How To Accurately Plan for the Cost of an LLC Formation

You can expect to pay around $600 to $2,500 to form a limited liability company (LLC) for your new small business. Business owners must prepare for all costs for their LLC business entity when planning their startup.

LLC business license fees vary depending on where you form your LLC. This FindLaw article helps new business entrepreneurs plan for startup costs associated with their chosen business structure, from fees associated with filing requirements to premiums for liability protection.

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Initial Articles of Organization Filing Fee

The initial filing fee to establish an LLC varies from state to state. The first step to take when making an LLC official is to file articles of organization with the secretary of state. Forming your new business as an LLC will protect you from personal liability and seizure of your personal assets if someone gets injured at your business or uses your product.

Like filing for a sole proprietorship, you must pay the state's filing fee to become a legal business entity. This differs from a general partnership because you're forming a business as opposed to merging two existing businesses. You will need to list:

• Your LLC name
• Employer Identification Number (EIN), also called a federal tax ID. This application with the IRS is free. It is what you use to file company tax returns and open an LLC bank account
• LLC owner (if a single-member) name, address, birthday, phone number, and email
• Contact information for all members of a multi-member LLC
• The management structure of your LLC (member-managed vs. manager-managed) as set out by your LLC operating agreement
• Registered agent contact information

The average filing fee is around $100. If you hire an attorney to file it for you, then you will likely pay $500 for filing the articles of incorporation and procuring a tax ID. Once the state approves it, you will receive a certificate of formation.

However, the filing fee for the articles of organization is not the only factor that goes into the average cost of forming an LLC. Owners must also keep in mind the ongoing costs of carrying on business.

Registered Agent Fees

Once you've chosen a business name, you can list yourself or a LLC member as a registered agent for the LLC. Some small business owners do this to save costs. Rather than pay a third party like a registered agent service or an attorney to be their agent, they choose to get served legal documents themselves.

An agent is responsible for accepting legal paperwork or certified demand letters for the business. If someone wishes to sue your LLC, they must send you a demand letter, often by certified mail. Depending on your state, they must send it to the agent on file with the secretary of state or the division of corporations. The same is true if they file a lawsuit against you. The sheriff must serve the agent on file with legal paperwork. This is called service of process.

You may not wish to be served legal paperwork at your home or business. In that case, you should secure a registered agent through a registered agent service for a fee. This fee is around $125 a year, and it is paid to the agent company. The registered agent will inform you of service or a letter.

You can also hire your attorney who formed your LLC or C Corporation (C Corp) to be your agent. Their fee will vary depending on their hourly rate or flat fee.

Annual Report Fee

An agent is also responsible for filing your annual report once a year. Some states require your report to be due on the anniversary of your LLC filing, while others have a set date every year. An LLC's annual report must accurately report a checklist that includes:

• Your business activities (NAICS code)
• Your current members and manager(s)
• Your registered agent
• Your principal place of business address

Like a filing fee, annual reporting fees must be paid to the state. Annual reporting fees vary from state to state. Some states, like Mississippi, do not charge a filing fee for an annual report, whereas others, like Louisiana, charge $35.

Paying LLC Taxes

The type of business entity determines the payment of taxes. The IRS classifies limited liability companies as "pass-through" entities for tax purposes. In a pass-through entity, the profits from the company pass through the company and go to the individual LLC members. You won't run into the double taxation issue certain corporations have to deal with.

The IRS requires LLC members to pay a self-employment tax if the member is an active participant in the business. A self-employment tax is a tax for self-employed people. LLC members' profit distributions are income for the individual LLC members.

Unlike when a person works for a company and has taxes withheld from each paycheck, the IRS does not withhold taxes from profit distributions in an LLC. Therefore, LLC members must claim the income from profit distributions when they file their individual income taxes.

Status as a pass-through entity is one of the leading tax benefits of forming an LLC. Because the LLC members claim profits from the LLC on their individual income taxes, the business itself does not pay corporate taxes.

Professional Expenses

When running an LLC and keeping track of state laws, you may need to hire professionals in their fields to help you. A certified public accountant (CPA) can help you set up payroll including your salary, file tax returns, and follow tax laws for you. A CPA is helpful if your LLC was formed to allow you to be a franchise company. 

Franchise taxes can be complicated. Some CPAs are on retainer for $350 a month, but most fees depend on the size of your LLC and business needs.

A business attorney can help form your LLC, advise on employment law, and answer any human resources questions that come up. You can expect to pay an attorney a flat fee for forming your legal entity ($600 to $2,000, depending on what you need) or a monthly retainer. Some attorneys charge by the hour. Others charge a flat fee. An attorney can help you save money in the long run by avoiding mistakes and getting you up and running smoothly.

You may also need to hire a social media manager, who can cost between $400 and $4500 a month. Marketing strategies may require an advertising budget for online marketing, such as paid Google Ads (pay-per-click, or PPC) or sponsored social media ads.

Name Registration Fees

Once you form your LLC, you should consider protecting your intellectual property. This includes registering your trade name with your state. This averages around $100. It also includes filing a trademark registration with the United States Patent and Trademark Office (USPTO), which starts at $250 per classification.

If you ever decide to use a name other than what you registered your LLC as, you will have to pay another fee with your state. You will file a doing business as (DBA) or assumed name certificate. The fee varies by state law. You can expect to pay anywhere from $25 to $75. 

A Business Lawyer Can Help You

A startup LLC can benefit from having a consultation with a business lawyer before LLC formation. Consults can be free or up to $500. This will allow you to understand all costs associated with forming your new business so you can budget for it.