From Side Hustle to Startup: The Essential Guide to Forming an LLC

Transform your side hustle into a startup! Learn essential steps and benefits of forming an LLC to protect assets and legitimize your business.

Ever dreamed of turning your side hustle into a thriving business? Many entrepreneurs start out as hobbyists, but taking the leap from freelancer to founder requires careful planning. This essential guide will equip you with the knowledge to navigate the crucial steps of forming a Limited Liability Company (LLC) and transforming your side hustle into a legitimate startup.

From choosing the right business structure to understanding legal and financial requirements, we’ll provide you with a roadmap for success. Whether you’re launching a technology startup, a creative agency, or a service-based business, forming an LLC is a critical first step in protecting your personal assets and establishing your company. Get ready to turn your entrepreneurial dreams into reality and watch your side hustle flourish into a thriving startup!

What is an LLC?

First things first: When we talk about forming an LLC, exactly what are we talking about?

The LLC format has been around since the 1970s, and since that time it has become one of the most popular options for small business owners across virtually every industry. That’s because the LLC format strikes a happy balance between the flexibility of Sole Proprietorship and the personal liability protections of a Corporation.

When you register as an LLC, you’re effectively establishing your business as its own legal entity, distinct from its owner(s). In other words, you can maintain a clear legal distinction between your personal assets and liabilities and your business assets and liabilities.

What this means in practice is that, if your business gets hit with a lawsuit, you can keep your personal assets (including things like a retirement account or your family’s nest egg) off the table. Similarly, LLCs shield your personal wealth from creditors, allowing you to feel more confident as you invest in business development. You can focus more on meeting the needs and opportunities of your customer base, and spend less time worrying about the litigious environment you’re operating in.

What are the Benefits of an LLC?

Even beyond these protections against personal losses, there are a number of benefits to the LLC format. For example:

• You can choose between different forms of management, from member management to bringing in a third-party manager.
• Compared with corporations, the laws and general regulatory requirements are pretty modest.
• In addition, LLC ownership means flexible taxation, allowing you to choose between pass-through or corporate tax status.
• Having an LLC makes it relatively easy to bring a new employee on board, whereas the nature of a Sole Proprietorship or a Partnership makes hiring people more difficult.

What are the Advantages of the LLC Over Other Business Structures?

There are plenty of options when it comes to business structure, from the S Corp to a basic Partnership. For a majority of small business startups, the LLC format is the best bet. This is because of the tax benefits combined with the personal liability protections, along with many other factors that make LLC management easy and flexible.

How to Start an LLC – A Step-by-Step Formation Guide

As you consider turning your side hustle into a full-fledged LLC, there are a few important steps to consider. Be aware that the process may look a little different from one state to the next, but here’s an overview of the typical LLC formation journey.

1) Choose the state you’d like to register in.

Legally speaking, you’re allowed to register your LLC in the state of your choosing. This sometimes leads entrepreneurs to wonder which state has the most advantageous tax structures and LLC regulations. It’s really pretty simple, though: To streamline the LLC tax process, it’s pretty much always wisest to simply register in the state where you’re operating. If your managers and customers are all centralized in one place, that’s almost surely the place where you want to register, both for tax purposes and for overall simplicity.

2) Select a name for your LLC.

This may seem pretty basic, but actually, there are some legal considerations to take into account as you select the name of your LLC. The most important one is that you have to pick a name that isn’t already in use by another LLC in the same state. Thankfully, most states provide searchable online directories, making it pretty easy to figure out whether the name you’d like is still up for grabs. A quick search in the relevant database should be all you need to confirm the name of your LLC. Note that you’ll need to ensure that the name you provide in your LLC records matches the name on any business licenses you have.

Something else to be aware of: Limited Liability Companies may also take advantage of DBA provisions. A DBA (abbreviation for “doing business as”) is basically an unofficial brand name that you operate under the umbrella of your legal LLC name. Be sure to double-check the specific rules for DBA use in your state to verify that this is a viable option.

3) Pick someone to serve as your Registered Agent.

Every LLC is required by law to have a Registered Agent. This may be either an individual person or an organization. The basic role of the Registered Agent is to receive legal and tax documents on behalf of the business entity. This includes sales tax documents, subpoenas, insurance documents, and more.

When selecting a Registered Agent, it’s vital to choose someone who has a physical address in the state where you’re registering. A post office box won’t suffice. For example, if you’re registering your business in New York, it’s vital to choose an Agent with a New York mailing address.

Be aware that, in some states, it is legal for a member of the LLC to serve as their own Registered Agent. However, it is much more common to hire a third party. The costs for Registered Agent services tend to be pretty reasonable, sometimes less than $100 annually, which makes this a very feasible investment. Again, you’re spending this money to have someone receive and organize mail and other legal notices for you, which is one less administrative task for you to handle yourself.

