If you’re considering starting a limited liability company (LLC), it’s smart to think about the cost. Having an idea of how much startup capital you need and the types of fees you will have to pay on a regular basis can help you position your business for success and avoid surprise expenses.
Prospective entrepreneurs shouldn’t jump into forming an LLC without first asking that crucial question: How much does it cost to start and successfully run the company? If you need help understanding what fees an LLC must plan for, you’ve come to the right place.
There’s a lot you need to consider, from the costs of LLC formation to the ongoing fees you will pay every year. Some costs are strictly required while other expenses are optional costs for services that can save you time and give your business a better foundation.
We break it all down, from the mandatory costs to the voluntary expenses, and from the one-time formation fees to the recurring charges you’ll encounter. With all this information, you can rest assured you know what you’re getting into when you form an LLC.
How Much Does It Cost to Form an LLC?
Starting your LLC is a multistep process. Costs can pop up at various different stages of LLC formation, including:
- Choosing your business name
- Filing articles of organization with the secretary of state
- Securing all applicable business licenses
Each state has its own process for forming an LLC, which means you might encounter slightly different steps when launching a business in one state compared to another. The costs of forming your LLC also vary depending on the state in which you decide to start your company.
In the cheapest states, you can satisfy the legal requirements to form an LLC business entity for under $100. Kentucky, for example, for example, charges an LLC filing fee of just $40, and Arkansas charges $45. Among the states that charge initial LLC filing fees of just $50 are Arizona, Colorado, Hawaii, Michigan, Mississippi, and New Mexico.
In more expensive states, like Texas, your LLC filing fees alone will add up to hundreds of dollars.
Name Reservation Costs for Your LLC
Choosing a business name is often one of the first steps toward formalizing your LLC formation. In certain situations, you may need to pay a fee to reserve a business name.
When Should You Pay to Reserve a Name for Your LLC?
The situations in which you need to pay to reserve an LLC name include:
- If you want to reserve the name of your LLC that you are maybe a few months away from starting, so that someone else can’t take it, or
- If you plan to start an LLC in the state of Alabama, which requires a formal Name Reservation document in addition to the Certificate of Formation to launch an LLC.
Outside of these circumstances, name reservation may not serve much of a purpose. If you’re ready to move forward with forming an LLC immediately—and doing so in a state that doesn’t require a separate name reservation—then you can skip this step in most instances.
The Cost of Reserving a Name for an LLC
The fee for reserving an LLC name is as little as $10 in some states, like Virginia. You could pay considerably more to reserve a name in other states, such as Pennsylvania, with its $70 name reservation fee. Alabama, the state where an official name reservation is mandatory for starting a business, requires a $25 processing fee.
DBA Name Registration Costs for Your LLC
Once you select a business name, you’re not locked into using that appellation, and only that appellation, forever. Many companies use a “fictitious name,” also referred to as a “doing business as” (DBA) name, to conduct at least some of their business. If you want to use a different LLC name than the one under which you first registered your business, there’s a good chance you will need to register that name with the secretary of state.
Of course, this means paying additional fees. The costs to register a DBA are usually in the ballpark of $10 to $50, depending on your state. The penalties for illegally doing business under a name that isn’t registered with the government can include steep fines in the thousands of dollars. In some states, you may have to renew DBA name registrations periodically.
State Filing Fees for Forming an LLC
To establish a business entity as an LLC, you need to file a document with the secretary of state that is known in most states as Articles of Organization. This essential step in starting an LLC is the part of business formation that makes your limited liability company official.
How Much Does It Cost to File Your Articles of Organization?
The cost for filing your articles of organization also varies depending on the state. LLC filing fees are typically under $300, according to the U.S. Small Business Association, but that isn’t the case in every state. If you plan to form your LLC in Massachusetts, for example, you’ll pay a steeper filing fee of $500.
The good news is that you only have to pay LLC filing fees once when you first form your LLC. This isn’t an annual or ongoing expense, although you will be required to pay additional state filing fees if you need to amend your articles of organization, merge with or acquire another business, or close your LLC.
Business License and Registration Fees for Your LLC
You’ve got a business name and an established business entity, but you’re still not ready to start bringing in the profits. First, you need to figure out what business licensing and registration requirements apply to your LLC and meet those criteria.
As a small-business owner, you may need to pay for only the basic business registration required by your state or for a complex patchwork of federal, state, and local licenses.
Federal Licensing for Businesses
Generally, your business needs a federal license only if it engages in certain activities and industries, according to the U.S. Small Business Association. These activities include:
- Fish and wildlife
- Maritime transportation
- Transportation by oversize vehicles
- Nuclear energy
- Mining and drilling
- Radio and television broadcasting
- Manufacture, sales, or serving of alcohol
- Manufacture or sales of firearms or ammunition
Federal business licenses, if you need them, can be expensive, sometimes costing several hundred dollars.
