. Fees can range from $50 to a few hundred dollars. Some states also have a franchise tax or business privilege tax that must be paid when you file your annual report. California has the highest LLC annual tax at $700.
Final Note
Starting an LLC comes with costs, but the benefits of an LLC, particularly the personal liability protection, make those costs a good investment. When you form your LLC, make sure that you check off all the boxes to ensure that your LLC is in good standing when you open your doors for business. Then you can focus on growing your business and making money!