How to setup your LLC or Corp for the first time

How To Painlessly Set Up an LLC or Corporation For The First Time

You’ve validated your idea and have a business name. Now, you must choose a business structure for your startup. In other words, you need to register your business as an official entity with the U.S. Government. 

Does that sound scary? Don’t worry, it’s not as bad as it sounds, and this guide will help. 

The truth is, most new business owners are unfamiliar with the ins and outs of business entities, and therefore, they’re unsure which one to choose or how to set it up. But skipping this critical step in starting a business can cause legal problems and even put your personal assets at risk.

This guide will help you choose a business structure for your startup and explain the key differences between an LLC and a corporation. Most startups today are establishing their business as a Limited Liability Company (LLC) or an S Corporation, so we’ll focus on those business entities in this guide. 

By the end of this article, you will feel prepared to register your business, and we’ll share some tools that can guide you through the process.

Let’s get started!

Table of contents

What is a Business Structure?

A business structure, or entity, refers to a business’s legal and organizational boundaries. The entity under which you operate influences various aspects of your business, including its legal, financial, governmental, and operational aspects. 

The entity you choose effectively tells the user government how to treat your business in terms of taxes and regulations.

Types of Business Structures

The most common types of business structures are the following:

  • Sole Proprietorship: A business owned and operated by a single person, offering simplicity and complete control but with unlimited personal liability.
  • Partnership: A business owned by two or more individuals who share profits and losses, with varying levels of liability depending on the partnership type.
  • Limited Liability Company (LLC): This flexible business structure allows for limited liability and pass-through taxation, meaning the LLC doesn’t file an income tax return; the owners pay the taxes themselves.
  • Corporation: A completely separate legal entity owned by shareholders, providing limited liability and easier access to capital, but subject to more regulations and potentially double taxation. The two main corporation types are S corp and C corp. We’ll focus on the S corp in this guide as it’s much more common and applicable to most small businesses.
  • Nonprofit: A business that operates for charitable, educational, or social purposes rather than profit, providing tax exemption, access to grants and donations, and limited liability.

For the purpose of this guide, we’ll focus on LLCs and Corporations, as they are the most common business entity types for startups and small businesses.

8 Reasons You Need To Form a Business Entity

Business structures aren’t just another government hurdle you have to jump through, they actually protect and benefit you.

Here are the key reasons business entities are important

LLCs and Corporations protect the business owner’s personal property from business debts and legal claims. A formal business entity can also enter into contracts, sue, and be sued, maintaining a clear distinction between the business and its owners.

2. Taxation Differences

Different business structures are taxed differently. For example, partnerships and sole proprietorships allow profits to pass through the business owner’s personal tax returns, whereas a corporation may face double taxation.

3. Management & Operations

How a business is structured determines how decisions are made. Structuring your business gives you clear management roles and responsibilities for smoother operations and conflict resolution.

4. Funding & Raising Capital

Forming a proper business entity can help attract more investors. Investors are typically more comfortable investing in formal business entities such as LLCs and corporations, as these entities involve partial ownership. 

5. Banking & Building Credit

A business entity is required in order to open a business bank account. Furthermore, LLCs and corporations actually have their own credit score associated with the entity. Setting up a business entity means opening a dedicated business bank account and building corporate credit. Before a business entity, your banking would be done through a personal account, and your personal credit would be on the line. 

6. Succession Planning

Some business entities, like corporations, guarantee perpetual existence, meaning if the owner leaves, the business continues. If you’re building a large organization, you’ll likely want to protect any risk here so that business doesn’t stop if you or another owner pass away.

7. Regulation & Compliance

Some business entities like Corporations require companies to adhere to strict reporting, annual reports, and compliance policies. While this can take some extra work, it can also help build trust and loyalty with customers, especially if you’re doing business with enterprise or global clients. 

8. Credibility & Professionalism

Forming a legal business entity enhances your credibility and creates a more professional brand image. This can help build trust and attract larger, more established customers and investors.

When & How To Set Up An LLC

An LLC is a great place to start, but that doesn’t mean it’s right for everyone. Here are some reasons you might choose to set up an LLC.

