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Starting a business is exciting, but it also carries lots of challenges. One of the largest, most common challenge is the cost behind owning and operating a business.
Most entrepreneurs balance the cost of their products and/or services with the profits they hope to make, but are you overlooking the costs associated with forming the business entity itself?
Limited liability company formation expenses add up quickly, so you need to understand what’s involved before you get started. This brief guide will give you a sense of what you can expect to pay while forming your LLC.
Expert insight: No two LLCs are exactly alike, and neither are their formation costs. The expenses incurred during the startup phase can vary depending on your state, as well as on the unique needs of your business entity.
That said, there are quite a few common costs for forming an LLC that apply to most businesses. Let’s break them down one by one to determine which of these costs you’ll incur to set up your new LLC.
Typical costs: $50 (legal services) + $50 to $800 (filing fee), depending on the state.
To legally form your business you need to first file the Articles of Organization with the secretary of State. In some state this is called “Certificate of Formation”, “Certificate of Organization”. You can file the LLC filing documents online, by mail, or in-person when visiting your local SOS office. The filing costs usually vary from $50 to $800 which is a one-time fee. The filing fee you pay is dependent on your state of formation.
If you plan to form your company in another state, then you might be required to provide additional documentation and pay a higher formation fee.
Not sure what an article of organization is?
The articles of organization is the document which officially forms your business with your state. Fees for this document vary from one state to another, with Kentucky’s fee of $40 being the cheapest.
In contrast, Massachusetts requires $500 to form an LLC, while Tennessee has a sliding scale with a $300 minimum and a $3,000 maximum. Most states charge within the $100-150 range to file this document.
For many entrepreneurs, the majority of their LLC startup costs typically comprise filing fees. While it is not necessary to hire a lawyer for filing the articles of organization to establish an LLC, utilizing an LLC filing service can be beneficial, especially considering the affordable nature of these services. Multiple service providers offer the option to register your LLC for a fee of less than $50, in addition to the state fee. This cost-effective approach provides convenience and professional assistance in navigating the LLC formation process without the need for legal representation.
Standard Cost: One-time fee between $10 and $140
By filing a name reservation, you can protect your business name from being claimed by others for a period of time. You are not required to complete this filing (unless you’re forming an LLC in Alabama, the one state that does require a name reservation in advance), but many people choose to.
The filing allows you to protect your business name while you get your business set up. The typical cost is $10-30, but some states charge more.
Typical costs: $0 to $200
An operating agreement serves as an internal document that generally outlines the operational framework of your LLC. It describes how your LLC will be run, the roles and contributions of the owners (members) and how decisions will be made.
Anyone can create an operating agreement on their own free of charge. However, its important to seek professional assistance when dealing with critical aspects such as profit and loss allocation among ownership to make sure everything is done correctly in adherence to legal requirements.
Legal service providers offer their expertise for a reasonable fee, typically ranging from $50 to $200. Alternatively, you can hire a local lawyer. Its a small cost to pay to establish clarity, align expectations, avoid potential conflicts in the future and ensure everyone is on the same page.
Typical costs: Varies, depending on state and local newspapers’ rates
Entrepreneurs in Arizona, Nebraska or New York are subject to additional LLC costs in the form of publication. LLCs in these states have to publish notices of formation for a specified period of time in one or more newspapers across one or more cities or counties.
Typical costs: $0 to $300
A registered agent is required for all LLCs. The agent accepts service of process and other important government documents on your behalf. You can save money by acting as your own agent, but we usually do not advise this route.
For most LLCs, it’s worth the expense to maintain your personal privacy, cut down on the junk mail you receive, and remove the risk of missing a crucial document delivery. Pricing for professional registered agent services can vary considerably, but for the most part this service costs in the ballpark of $100-300 per year. In our opinion, it’s usually worth every penny.
After paying the initial startup LLC costs and succesfully forming your business, you’ll have to take care of other LLC costs associated with maintaining it. This includes state and federal taxes, annual filings, licensing, reporting fees and the cost of any services used to maintain the LLC OR any compliance services provided by an online formation company if you hired one.
Standard Cost: Between $0 and $99
An employer identification number is a number assigned to a company by the IRS that will be used when paying federal taxes. If your LLC has more than one member or employees, you’re required to have an EIN. But even if your LLC isn’t required to have one, it is good you consider getting one.
You’ll need to get an EIN If your LLC plans to hire employees, make contracts with vendors or open business bank accounts. You can apply for an EIN from the IRS for free, provided you apply for it yourself. That said, some LLC formation services will complete the application for you.
If you do use their service, you’ll need to pay their fee, which is typically between $50 and $100 for EIN obtainment. The EIN application is often included as part of a larger service package.
In most cases, the costs to maintain an LLC are not quite as much as those to form. Since we’re on the subject though, we figure it’s worth mentioning.
These costs including filing annual reports, renewing your licenses, paying franchise taxes required by your state, and perhaps other annual fees. When you form an LLC, we recommend that you inquire about maintenance fees. That way, you’ll be informed from the beginning about your annual costs.
In general, the only ongoing costs that get really expensive are annual reports (which cost between $10 in Colorado and $500 in Massachusetts), and franchise taxes (which can exceed $1,000 in some states, like California).
Typical costs: Varies from state to state
Like any other person or entity, LLCs are subject to taxation. But unlike other business entity, the federal government doesn’t take its cut directly from the LLC. Instead, the taxes are collected from the profits of the owners as a pass-through income. But LLCs can write off certain startup costs—up to up to a maximum of $5,000. These deductions can include attorney fees, market research costs, office space, equipment, and so on.
Most states tax LLC profits in the same way as the federal government, where profits pass through to the personal tax returns of the members. However, some states also have and enforce mandatory LLC franchise taxes. For example, the franchise fee in Delaware is $300, while California has an annual minimum franchise tax of $800.
At the state government level, LLCs may be subject to reporting fees. Reporting fees are variable from state to state, but typically average somewhere around $100 a year.
In some states, you must apply for a seller’s permit as part of your registration for sales taxes, which gives you the right to sell goods and services in that state. If you do need a seller’s permit, which is required in 16 states, it will cost you anywhere from $5 in Florida to $100 in Connecticut.