Starting a business is exciting, but it also carries risk. One of the largest, most common risk factors is the cost behind owning and operating a business.
Most entrepreneurs balance the cost of their products and/or services with the profits they hope to make, but are you overlooking the costs associated with forming the business entity itself?
Limited liability company formation expenses add up quickly, so you need to understand what’s involved before you get started. This brief guide will give you a sense of what you can expect to pay while forming your LLC.
Guru Tip: If you’d like to compare some of the top rated LLC services, see how our favorite options stack up against each other.
Common LLC Formation Costs
Full disclosure: no two LLCs are exactly alike, and neither are their formation costs. The expenses incurred during the startup phase can vary depending on your state, as well as on the unique needs of your business entity.
That said, there are quite a few common costs for forming an LLC that apply to most businesses. Let’s break them down one by one to determine which of these costs you’ll incur to start your new LLC!
Articles of Organization
The articles of organization is the document which officially forms your business with your state. Fees for this document vary from one state to another, with Kentucky’s fee of $40 being the cheapest.
In contrast, Massachusetts requires $500 to form an LLC, while Tennessee has a sliding scale with a $300 minimum and a $3,000 maximum. Most states charge within the $100-150 range to file this document.
Name Reservation
By filing a name reservation, you can protect your business name from being claimed by others for a period of time. You are not required to complete this filing (unless you’re forming an LLC in Alabama, the one state that does require a name reservation in advance), but many people choose to.
The filing allows you to protect your business name while you get your business set up. The typical cost is $10-30, but some states charge more.
Hiring a Registered Agent
A registered agent is required for all LLCs. The agent accepts service of process and other important government documents on your behalf. You can save money by acting as your own agent, but we usually do not advise this route.
For most LLCs, it’s worth the expense to maintain your personal privacy, cut down on the junk mail you receive, and remove the risk of missing a crucial document delivery. Pricing for professional registered agent services can vary considerably, but for the most part this service costs in the ballpark of $125-150 per year. In our opinion, it’s usually worth every penny.
Business Licenses
This is where estimating costs gets tricky, as the specific licenses and permits you need to operate your compliant business will depend on both your location and your industry.
Many license applications cost anywhere from $50-100. It’s not uncommon for a business to need several different licenses ― not just from your state, but also on federal, county, and local levels. We’ll briefly discuss some of the most common ones, but if you want more guidance, the Small Business Administration offers a helpful resource on licenses.
- General business licenses: Some states require you to acquire a license simply for the privilege of conducting business in the state. You should consult your state’s Licensing Division (or equivalent department) to learn more.
- Federally regulated industry licenses: According to U.S. law, certain industries are regulated by federal offices. For example, businesses involved in agriculture, medicine, or architecture need to apply for a license with the appropriate government body. Learn more here.
- Professional licenses: Many states require certain professionals to acquire licenses specific to their job, such as cosmetologists, real estate agents, and barbers. Your state likely has a database of professional licenses, or a department specific to licensure. Many states require dozens to hundreds of these licenses depending on your industry, so there’s a good chance you’ll need at least one.
- Local licenses: Just like your state may require a general business license, some cities or counties require licenses to operate in that area. We recommend that you consult both your city and county government to learn what licenses you may need.
As an example, let’s say a restaurant is registered as an LLC. The LLC needs the state’s general business license, and because the restaurant serves alcohol, it needs a license from the Alcohol and Tobacco Tax and Trade Bureau, as well as one from the local alcohol control board. There’s also a food safety license, too. Let’s say that (conservatively) that each of these licenses costs $50 or less for a total licensure cost of $200.
$200 is a large enough sum that you don’t want to overlook it, especially in your startup budget. And to be fair, we’ve probably underestimated this cost, too. Of course, some industries are not as expensive, so you’ll have to do some digging to figure out what this exact cost will be for your business.
Another option is to hire a business services company to compile a business license application package, like the one available from Incfile or Swyft Filings. This service usually costs around $100. If you choose this option, they will research which permits and licenses you need to run your compliant LLC, then provide you with the applications.
At that point, all you need to do is fill out the forms and submit them to the relevant government entities.
Seller’s permits
In some states, you must apply for a seller’s permit as part of your registration for sales taxes, which gives you the right to sell goods and services in that state. If you do need a seller’s permit, which is required in 16 states, it will cost you anywhere from $5 in Florida to $100 in Connecticut.
Getting an EIN
Technically, getting an EIN from the IRS is completely free, provided you apply for it yourself. That said, some LLC formation services will complete the application for you.
If you do use their service, you’ll need to pay their fee, which is typically between $50 and $100 for EIN obtainment. The EIN application is often included as part of a larger service package.
Post-Formation Costs for LLCs
In most cases, the costs to maintain an LLC are not quite as much as those to form. Since we’re on the subject though, we figure it’s worth mentioning.
These costs including filing annual reports, renewing your licenses, paying franchise taxes required by your state, and perhaps other annual fees. When you form an LLC, we recommend that you inquire about maintenance fees. That way, you’ll be informed from the beginning about your annual costs.
In general, the only ongoing costs that get really expensive are annual reports (which cost between $10 in Colorado and $500 in Massachusetts), and franchise taxes (which can exceed $1,000 in some states, like California).
Should I Use an LLC Formation Service?
You can form an LLC yourself simply by filling out the required forms with your Secretary of State. Doing it yourself is obviously much cheaper than using a service, but it does cost you time, and you may prefer to spend that time addressing the actual operational aspects of your business.
LLC formation websites will complete all of your formation paperwork for you. You still pay the necessary fees, but they do the legwork. Some of these services can also act as your registered agent, and they can often handle the annual maintenance of your business, such as filing annual reports, renewing licenses, and more.
If you’re interested in using a formation service, we recommend checking out our guide to the top services available, including Incfile, Northwest Registered Agent, and ZenBusiness. Depending on your priorities, you may find that the cost of using a formation service is well worth it, considering the time and hassle you’ll save.
Conclusion
Regardless of whether you use a formation service or start your business yourself, you’re going to pay some fees along the way, which could vary significantly depending on your state, and the industry your LLC operates in.
In this guide, we’ve covered the most common costs LLCs encounter when forming. By knowing what to expect, you can plan your budget successfully.