State and Local Business License Costs
Just because your business isn’t required to attain a federal license doesn’t mean you’re all set. Depending on your industry and business activities, you may need to get business licenses from the city, county, and/or state in which your business is located. State and local licenses apply to a broader array of business industries and activities than federal licenses do, including restaurants and retail stores.
However, because these requirements are so specific to your industry and your location, figuring out exactly what licenses you need can be complicated. You need to do research specifically on your industry and your city, county, and state to determine what activities are regulated at which levels of government and begin the process of getting the licenses you need.
It’s important to include the costs of acquiring and maintaining business licenses in your calculations of how much money you will spend to get your LLC started. This is difficult to do without more research into what exactly is expected of your LLC in terms of licenses and registration. You should consider that the cost of a business license can range from $25 for a general business license to a few hundred dollars for more specific licenses used in highly regulated industries and activities.
What Parts of the LLC Formation Process Are Free?
It may feel like every single step of the process by which an LLC is formed just piles on more and more state fees. You should know that some steps, like the following, typically have no cost.
- Running a business name search through an online database in preparation for reserving or registering your business name
- Acquiring an employer identification number (EIN) from the Internal Revenue Service (IRS)
- Registering as an employer with your state workforce commission or labor agency
Beyond the State Fees for Starting an LLC
The state fees for name reservations (if applicable), articles of organization filings, and business licenses and registration are unavoidable. Without taking these actions and paying the accompanying fees, you can’t legally launch an LLC.
Beyond the state fees that apply, there are often other costs involved in forming your LLC. You’re not required by state law to pay for professional services used for LLC formation, but it may be a good idea to do so. Similarly, no one will make you hire a lawyer to write your legally binding contracts, but it’s a smart move nonetheless.
Your LLC is a true professional endeavor, not just a hobby, so it’s important to make sure that all of your bases are covered. Hiring a professional can help you avoid mistakes and save time that would be better used for building your business.
The Cost of Drawing Up Legal Documents to Start Your LLC
You don’t need a lawyer to write your articles of organization or certificate of formation for you. Generally, you just have to complete a state form and submit the accompanying state filing fees to the secretary of state.
Where a business lawyer will really add value to your efforts to form an LLC is in the context of your operating agreement. The operating agreement, which is often mandatory for LLC formation, is a legally binding contract. Your operating agreement should specify, in writing, how your business will work and the rules it will follow.
What an LLC Operating Agreement Should State
Some key aspects of an operating agreement include:
- A breakdown of the members’ shares of the company
- Allocation of profits and losses to and among members
- The company’s management structure
- Duties and voting powers of all members
- Rules for adding and removing members and for closing, selling, or transferring ownership of the company
These elements include serious contractual obligations, which is why business law firms are best suited to the task of creating this document.
If an operating agreement isn’t written to thoroughly address each of these points (and more), it could result in the company facing disagreements among its members. Business owners could end up squabbling over who gets what portion of the profits or who gets to make important business decisions, leading to lawsuits and ultimately tearing your company apart.
The Cost of Hiring a Business Lawyer for LLC Formation
To avoid the problems posed by missing information and vague language in a contract, it may be best to bring in a professional to write this agreement for you, especially if you are forming a multimember LLC. This can be a big expense.
When a law firm writes up an operating agreement for a single member LLC, you should expect to spend at least several hundred dollars for the service. For an operating agreement for a multimember LLC, you are likely looking at a price tag between a thousand and several thousand dollars.
Professional Services as an Alternative to Hiring a Business Lawyer
Perhaps the full cost of an attorney’s fee isn’t in your startup budget, but you’re not comfortable just winging it when it comes to something as important as an operating agreement. There is a middle ground to consider. Online legal technology companies like LegalZoom can create an operating agreement for your business that based on your answers to simple online questions, and for a much smaller fee (in the $99 to $199 range).
The Costs of Registered Agent Services
Another requirement for forming an LLC is that business owners must designate a registered agent. The registered agent serves as a company’s official recipient of legal and tax documents. For many business owners, this requirement means yet another cost of creating an LLC.
You don’t technically have to pay someone to be your registered agent. However, state law may require a registered agent to be separate from the business entity. If you can’t just name your LLC its own registered agent, you would have to either personally serve as the registered agent yourself or hire a professional service to handle this task for you.
Many business owners can’t or don’t want to make themselves available at a registered office at all times during business hours, as a registered agent is required to do. Instead, owners choose to outsource the job. LLC owners can hire a registered agent, either as an individual service or as part of a plan offered by a professional incorporation service such as ZenBusiness. If you’re planning on hiring a registered agent, you should expect to spend between $100 and $200 annually for the service.
