How Much Does an LLC Cost?
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How much does it cost to form an LLC? If you are planning to open a business, you may be considering the various entity options that are available to you.
There are five general types of entities that you may choose from. These include the sole proprietorship, partnership, limited liability company (LLC), corporation, and small business corporation (S-Corp).
The LLC is a popular choice for most business owners since it provides a layer of security for personal liability and is easy to set up.
Other advantages of choosing an LLC include pass-through taxation, ownership and management flexibility, reduced compliance activities, and flexible profit distributions. So how much does an LLC cost? Read on for more information.
Choosing a Business Name
An LLC’s business name must meet certain legal criteria. Criteria are defined by the state government in which the entity is set up. Generally, the business name must include the words “limited liability company,” “limited liability,” or “LLC.” An example of a business name that meets the rules is “Pizza Shack, LLC.”
The LLC is set up at the state level, and each state has its own rules and regulations governing limited liability companies.
Frequently, companies are prevented from using certain terms in their business name, such as “bank” or “insurance.” Banks and insurance companies must meet strict regulations, so they are usually unable to adopt an LLC entity structure.
Once you have selected your business name, you may need to file for an employer identification number (EIN). The EIN is obtained through the IRS and can be considered to be similar to a Social Security number, but for a company. The EIN is required if the LLC:
- Has multiple members
- Has elected to be taxed as a corporation or S-Corp
- Has, or will have, employees
If your LLC does not meet any of the criteria above, you are not required to get an EIN, but there can be advantages to having one.
Business Name Reservation Fee
If you have decided on a name for your LLC but are not yet ready to open the business, you can pay to reserve your business name.
This payment prevents the name from being used by anyone else until you are ready to open the business. The period that a business name reservation can be used varies by state but is generally between thirty days and one year.
Registering a Trade Name, DBA
A trade name is a legal way to do business under a particular name that you file with the state or local government. It allows you to present yourself under a specific alias or business name.
This setup can be helpful for sole proprietors who are operating on their own as freelancers or independent contractors.
How Much Does It Cost to Form an LLC?
You may have certain questions when forming an LLC, such as what type of registration documents are required or how much does an LLC cost. There are many different steps and costs associated with forming an LLC. Gusto is a great option for businesses who need help with local taxes or unemployment as you are getting started.
Articles of Organization
The articles of organization for an LLC are required by every state. They formally register the business and its company name. Filing may be completed online or through the mail. Costs vary by state but are usually between $50 and $200.
Registered Agent Fees
An LLC must designate a registered agent to receive legal documents on its behalf. The registered agent may be the owner of the LLC, a spouse, a friend, or another individual.
Some companies offer their services as registered agents. If you choose to hire a professional business to act as your LLC’s registered agent, you may expect to pay an annual fee between $100 and $300.
Some states require new LLCs to publish a notification in the newspaper that indicates the company's formation. Costs vary depending on the location of the company and the advertising rates. A few states that require publication include New York, Arizona, and Nebraska.
Operating agreements outline how your business will be run, the business structure, management responsibilities, allocation of funds, and the purpose of the business. The operating agreement is usually optional but can be helpful to clear up any future disputes.
Agreements may be written with the assistance of a lawyer or using a template. If you seek assistance setting up an operating agreement, you can expect fees between $100 to $1500. So how much does an LLC cost? Make sure to include the expense for an operating agreement.
Other Ongoing LLC Costs
Above we outlined the initial LLC costs, but there are also some ongoing expenses to consider. Once your LLC is set up, depending on the state where your business is formed, you may need to pay some of these additional ongoing costs:
Business Permits and Licenses
Depending on the state that you operate in, you may be required to pay a business permit or license fee. This fee can range from $50 to $550, depending on the state you are in. The fee will include any required processing fees.
Annual Registration Fees
All 50 states require an annual LLC fee. Annual fees vary, but the average is typically around $91.
Annual Report Fees
In some states, an annual information report must be filed with the local government for compliance purposes. These reports are generally informational and may include any updates to the company’s registered office address or business scope. Fees for an annual report vary but are usually less than $100.
LLCs and Taxes
An LLC is considered to be a pass-through entity unless it elects to be taxed as a C-Corporation. Certain factors affect your LLC and taxes.
As a pass-through entity, any income earned by an LLC will be taxed at the owner’s personal tax rates. Deductions from the company’s earnings are allowed through Schedule C, Profit or Loss From a Business. Costs for the LLC and taxes are determined based on the company’s taxable income.
If the LLC chooses to be taxed as a corporation, then personal tax rates will not apply. Instead, the company must pay corporate income tax on any income for the year. The corporate income tax rate is currently a flat 21%.
An LLC is taxed as a pass-through entity on state returns unless it chooses to be held as a corporation for tax purposes. This setup means that the LLC will be taxed at personal income tax rates.
Total LLC and taxes costs for those entities that choose to be charged at corporate rates are determined based on the state corporate income tax rates.
Sales tax is levied by states, counties, and municipalities on business transactions of goods or services. Each state has its own set of rules governing which products or services are taxable and which are not.
In most cases, you must charge a sales tax on any goods or services that your LLC provides. The sales tax is then remitted to your state or local government on a regular basis.
If the LLC has employees, it must register with the state and pay unemployment tax. Unemployment taxes are paid as a percentage of each employee’s income and vary by state.
In some states, there are local taxes that must be paid in addition to sales and unemployment taxes. These taxes are used to fund local operating budgets and are typically charged as a percentage of employee wages.
So How Much Does an LLC Cost?
How much does it cost to form an LLC? While there are various fees associated with an LLC, they are much less than you might expect. This disparity is especially true when comparing an LLC business entity structure with a corporation.
During the initial setup of an LLC, you can expect to pay anywhere between $500 and $3,000, not including taxes. Ongoing annual fees to keep the business compliant will be between $250 to $1,000, depending on the state that the LLC is registered in.
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