- Why this guide?
- Who is this guide for?
- What is an LLC?
- Why is an LLC so popular?
- Why should I form an LLC?
- When should I form an LLC?
- Why not operate as a sole proprietorship?
- Who is liable pre-LLC?
- How do I form an LLC?
- What can I name an LLC?
- What are the annual fees of an LLC?
- What if I want to close an LLC?
- Does an LLC make me anonymous?
- How are LLC taxes handled?
- How are LLC bank accounts handled?
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Before we jump in, here's the standard disclaimer for legal information: this website is purely the provision of legal information and not legal advice for specific cases. This website is not intended to create an attorney-client relationship and all readers should not act upon this information without seeking professional counsel.
Note: The laws governing an LLC vary from jurisdiction to jurisdiction. This guide is written from a general perspective and not necessarily specific to one jurisdiction.
Why this guide?
I keep reading the same questions about LLCs from indie makers and solo internet entrepreneurs posted across the internet from Indie Hackers to Hacker News to Product Hunt to Makerlog and other online communities.
Who is this guide for?
This guide is for the millions of indie makers, solo web developers, independent graphic artists, weekend software developers and app makers looking for an accessible guide about LLCs for their latest digital side hustle, website, mobile app or anything they are building on the internet. This guide is not necessarily written for those looking to form a high-growth, venture-backed unicorn company (because other types of business entities are a better fit).
What is an LLC?
LLC is the acronym for a limited liability company. An LLC is formed in a specific U.S. state, U.S. territory, or the District of Columbia -- an LLC is not formed at the federal level. The legal basis of an LLC is governed by the U.S. state, U.S. territory, or the District of Columbia. For example, if you form an LLC in Delaware, then you operate a Delaware LLC.
Why is an LLC so popular?
An LLC is so popular because of its ease of formation, speed of formation, and ability to provide protection from personal liability. You can form an LLC with only yourself, you can form an LLC for a low cost (depending on the U.S. state, you can form an LLC for as little as $50), and you can form an LLC quickly (depending on the U.S. state, you can pay expedited fees to form an LLC within 24 hours).
Why should I form an LLC?
Perhaps one of the best reasons to form an LLC is the limited liability protection you enjoy by separating business assets from personal assets. In addition, you form contracts between third parties and the name of your LLC. This allows you to do business with some level of anonymity, especially if are working on side projects that you don't want associated with your name. For example, let's say you want to publish a few apps to Apple's App Store. Apple requires you to publish under your personal legal name or the name of a legal business entity. Apple does not allow fictitious or alias "trade names" to publish to the App Store.
When should I form an LLC?
This is the ultimate question that is the subject of much debate. The short answer is: you can form an LLC at any time and then transfer assets or intellectual property to that LLC. The better answer is: whenever you feel most comfortable paying the business expense of forming an LLC. Some individuals feel most comfortable forming an LLC at the start of the project -- similar to forming an LLC right after registering a new domain name. Some individuals feel most comfortable forming an LLC at the time of revenue generation.
I think a wise decision is to form an LLC at the time your project enters into contracts with third parties. For example, you may not have generated revenue, but you may be hiring freelancers on Upwork or Fiverr. It seems much more official to hire freelancers when the contract uses the name of your LLC. In addition, even if your business it not revenue generating, you may still open yourself up to liability -- whether through contractor disputes or early users.
Why not operate as a sole proprietorship?
A sole proprietorship is not a separate legal entity from you. A sole proprietorship offers no liability protection. If the business is sued, then your personal assets are at risk.
Who is liable pre-LLC?
The term "promoter" is used for an individual that does preliminary work on behalf of an LLC before this LLC exists. The general rule is that if you are acting on behalf of an LLC before the LLC is formed, then you are liable. However, the LLC may become liable and assume the legal obligations of the promoter, if the LLC assumes the legal obligations of the pre-LLC contracts either explicitly or implicitly.
Note: There may be variance by U.S. state, U.S. territory, or the District of Columbia on these legal terms of art.
How do I form an LLC?
You can form an LLC yourself. For the purposes of this guide, I will list the steps that I once used to form a Delaware LLC. If you decide to form an LLC in another state, the steps to form an LLC in that state are typically explained on a government website for that state.
Again, these are the action steps to form an LLC in Delaware.
