Everyone has heard off the acronym LLC. “But what does it mean? Is this something I should learn if I’m starting a business?” This article covers the who, what, when, where, why, and how to start an LLC.
What is an LLC?
LLC is short for Limited Liability Company. It’s a fancy name you can register your business as with your state government. The primary benefit of this type of business structure is three-fold:
- It makes your enterprise sound important and fancy (Joking)
- It’s easy and fairly in-expensive to setup. ($300 in Texas)
- If your small business gets sued, the owner’s personal assets (bank accounts, house, car, etc) are protected.
The third reason is the most important, and I’ll give an example of what it means.
Let’s say a billionaire opens a lemonade stand on the side of their street. They don’t register their lemonade business as an LLC. A sneaky lawyer comes by for some lemonade, recognizes the billionaire, and decides that he’s going to file a frivolous lawsuit against the lemonade stand. Because the lemonade stand was not setup as an LLC, the billionaire has to pay out of pocket for any legal fees/damages. This is an extreme example to illustrate that limited liability companies are created to protect the owner’s personal assets. If the hypothetical lemonade stand was setup as an LLC, the billionaire could have rolled their eyes and told the sneaky lawyer to take the measly lemonade stand along with all profits made. (Even if it didn’t cover the total cost of legal fees/damages, the lemonade stand can go bankrupt without effecting the billionaire’s personal assets.)
I like to think of an LLC as a shield that protects business owners from any legal risks their businesses may incur. Now that we’ve cleared up what an LLC is, let’s talk about who this is for.
Who is an LLC for?
An LLC is for any small business or startup that has any potential of getting sued. (Hint: This is actually most businesses) This is especially true if the owners have some personal assets they want to protect in the event of a lawsuit. Nobody wants to lose their house because some scumbag lawyer decided to prey on their side-hustle. On the other side of the coin, don’t bother forming an LLC if there’s no chance of your company ever getting sued. You don’t need to register your business with the government if you decide to start blogging or selling T-shirts online. (You should talk to a lawyer to double check the amount of liability your business has)
This article is geared for people starting their business alone, but if you’re interested in the different types of LLCs you can do some deeper reading here.
When to setup an LLC?
Forming an LLC should NOT be the first thing you do when building your business. I learned this one the hard way. Unless your business is likely to get sued right out of the gate, save this step for later. Build a product, find people who want it, and just start selling the damn thing. You can always setup your business operations once you verify you actually have a business.
How and where to start an LLC?
Answering this question is the primary reason I wanted to write this article. There was a drastic difference between the misinformation I read online, and what it actually took to start an LLC. This is so much easier than it seems, I promise.
You’ll need two things to start an LLC:
- A unique name for your LLC
- The name and address of somebody who lives in the state you’re registering in. (This can be you)
You can check if your business name is unique on your secretary of state’s website. Texas charges a $1.00 fee for each name you check. You can skip this step, but if your company name is already registered it can mean legal trouble later.
Second, you’ll need an “registered agent”. This is a fancy title for any person who lives in the state you’re registering your business with that can receive legal documents via snail mail. If you have a physical address in that state, just make yourself the “registered agent”.*
There is a third step your business may need to take if you’re registering outside of Texas called an operations agreement. This is basically a legal breakdown of who does what, and who owns what. They are especially useful when you’re starting business with other founders. Operation agreements are not necessary in Texas, and it doesn’t make sense to have one if you’re building a business alone.
Once you have those things listed above:
- Go to your secretary of state’s website and print out the appropriate document to start an LLC. (I used form *205 Certificate of Formation for a Limited Liability Company)
- Write a check to cover the fee needed to setup an LLC ($300 for Texas) The website will say who to write the check to.
- Mail the filled out form and check to your secretary of state office. (Address will be on website)
- Wait a few weeks for confirmation and a certificate of formation of your new LLC.
The form itself is straight-forward, short, and easy to fill out. If you do get stuck on the form, there are some nice YouTube videos with lawyers walking you through each part of it.
There is currently no way to form an Texas LLC online yourself, without sending a form in the mail. Other sites and tutorials will tell you there’s a way, but there’s not. Don’t get scammed or waste your time on shitty government websites.
Why start an LLC?
We covered this in the first paragraph, but to wrap this all up:
Limited liability companies protect an owner’s personal assets from business risks and liability. Forming an LLC is an excellent first step to keeping your personal assets separate from your business assets. Opening a business account with your bank is another way keep your accounts separate. In my experience, the banks will ask for a certificate of formation of an LLC or similar paperwork to open a business banking account. Whatever path you take with your small business, forming an LLC is a quick and easy way to get your business accounts up and running.
*There are businesses and lawyers that serve as registered agents if you want to register your LLC in a state you don’t live in. If you do this, keep in mind you still have to operate your business in the state you’re registering in. Frankly, registering your LLC in a state like Delaware for tax breaks doesn’t make sense unless you’re a multi billion dollar business (Youtube) that wants to cleverly avoid taxes.
**If you’re new here, this blog is about my journey starting 12 startups in 12 months. Start with this post if you’d like to learn more, and thank you for stopping by.