The Costs of Professional LLC Formation Services
Just because you can go through the process of starting an LLC on your own doesn’t mean you have to, or even that you necessarily should. The paperwork and other aspects of the LLC formation process are time-consuming and often tedious. As a small-business owner, you’ve got other things on your plate.
It’s possible that your time is so valuable, as far as actually putting in the work to make your business a success, that you would be better off outsourcing the task of setting up an LLC. When you go through a professional service for LLC incorporation and business development, you can minimize your direct involvement in the technicalities. This frees up your time for setting up your business location, hunting down the supplies and equipment you need, acquiring the workforce talent that will help you operate your company, and the other tasks that are crucial to short-term and long-term prosperity.
How much will you pay to have someone else form your LLC for you? Some companies, including LegalZoom and ZenBusiness, offer LLC business formation packages for under $100. If you want more bells and whistles, such as expedited processing and the start of your company’s online presence, you’ll pay more—likely a few hundred dollars. These costs are typically tax-deductible as part of the expense of operating your business.
How Much Does It Cost to Keep an LLC Running?
The cost to start an LLC is probably the biggest barrier for would-be entrepreneurs, but it’s important to plan for the expenses beyond formation. When you have an LLC, you’re sure to encounter ongoing costs, including state fees that you need to pay year in and year out.
Many states impose a franchise tax on LLCs. Contrary to what the name would suggest, these annual fees aren’t limited to franchises of a corporation. Instead, they are imposed on companies (excluding sole proprietorships, typically) that do business in a state. A franchise tax is sometimes called a “business privilege tax.”
Depending on the state, your franchise tax obligation may be charged as a flat fee or as a portion of your LLC’s income. In Oklahoma, for example, a business must pay a tax of $1.25 for every $1,000 of capital that it uses or invests in the state. LLCs doing business in California must pay a minimum annual franchise tax of $800.
Not all states impose a franchise tax, but if you happen to do business in a state that does, you will have to contend with these taxes for the entire life of your business. These ongoing costs are one of the downsides to forming an LLC as opposed to taking care of business as a sole proprietor.
Annual Report Filing Fees
One of the requirements for an LLC to remain in good standing is, in many states, the regular filing of a statement of information. These statements are often referred to as “annual reports.”
What Is an LLC Annual Report?
Don’t confuse the annual report an LLC has to file with the kind of publication given to shareholders that serves as a public disclosure of a corporation’s financial growth and which often seeks to inspire potential investors to buy into the company.
An LLC’s annual report isn’t meant to drive the sales of stocks and shares. Instead, it’s needed to make sure the government has up-to-date information on the company’s address, its members and managers, its registered agent, and other details.
Almost all states require LLCs to submit some form of a statement of information or other informational updates on a regular basis, but these reports aren’t always annual. Many states require an updated informational report every two years. In Pennsylvania, a “decennial filing” is required every 10 years (during years ending in the digit 1) instead of filing reports annually.
The Costs of Filing Your Annual Report
What does filing your annual report have to do with your LLC costs? Even though the filing of an annual report is mandated by the state, LLC owners often need to pay a fee to process their report filing. These annual (or biennial or decennial) fees are ongoing costs that you will need to pay for as long as you own your LLC.
Like other state filing fees, the charge to process an annual report varies depending on the state. In Colorado, for example, it costs just $10 to file your periodic (annual) report online. If you form an LLC in the state of Massachusetts, which again proves to be one of the most expensive states for LLCs, your annual report filing fee is $500, as of early 2021.
Not every state requires an annual report or charges fees to process one, but most states do. Make sure you plan for these LLC costs, because an unexpected fee of hundreds of dollars can pose a problem, particularly for LLC members whose companies are a small side business rather than their full-time focus.
Tax Payments for an LLC
Besides the filing fees, state franchise taxes, and annual fees for filing reports, there is another government cost you shouldn’t overlook: income tax. All businesses pay tax on their income in some fashion, so this cost isn’t exclusive to LLCs. What is unique about LLCs is that their members can elect to use different classifications for tax purposes. In other words, you can choose how you want your LLC’s earnings to be taxed.
Taxation Options for LLCs
One of the reasons LLCs are popular is because this business structure offers the benefit of flexibility for tax purposes. More specifically, an LLC can be taxed as a pass-through entity. A pass-through entity passes the company’s tax burden onto its members, who pay individual income tax on their share of the company’s earnings.
Pass-through taxation allows the LLC to avoid the complexities of paying a separate set of corporate taxes. In doing so, you can escape the double-taxation phenomenon that occurs when the company pays corporate taxes and the individual member is also taxed on their salary or other earnings from the LLC.