Select a name
For the research purpose of finding a name, click here to search for the name of an existing LLC in Delaware. You want to select a name unique to your LLC. If you've thought of a name, then you can move to the next step.
Obtain a Registered Agent
A Registered Agent is an agent with a physical business address in Delaware. This is the physical address that legal papers and notices will be mailed. For individuals not living in Delaware, it is very common to use a third-party Registered Agent. Delaware even provides a list of a Registered Agents. If you are living in Delaware, then it is possible to use yourself (and your home address) as the Registered Agent.
File the Certificate Of Formation
Before filing any paperwork to form the LLC, you want to know the name that you will use for the LLC and the information about the Registered Agent. If you already know these two, then you can file the paperwork. In order to form the LLC with Delaware, you will file two documents: a Certificate of Formation and Filing Cover Memo. If you click here to view a list of forms from Delaware, then you will see one titled "Limited Liability Company Formation" - this is the Certificate of Formation. The fee to file the Certificate is $90. If you click here, then you will see a link for the "Filing Cover Memo." Fill out both and send them in via mail or fax (the mailing address and fax number are listed on the Filing Cover Memo).
How long does it take to form?
In Delaware, it can take a few days or more. You also have the choice of paying a premium for different priority formation times.
What about an operating agreement?
Delaware does not require an LLC operating agreement.
What are the annual fees?
Delaware requires an LLC annual fee of $300 by June 1 of each calendar year the LLC exists. If you formed an LLC in mid-2019 and decide to close the LLC in January 2020, then you will pay the annual fee of $300. Also, if you are using a third-party Registered Agent, then remember to pay any annual renewal.
What about an annual report?
There is no requirement to file an Annual Report in Delaware.
Note: In order to form an LLC in Delaware, you do not need extra information such as an Employer Identification Number (EIN) from the Internal Revenue Service (IRS). You simply file paperwork with Delaware about the name of your LLC and the information for the Registered Agent.
What can I name an LLC?
Different jurisdictions specify different requirements for the name of an LLC. But one requirement is certain: If you form an LLC, then the name of the LLC generally must include language to signal that you operate an LLC. The laws governing the name of an LLC vary from state to state, but you generally must include the abbreviations "L.C.C." or "LLC" in your name.
Example: Click here to view the laws governing the naming of an LLC in Virginia.
What are the annual fees of an LLC?
The annual fees to maintain an LLC vary jurisdiction to jurisdiction. Because the example above focused on formation of an LLC in Delaware, I will use Delaware as an example. To maintain an LLC in Delaware, you are required to pay an annual tax of $300 (click here to view the annual tax information.)
If you paid a third-party registered agent, then do not forget to also pay the annual fee to maintain the registered agent.
What if I want to close an LLC?
If you want to shut down and dissolve the LLC, then there is usually a "cancellation" or "dissolution" fee.
Example: If you formed an LLC in Delaware, then the Certificate of Cancellation of a Limited Liability Company to be filed is $200 (in addition to any potential remaining annual tax).
Does an LLC make me anonymous?
In most jurisdictions, you can easily look up the name of an LLC and find the individual that owns the LLC. One jurisdiction, in particular, is famous for allowing you to form an LLC without the requirement of disclosing the owner: Delaware. In order to form an LLC, Delaware only requires the name of the LLC and name of the Registered Agent (because the Registered Agent can be a third-party, it is more difficult to identify the owner).
How are LLC taxes handled?
In a single-member LLC, you pay taxes on LLC revenue once. According to the IRS, the single-member LLC is considered a "disregarded entity" and taxed as if the LLC is a sole proprietorship. Further tax information is outside the scope of this guide.
How are LLC bank accounts handled?
If you form an LLC in a jurisdiction that you do not live in and want a business checking account for your LLC, then banks may require you to have a physical office location that they can visit and inspect. For example, if you form an LLC in Delaware and want to open a business checking account at a bank in Wilmington, then they will require a physical office location that they can tour and inspect. A virtual mailbox service at a coworking space or the address of any third-party Registered Agent does not usually count as a physical office location.
For this reason, many individuals choose to form an LLC in the jurisdiction that they currently reside in and then use their home address as a home office.
In addition to a physical address, banks often require additional documentation of your LLC, such as a "certified" copy of your LLC formation or a certificate of good standing.
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