Chapter 4 — The LLC, Step by Step

Chapter 4 — The LLC, Step by Step

The LLC — limited liability company — is the most popular business structure for small businesses in America. It gives you the two things founders want most: liability protection like a corporation, and simple pass-through taxation like a sole proprietorship. No double tax, no board meetings, no corporate formalities — just a legal wall between your business and your personal savings.

What an LLC actually gives you

Limited liability. If the business is sued or cannot pay its debts, creditors generally go after the business’s assets — not your house, car, or savings. But “limited” is doing honest work in the name: it does not cover your own negligence, debts you personally guarantee (most small-business bank loans), unpaid payroll taxes (the IRS can pursue owners personally), or fraud. And courts can pierce the veil if you mix personal and business money.

Pass-through taxation (by default). The IRS has no separate tax category for LLCs — a one-owner LLC is taxed like a sole proprietorship, a multi-owner LLC like a partnership. Profits flow to your personal return; no corporate-level tax.

Flexibility and credibility. One owner or fifty; you can later elect S or C corporation tax treatment without changing the LLC itself. And “LLC” on the invoice, contracts in the company’s name, a business bank account — the signals banks, landlords, and corporate clients look for.

The seven formation steps, in order

Step 1: Choose a name and check availability. Include an LLC designator (“LLC,” “L.L.C.,” or “Limited Liability Company”) and check it on your Secretary of State’s free name search. It cannot match an existing business or use restricted words like “Bank” without permission. Pick something simple and spellable — “Atlas Cleaning LLC” — and check the domain name at the same time.

Step 2: Pick a registered agent. The agent receives legal papers on your LLC’s behalf; every state requires one, with a physical in-state address (no P.O. boxes). You can be your own agent for free — most small businesses do. Trade-offs: your address becomes public record, and you must be available during business hours. A commercial service runs roughly $100–$300 per year if privacy matters.

Step 3: File Articles of Organization with the state. The short online form that creates your LLC: name, agent, address, sometimes the owners (called members). Real 2026 costs: Wyoming ~$100 filing plus ~$60 annual report; California $70 filing but a $800 annual franchise tax every year, even with zero income; Massachusetts $500 filing plus a $500 annual report; Texas $300 filing, no annual report fee. Most states fall between $50 and $500. File where you actually do business — forming in Wyoming while operating in Massachusetts means paying both states.

Step 4: Get an EIN from the IRS (free). An EIN is a Social Security number for your business — needed for bank accounts, employees, and taxes. Apply at irs.gov: about 15 minutes, completely free. Warning: scam sites charge $50–$200 to fill out the same free form — only use irs.gov.

Step 5: Write an operating agreement. Your LLC’s internal rulebook: ownership percentages, decision-making, profit splits, what happens when a member leaves. Most states do not require one for a single-member LLC — write one anyway. An hour with a template proves to courts and banks that your LLC is a real separate business. Even a two-page “I own 100%, I make all decisions” is worth having.

Step 6: Open a business bank account. This is where liability protection lives or dies. Bring your filed Articles, EIN letter, and operating agreement. From day one, all business income goes in, all business expenses come out, and personal spending stays out. Pay yourself with recorded transfers (“owner’s draw”) — fine. The moment you pay for groceries from the business account, you hand a future creditor the argument that your LLC is a sham.

Step 7: Handle licenses and permits. The LLC sits alongside these, not instead of them: city business licenses, professional licenses, health permits for food, zoning approval for home businesses, sales tax registration. Budget $50–$400.

How LLCs are taxed

Default: pass-through. A single-member LLC is taxed like a sole proprietorship (Schedule C); a multi-member LLC like a partnership (Form 1065, K-1s). The LLC itself pays no income tax.

Self-employment tax, with numbers. Pass-through profits face about 15.3% self-employment tax — 12.4% Social Security (up to the ~$184,500 wage cap in 2026) plus 2.9% Medicare. If your LLC nets $70,000, roughly 92.35% of that (~$64,600) is subject to self-employment tax — about $9,900 — on top of income tax. That is the price of the simple default, and why high-earning LLCs look at the next option.

The S corporation election (for later). An LLC can elect S corporation tax treatment: you take a reasonable salary (payroll taxes apply) and the rest as distributions, which are not subject to self-employment tax. On $120,000 of profit, savings can be several thousand dollars a year. Trade-off: payroll filings, a separate return (Form 1120-S), stricter rules. Rule of thumb: consider it when consistent profits pass roughly $60,000–$80,000 a year.

Mistakes that undo the protection

Never separating money — the number-one LLC killer. Business money pays the mortgage, personal accounts receive client payments — a creditor’s attorney’s dream. Fix it on day one and never backslide. Forgetting annual reports and fees can get your LLC administratively dissolved, vaporizing your protection exactly when you need it. No operating agreement leaves you under default state rules you never read. Skipping business insurance leaves the business itself exposed — a $500-a-year general liability policy is the LLC’s best friend.

Signing contracts personally can make you the party to the contract, bypassing the entity entirely. Always sign as the LLC — “Atlas Cleaning LLC, by Jamal Amimi, Member” — not just your name. This is education, not legal or tax advice — talk to your own attorney or CPA before you form anything.

Key takeaways

• An LLC combines limited liability with pass-through taxation — the most popular small-business structure for good reason.
• Seven steps in order: choose and check a name; pick a registered agent; file Articles of Organization ($50–$500; e.g., Wyoming ~$100, California $70 + $800/yr franchise tax, Massachusetts $500, Texas $300); get a free EIN at irs.gov; write an operating agreement; open a business bank account; get licenses and permits.
• File in the state where you actually operate — out-of-state “bargain” filings usually mean paying two states.
• Default taxes are pass-through; profits face self-employment tax (~15.3%). When profits consistently exceed ~$60,000–$80,000, the S corporation election can save thousands.
• Protection dies when you mix money, skip annual reports and fees, operate without an agreement, skip insurance, or sign contracts in your own name instead of the LLC’s.