Whether you pay your LLC’s taxes as a pass-through entity or a corporation, you need to make sure you understand how your company is classified for tax purposes and plan for this expense. Don’t forget to keep track of the business expenses you can deduct from your company’s taxable income. These potential deductions can include the cost to form an LLC, the cost of having a law firm draft legal documents for your company, and any annual fee charged by the state.
As of 2020, the corporate tax rate is 21%, according to the Tax Policy Center. For LLCs taxed as pass-through entities, each member will be subject to individual tax rates on their income from the business and may also be subject to self-employment taxes in some cases.
The Costs of Doing Business
One area in which costs will vary a lot from one company to another is operating costs. The size and purpose of a business can have a huge impact on how much the company needs to spend to keep the business going and growing. LLCs can be large or small and exist in just about every imaginable industry.
If you’re the only business owner of the LLC and you have no employees, you don’t have to worry about the overhead payroll that plagues a large LLC with numerous workers. You will also likely use less commercial space and go through fewer resources, which can save you operating costs.
Exactly how your company makes money also matters. You may have a lot less in business expenditures if you provide a professional service, particularly one that uses up comparably little resources, than if you manufactured products using raw materials and ingredients, machinery, and packaging materials.
Aside from these costs that are unique to your individual business, there are some expenses that most LLCs must be aware of, including:
- Bank account service fees, including monthly maintenance fees and transaction fees on business bank accounts
- The cost of business insurance
- Fees and interest charges on business credit cards
- Technology solutions, like IT support services and cybersecurity firewalls, for your LLC
- Marketing costs, which can include traditional and digital marketing campaigns and materials
Operating costs are part of the expense of running a business regardless of whether you choose an LLC, corporation, or sole-proprietorship structure. Still, if you dive into forming an LLC without thinking about how much it costs to actually perform your business activities, you could come up short of capital and have to close your doors.
Is an LLC Worth the Cost?
All of this information can be enough to make an aspiring entrepreneur’s head spin. It may sound like you will face so many costs at so many different stages of setting up your LLC and running your business that having an LLC is not feasible, or at least not profitable.
Don’t let the sticker shock scare you away from your dream. A limited liability company is actually one of the most affordable business structures for owners to start, and the benefits of this business structure, like liability protection and tax flexibility, are valuable for new and growing companies.
The Cost of an LLC Versus a Corporation
Corporations are generally both more complicated and more expensive to launch overall, even if the difference in initial state filing fees is marginal. Corporations need a more rigid formal hierarchy and are more heavily regulated than LLCs. The result is that you are likely to encounter higher operating costs and more expenses in the form of state fees.
The money that comes in through your business may also face a higher tax burden if the company is structured as a corporation compared to an LLC. Even if the tax rates are comparable, you will most likely pay more in taxes for a corporation than an LLC, since the company’s income will be subject to corporate tax and your own salary or dividends will be taxed as personal income.
The Cost of an LLC Versus a Sole Proprietorship
One business structure that is easier and cheaper to form than an LLC is a sole proprietorship. When comparing a sole proprietorship and an LLC, you need to consider the differences in cost as paying for something priceless: peace of mind.
Although you wouldn’t have the same formation costs and annual fees as a sole proprietor that you would as an LLC, you also wouldn’t have the same advantages. An LLC offers benefits a sole proprietorship doesn’t—most importantly, liability protection.
By establishing a business as its own separate legal entity, as you do when you form an LLC, you create a distinction between your personal assets and your business assets. This protects you personally from the impact of any business debts or lawsuits that your company could incur.
There’s no question that you’ll pay more to start an LLC than a sole proprietorship. If your business goes south, though, the liability protection you gave yourself when you paid to form an LLC could be the only thing standing between you and personal bankruptcy. When it protects you from losing your home and seeing your credit score take a dive, the relatively small extra cost of forming an LLC is certainly worth the expenditure.
There’s no simple answer to the question of how much it will cost to form a limited liability company. So many individual factors make this question much more complex than it may seem.
All business owners need to look at factors like the initial filing and annual fees charged in every state as well as the differences in operating expenses for businesses of different sizes and in different industries. You also need to decide how much of the work you are willing to do yourself and how much you will outsource, whether that’s because you want a professional to ensure the task is done correctly or because you don’t have the time to personally devote to the formalities.
Even in more expensive states, you can often start your LLC for under $1,000. In the cheapest states, the cost to start an LLC may be as low as $100 or less.
Keep in mind that neither of these figures includes the costs of hiring a business lawyer to draft your legal documents or the service fees for outsourcing LLC formation to a professional company. While these options will add to your LLC costs, the value they add to a business owner is worth it in many instances.
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