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An LLC is one of the most powerful tools available to entrepreneurs. It protects them from business liabilities so they cannot be held personally responsible and provides tax flexibility. And for all its power, LLC startup costs are relatively inexpensive compared to other investments you’ll make in your business.
LLC costs can be split into two categories: LLC startup costs and LLC maintenance costs. LLC startup costs are mostly a function of the state where it’s being registered. There are also ongoing costs to maintain your LLC. Here’s what you need to know.
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LLC Costs: Startup
There are several fees associated with the creation and filing of legal documents to form your LLC. There are also some tangential costs associated with registering your LLC with state and local authorities. For example, you’ll want to make sure you have all the proper permits, licenses and certificates required by local, state and federal governments. How much you spend, ultimately, is a function of your willingness (or capability) to do it yourself.
Filing Fees
Typical costs: $50 (legal services) + $50 to $800 (filing fee), depending on the state
For most entrepreneurs, filing fees will account for the majority of their LLC startup costs. You don’t need a lawyer to file articles of organization to form an LLC, but it doesn’t hurt to use an LLC filing service, especially when you consider the low costs associated with these services. There are several service providers that can register your LLC for less than $50 plus the state fee.
Using a legal services provider is well worth the cost. It can reduce the risk of improperly filing paperwork, which can lead to additional fees to fix the application or reapply—not to mention all that wasted time.
Operating Agreement
Typical costs: $0 to $200
An operating agreement is an internal document that describes how your LLC will be run, the roles and contributions of the owners (members) and the way decisions will be made.
Anyone can create an operating agreement on their own for free. But when you are doing something like dividing profits and losses amongst ownership, you want to get professionals involved to make sure everything is done correctly. Legal service providers can handle the task for anywhere between $50 to $200, or you can hire a local lawyer. It’s a small cost to pay to ensure everyone is on the same page and avoid future disputes.
Publication
Typical costs: Varies based on state and local newspapers’ rates therein
Entrepreneurs in New York, Nebraska or Arizona are subject to additional LLC costs in the form of publication. In short, LLCs in these states have to publish notices for a specified period of time in one or more newspapers across one or more cities or counties.
LLC Costs: Maintenance
Once you’ve registered, you’ll have to take care of LLC costs associated with maintaining it. This includes state and federal taxes, reporting fees and the cost of any services used to maintain the LLC.
Taxes
Typical costs: Varies from state to state
Like any other person or entity, LLCs are subject to taxation. The federal government doesn’t take its cut directly from the LLC. Rather, it’s collected from the profits of the owners as a pass-through income. But LLCs can write off certain startup costs—up to $5,000—including attorney fees, market research, office space, equipment and so on.
Most states tax LLC profits in the same way as the federal government—profits pass through to members’ personal tax returns. However, some states also have mandatory LLC franchise taxes. For example, the franchise fee in Delaware is $300, while California has a minimum $800 annual franchise tax.
At the state government level, LLCs may also be subject to reporting fees. Reporting fees are variable from state to state, but average somewhere around $100 a year.
Registered Agents
Typical costs: $0 to $300
A registered agent is the main point of contact between the LLC and the state. The registered agent accepts service of lawsuits and other legal documents and can accept office mail. Any adult can be a registered agent, so long as they reside in the state in which the LLC is registered and are available during business hours. This lack of restrictions means that businesses don’t have to endure any costs to declare a registered agent. With that said, there are service providers that will serve as your registered agent for $100 to $300 per year.
Frequently Asked Questions (FAQs)
How do I know if an LLC is active?
You can search for an LLC name on the website of your state’s agency responsible for business filings (in most states, that’s the Secretary of State). When you find the LLC name you’re looking for, the website will indicate whether the LLC is active. If your name search doesn’t yield any results, then that LLC name is unused and probably available in your state. Searching the state business database is free, although you can hire professional service providers to handle this task for you.
What kind of tax flexibility does an LLC provide?
LLCs can be taxed as sole proprietorships, partnerships, C corporations or S corporations. This choice allows members of an LLC to minimize their tax burden.
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