Final note: Technically, you can give consent for just about anyone to be your Agent, so long as they have the right address, but it’s essential to find someone who is trustworthy and responsible. Again, finding a high-quality Registered Agent service in your area or community is likely the way to proceed.

4) File Articles of Organization.

To officially register your LLC, you’ll need to file a document with your Secretary of State. This document goes by different names, but in most states, the form is known as the Article or Articles of Organization. You can almost think of this as your application for official LLC status.

This document covers a lot of basic information about your LLC, including a list of members, the type of business you’re running, the business name, the name and contact information of your Registered Agent, the purpose of your business, and more.

This paperwork may also include:

• A statement about your projected business income.
• The reasons why you started the business.
• An estimate about the overall duration of the business or the current age of your business.
• Contact information for the LLC owners, including you and any others involved with the business.
• And more, depending on the specific requirements of your state government.

When you file this paperwork, you’ll also need to pay a registration fee. These fees can vary from state to state, so it’s worth investigating the specific filing fee in the state where you plan to register. (Example: How much does it cost to set up a Texas LLC?) Note that state fees tend to be highest in California, whereas places like North Carolina, South Carolina, New Jersey, Maryland, Louisiana, Massachusetts, Michigan, Tennessee, New Mexico, Arkansas, South Dakota, Wisconsin, and Kentucky are all more favorable LLC environments. Minnesota, Colorado, Maine, Kansas, and Connecticut are also known for having favorable LLC terms.

5) Create an Operating Agreement.

Businesses do not necessarily have to have an Operating Agreement, but it’s very advisable to create this document before you start running your LLC in earnest. Simply put, the Operating Agreement helps companies and LLC entities answer important questions about the allocation of responsibilities and profits between different partners. Essentially, it’s a document for outlining administrative authority between the different individuals (basically the shareholders) associated with your LLC. As such, it can potentially save you from legal conflicts and hefty attorney fees down the road.

Note: A business attorney can help you hammer out the details of this document if you so desire, walking you through different options to ensure the smooth operation of your business. If you decide to make your LLC operating agreement alone, here are some important things to include:

• How will you divide daily tasks between your partners?
• How will you handle new partnerships/bring new LLC members on board?
• How will you handle the processing of a partner who wishes to end their time with the business?

6) Claim an Employer Identification Number.

You won’t need your EIN, or tax ID number, right away, but you will need one before you start filing taxes. You’ll also need it before you process payroll for your employees. The Internal Revenue Service will provide you with a number for free, assuming you are a resident of the United States.

7) Set up a business bank account.

One final piece of advice: After filing your formation documents, you’ll also want to open a business bank account. Make sure you create an account that’s distinct from your personal checking or savings accounts. This is a crucial way to capitalize on the personal wealth protections and other benefits of the LLC structure. Request information from different banks about the types of accounts and credit card options they offer, and compare terms and rates before making your final decision.

8) Stay up to date with LLC taxes.

With your taxpayer identification number, you’ll be ready to handle the tax implications of LLC ownership. Thankfully, this is usually pretty easy. You do not have to file a separate income tax return on behalf of your business operations. Instead, you can simply declare LLC profits on your personal tax returns, then pay your default tax rate to the IRS. In rare cases, it might be advantageous to opt into corporate tax status, though you’ll want to talk with a lawyer or accountant before taking this step. Keep in mind that incorporation means double taxation, which is why most LLCs stick to pass-through tax accounting.

9) Maintain regulatory compliance.

A final tip for any LLC business owner: To avoid any kind of legal trouble, make sure you stay abreast of the regulatory requirements in your city and state. This usually just means filing annual reports, affirming that everything about your LLC is continuing as previously stated. If your Registered Agent changes their street address, or if you make the choice to change Agents, you’ll need to report that to the state. Failure to do so may compromise your liability protection and other LLC rights, so make sure you keep the government records up to date. (It could also just result in some small penalties, but still, better safe than sorry). Usually, you’ll file your report with the Department of State, though in some cases you may be able to file a copy of your report with the county clerk.

How to Start an LLC – Final Thoughts for Your Startup Team

Of course, it’s always important to review different types of business structures (including Partnership options) to procure the right business permits and licenses and to ensure a robust understanding of state law. Each of these steps is an important part of your LLC journey.

The bottom line: For those looking to go from hobbyists to professionals, seeking LLC approval is an important leap forward. For additional answers about forming an LLC, reach out to a local business lawyer with LLC experience. Or, look for legal templates you can use from LegalZoom, ZenBusiness, and related sites.