  • If you want a simple and less expensive structure: An LLC is easier to form, and there is no need for extensive record-keeping or formal annual meetings.
  • If you want a flexible management structure, LLCs don’t require a board of directors, making them ideal for companies with multiple types of owners. An LLC might be owned by individuals, a corporation, or multiple businesses.
  • Avoid double taxation: LLCs automatically allow profits and losses to be reported on the owners’ personal tax returns, avoiding double taxation.

Summary: An LLC offers a flexible management and ownership structure, a simpler setup process, and minimal compliance with pass-through taxation.

How To Form An LLC: Step-by-Step

  1. Choose a business name: Hopefully, you’ve already done this. If not, refer to our guide on how to name your business.
  2. Register your LLC: Head to your state’s Secretary of State website, navigate to the business filing services portal, and select to register a new business. To find this, search “register LLC in <state name>” in Google. Follow the prompts to complete the registration, including confirming your business name, selecting the month your fiscal year ends, and more details.
  3. Appoint a registered agent: During the above process, you’ll need to assign a registered agent (likely yourself or one of the other business owners). A business’s registered agent is a person designated by the LLC to receive legal, government, and compliance documents on behalf of the LLC.
  4. Prepare an LLC operating agreement: As of June 2024, five states require LLCs to have an operating agreement. Even if your state doesn’t require one, it’s a good idea to write one. This document outlines financial and operational guidelines and ensures the LLC is set up to run smoothly.
  5. File your articles of organization: An LLC’s articles of organization include information such as the LLC’s name, primary address where business is done, duration and purpose, and management details. Check with your secretary of state for specific requirements for your location.
  6. Apply for an Employer Identification Number (EIN): An EIN, also known as a federal tax ID, is needed to open a business bank account, pay federal taxes, and hire employees. You can apply for an EIN here.
  7. Appoint a registered agent: The agent must have a physical address within the state and be available during business hours to receive documents. You can choose to be your own registered agent, or you can appoint someone else, such as an accountant or attorney.
  8. Create bylaws: Most states require S corps to adopt bylaws. Bylaws outline the internal rules and procedures of your S corp, such as meeting procedures, shareholder and director responsibilities, and other key business details.

When & How To Set Up An S Corporation

If an LLC doesn’t seem the right choice, you might consider setting up an S corporation. Here are some reasons you might choose to set one up.

  • If you’re raising funds: If you need to raise funds or investment money, you may need to establish a corporation to issue stock shares or other forms of equity.
  • If you’re going to generate significant profits: An S corp allows you to divide income into salaries and offer tax savings based on profits. 
  • If you will have a limited number of shareholders: S corps must have 100 or fewer shareholders, making them ideal for family businesses. 
  • If you’re prepared for regulations and compliance: S Corps requires strict bookkeeping records, annual meetings, and a board of directors.

Summary: If you plan to raise funds and make large profits, have a limited number of shareholders, and are comfortable with the strict formalities and compliance requirements, go with an S corporation.

How To Form An S Corporation: Step-by-Step

  1. Choose a business name: If you haven’t already done so, check out our guide on how to name your business. 
  2. Form a C corporation or LLC: An S corporation must be formed by applying for S corporation status from an existing C corporation or LLC. So, you’ll need to register your business under one of these entities first. 
  3. Obtain an EIN: You’ll need an EIN for tax purposes, to start a business bank account, and to hire employees. Apply for an EIN on the IRS website.
  4. Elect a board of directors: All S corps require at least one director on the board, which is responsible for overseeing the company’s management and strategic decisions.
  5. File articles of incorporation: Often, this can be a single-page document, including a brief description of the business, the address of incorporation, and the ownership structure, including the number of shares to be issued. Each state has its own requirements for what to include in the articles of incorporation, so make sure to check your state’s requirements. 
  6. Apply for S corp status: File Form 2553 with the IRS to elect your company’s S corp status. This kicks off the process of converting your LLC or C corp into an S corp.
  7. Appoint a registered agent: The agent must have a physical address within the state and be available during business hours to receive documents. You can choose to be your own registered agent, or you can appoint someone else, such as an accountant or attorney.
  8. Create bylaws: Most states require S corps to adopt bylaws. Bylaws outline the internal rules and procedures of your S corp, such as meeting procedures, shareholder and director responsibilities, and other key business details.

