As a businessperson, you are—and always will be—concerned with how much things cost. Now that you’re thinking about setting up an LLC, naturally you’ll want to know how much would setting up an LLC cost.
Depending on whether you’re setting up a single-member LLC or a multi-member LLC, an LLC can cost less than $500 to a few thousand dollars. This includes the state’s filing fees as well as any service you use to help you file the paperwork.
Let’s break this down a little.
- Forming a Single-Member LLC Costs the Least
- Even a Single-Member LLC Should Have an Operating Agreement
- Forming a Multi-Member LLC Costs More
- What is Typically in an Multi-Member LLC Operating Agreement
- It’s a Good Idea to Hire an Agent for Service of Process
- LLCs are Not Expensive to Set Up, but Be Sure to Pay for a Solid LLC Operating Agreement
Forming a Single-Member LLC Costs the Least
Forming a single-member LLC costs the least. The filing fees to your state usually costs a few hundred dollars. While you can file the paperwork yourself, many filing services will also file the paperwork for you for about $50. In other words, the filing services’ cost is negligible.
Of course, the filling services will try to upsell you with packages that cost more. But, very often, you can do without these add-ons. The services you absolutely should consider getting are:
- A basic LLC operating agreement and
- An agent for service of process
Some upgraded packages include an Employer Identification Number (EIN), IRS forms on electing to file as an S corporation, and/or meeting minutes to open a checking account. Don’t fall for the sell. You can get all these for free either from the IRS or from your bank.
Even a Single-Member LLC Should Have an Operating Agreement
Even if you’re a single-member LLC, it’s a good idea to have an operating agreement.
Your state will have default laws on how to run an LLC. Some of these default laws can be inconvenient. For example, if you die, the law often automatically dissolves your LLC. If you want to pass the LLC to your heirs, you wouldn’t be able to do it unless your LLC operating agreement says the LLC continues to exist.
In addition, having an operating agreement is an indication that you’re running the LLC as an entity separate from yourself. This helps to hold up the LLC’s limitation of liability in court, if you ever have to argue this. So, having a simple LLC operating agreement can save you a lot of trouble in the future.
Under most circumstances, we think using a form agreement is a horrible idea. But, for a single-member LLC, a form agreement might be OK.
If you use an LLC filing service, you can often buy a form LLC operating agreement from them or get it as a part of your filing package. You can probably find free templates online too, but we think you should be very cautious when using them.
The form operating agreements we’ve seen are typically written broadly and vaguely. Read through the agreement, and, as long as you can understand the substance of the document and have no issues with following them, they are usually OK.
Forming a Multi-Member LLC Costs More
The filing fee for starting a multi-member LLC is the same as that of a single-member LLC. You can still use an LLC filing service to file the paperwork with your state for about $50. But you should spend more time and money on the LLC operating agreement.
We recommend that you have a lawyer draft the operating agreement for your multiple-member LLC. You can hire the lawyer after you used the LLC filing service to form the LLC, or you can just hire the lawyer from the start. This way, they can handle the entire process for you.
The lawyer is supposed to help everyone think through some issues and help you decide what you want to happen if one of the issues comes up (e.g., death of a member). So, make sure the lawyer’s LLC formation services include at least a few hours of consultation time. They need to talk to you and your co-owner to understand your preferences in different business situations.
While some lawyers cost less, budget $1,000+ for one who will file the LLC paperwork with your state and then tailor the operating agreement to your needs.
What is Typically in an Multi-Member LLC Operating Agreement
It’s important to have an operating agreement for a multi-member LLC. If you don’t, then the default state laws would apply. But these default laws can cause a lot of problems later on because they’re usually extremely vague on every important issues.
For example, often, the default laws aren’t very clear on how the LLC’s profits and losses should be divided among its members. You’ll want this to be spelled out very clearly, and you do this with an LLC operating agreement.
It’s best to finalize the operating agreement very soon after you form the LLC. When you start a business with someone, you often start on a friendly footing and believe things can be worked out when disagreements arise. The good feelings often don’t last.
Friendships can sour fast when working as business associates. (Good) lawyers tend to be rigorous about taking you through each issue that might arise in the future so they can draft a better operating agreement to fit your needs.
Of course, drafting a good agreement takes time. Since, lawyers usually charge by the hour, this will increase your LLC costs.
A typical multi-member operating agreement cover things like:
Profit and Loss Allocation
Profit and loss do not have to be allocated based on how much money a person contributes to the business. A person who contributes money and a person who brings industry knowledge and runs the business can agree to share the profits and losses 50-50.
The allocation is whatever the members can agree to.
Voting Rights
Voting rights also don’t have to depend on the amount of money contributed to the LLC. Some LLCs even define different classes of voting rights, much like a corporation can have common stock and preferred stock, each with different voting and dividend rights.
Votes can pass by simple majority, 2/3 majority, unanimous, or whatever percentage you decide. The percentages don’t even have to be uniform for all situations.
Contributions
This sets out how much each member contributes to the business. It doesn’t have to be cash. It can be knowledge or a physical asset like a car.
Departures and Buyouts
Sometimes, members want to or are forced to leave. It’s best to set out this “business divorce” procedure from the beginning.
For this procedure, you’ll have to decide on, among other things, how to calculate the full worth of the business and how much each member must pay to the departing member to buy out their share.
Dissolution
LLCs can live forever, but sometimes the members want to close down the business. It’s better to have a procedure on how to decide whether and how to dissolve the LLC. It’s also good to set out the steps the members must take to dispose of the business assets and close down the business (called winding down).
For instance, you can agree that, to dissolve the LLC, you must have a unanimous vote from the members. Then, the members can appoint a specific member to wind down the business.
It’s a Good Idea to Hire an Agent for Service of Process
Whether you’re a single-member LLC or a multi-member LLC, it’s a good idea to engage an agent for service of process for your LLC. An agent for service of process is usually a person or a business that officially receives important documents for you, documents such as lawsuit filings or notices from government agencies.
An agent for service of process is required to have a physical address that can be looked up by anyone. So, if you run a home-based business and do not wish to have strangers knocking on your door to hand you official notices, hiring an agent for service of process is the solution.
If you used a lawyer to form your LLC, they might agree to be your agent for service of process for free. Otherwise, add $100-$120 per year to your LLC costs to hire a service to be your agent for service of process.
LLCs are Not Expensive to Set Up, but Be Sure to Pay for a Solid LLC Operating Agreement
As you can see, LLCs are not too expensive to set up. Excluding the filing fees, you can spend less than $50 to get a filing service to help you with the paperwork.
You should, instead, focus most of your time (and money) on the LLC operating agreement. This is especially important for multi-member LLCs. The agreement can override a lot of vague default laws that might cause problems in the future. So, if you want to start an LLC and are worried about how much setting up the LLC costs, you shouldn’t be. Focus on getting a good LLC operating agreement, and you’ll do just fine.
DISCLAIMER: This article does not constitute legal advice. Instead, it contains general information. The information gives you the background you’ll need to hit the ground running when you do go get advice from a lawyer. Only lawyers properly licensed in your state/country are qualified to give you legal advice.
Questions? Comments?