Tools To Help You Set Up A Business Entity

If you feel intimidated by the idea of registering your business yourself, don’t fret. Plenty of third-party tools are available to help walk you through the process and actually handle much of the heavy lifting on your behalf. 

Here are some popular offers to help you register your business entity. 

Note: the prices listed below are as of August 2024 and represent the membership plan that inlcludes setting up all of the items we shared earlier in this article. Some of these tools have cheaper plans, but they don’t include 100% of the services. 

LegalZoom

1. LegalZoom

Cost: Entity formation starts at $249

Best for: Businesses that need a one-stop-shop for all things legal, but aren’t ready to hire an in-house attorney.

LegalZoom aims to make legal assistance more accessible and affordable by offering a wide range of services and products that are traditionally only available through hiring an attorney.

With LegalZoom, you can simplify the process of starting a business and do much more, like register trademarks, create wills and trusts, and get access to a lawyer for general legal help. Legal Zoom is great for businesses or individuals, depending on your legal needs. 

RocketLawyer

2. Rocket Lawyer

Cost: Entity formation starts at $239

Best for: Any business that needs to create legal documents quickly with the assistance of experienced attorneys.

Rocket Lawyer provides legal services and resources to individuals, families, and businesses. Their core focus is providing access to experienced attorneys and assisting with creating legal documents. Their services also include access to on-call attorneys. 

ZenBusiness

3. ZenBusiness

Cost: Entity formation starts at $199

Best for: Small businesses looking for simple and straight forward legal help on a one-off basis.

ZenBusiness specializes in business formation and compliance, including LLC registration and other formation services and registered agent services.

Its strong focus on business formation and user-friendly pricing make it appealing to new business owners setting up an LLC.

Doola

4. Doola

Cost: Entity formation starts at $297

Best for: New business owners and young entrepreneurs who need to formalize their business and improve bookkeeping practices.

Doola is geared towards young entrepreneurs. It helps them create a new business with confidence and simplifies the process along the way.

With Doola, aspiring business owners can form official business entities, get help with bookkeeping and taxes, and more.

Why You Should Start With An LLC

Choosing an LLC or S corporation depends on how much administrative complexity you can handle, how formal of a management structure you want, and whether or not you will be raising money. 

If you have doubts about which entity type to start with, play it safe and start an LLC. 

An LLC gives you the flexibility to convert to an S corp later, but you can’t convert an S corp to an LLC. With an LLC, you get personal asset protection, you can build corporate credit, you get a tax ID number, and you can open a business bank account. 

Need More Help? 

Check out these other guides:

  • IRS Businesses Page: This page breaks down everything you need to know about setting up your business, like choosing a structure, handling taxes, and getting an EIN (Employer Identification Number). Whether you’re self-employed or running a small business, it gives you the essential tools to stay on track with taxes, deductions, and credits​.
  • S Corp vs. C Corp Differences and Benefits (Wolters Kluwer): This article explains the big differences between S Corps and C Corps. With an S Corp, you avoid paying taxes twice, but you can only have limited shareholders. C Corps, on the other hand, are better for bigger businesses, but you’ll get hit with double taxation—once at the company level and again on your personal taxes​.
  • Spotify Podcast on Corporations: This podcast explores whether an LLC, S Corp, or C Corp is right for your business. It discusses the pros and cons of each and highlights the tax differences. It’s perfect for figuring out what’s best for your business needs.
  • IRS Guide on Forming a Corporation: Starting a Corporation? This guide tells you exactly how to do it—from registering with your state and getting your EIN to filing the right forms with the IRS. Plus, it lays out the corporate rules you need to follow​.
  • IRS Employer Identification Numbers (EINs): You’ll need an EIN to pay taxes, hire employees, or even just open a business bank account. This page explains why an EIN is a must and how to get one for your business​.
  • IRS S Corporations: If you’re thinking about becoming an S Corp, this page walks you through what it means. You get to pass profits and losses to your personal taxes, which can save you money, but you have to meet certain rules to qualify​.