How do you set up an LLC for a side business?

Short answer: you set up an LLC by filing Articles of Organization with your state's Secretary of State, paying the filing fee (typically $35 to $500), getting a free EIN from the IRS, and opening a separate bank account. Most people finish the whole thing in one to two weeks, much of it in an afternoon.

An LLC feels like a milestone. It is the moment a side project starts to look like a real business, with paperwork to prove it. That feeling is mostly justified — but it helps to know exactly what the paperwork does and does not buy you before you file it.

What an LLC actually gives you

An LLC — limited liability company — creates a legal separation between you and your business. If the business is sued or takes on debt it cannot pay, your personal assets (your house, your savings) are generally protected. Creditors go after the company's assets, not yours.

That is the whole point. It is liability protection, not tax magic. By default, a single-member LLC is taxed exactly like a sole proprietorship — the IRS calls it a "disregarded entity," which is a cold way of saying nothing changes on your tax return. Your business profit still flows onto your personal return, and you still pay self-employment tax on it. Anyone selling you an LLC as a tax strategy is selling you something it does not do by default.

The protection is also conditional. It depends on you treating the LLC as genuinely separate: separate bank account, separate finances, no paying your rent from the business card. Mix everything together and a court can "pierce the veil" — ignore the LLC entirely. The paperwork starts the protection. Your behavior maintains it.

Step one: pick your state

For almost every side business, the answer is your home state — the state where you live and operate. Forming in Delaware or Nevada because you heard it was clever is a classic beginner move that buys you nothing and costs you double: you pay the formation state's fees and still have to register as a foreign entity in your home state, where you actually do business.

State filing fees range from around $35 (Montana is famously cheap) to $500 or more (Massachusetts sits at the top), with a national average near $132. Some states also charge annual report fees to keep the LLC active — Florida's is about $139 a year, for example. Check your own state's fee schedule before you start; it is the one cost you cannot avoid.

Step two: choose a name and a registered agent

Your LLC needs a name that is available in your state and includes a designator like "LLC" or "Limited Liability Company." Every state has an online business name search — use it before you get attached to anything. Skip names that imply you are a bank, an insurer, or a government agency unless you hold the license to match.

You also need a registered agent: a person or company with a physical street address in the state (not a P.O. box) who can receive legal documents on the LLC's behalf. You can be your own registered agent for free if you have an in-state address and are reliably available during business hours. The tradeoff is privacy — your address goes on the public record. Commercial registered agent services run roughly $50 to $300 a year and keep your home address out of it.

Step three: file the Articles of Organization

This is the actual filing that creates your LLC. It is usually a short online form on the Secretary of State's website: the company name, the registered agent, the members, and a business address. You pay the state filing fee here, and this is the one real cost of the whole process.

Approval takes anywhere from same-day to a few weeks depending on the state. Once the state accepts it, your LLC legally exists. It can own assets, sign contracts, and open bank accounts. The whole thing is less dramatic than it sounds — it is a form, not a ceremony.

Step four: write an operating agreement

The operating agreement spells out how the business is owned and run: who owns what percentage, how decisions get made, how profits are split, and what happens if someone leaves or the business closes. Most states do not require you to file it anywhere. Write one anyway.

If you are the only member, this feels pointless. It is not. The agreement reinforces the legal separation between you and the business — the very thing your liability protection depends on — and banks routinely ask to see it when you open a business account. A template customized to your situation is fine. A handshake with yourself is not a document.

Step five: get your EIN from the IRS

An EIN — Employer Identification Number — is like a Social Security number for your business. You need it to open a business bank account, hire anyone, and handle business taxes. Get it free, directly from the IRS website, in about fifteen minutes. It is issued on the spot.

This step has a scam attached to it worth knowing about: third-party sites that charge you $50 or $100 to "file" for an EIN. They are charging you for a form the IRS gives away for free. Go to IRS.gov yourself. Download and save the confirmation letter — the IRS does not easily reissue it, and your bank will want to see it.

Step six: separate everything and handle the rest

With the LLC formed and the EIN in hand, open a business bank account. This is not optional decoration — it is the single behavior that makes the liability protection real. Every dollar of business income goes in; every business expense comes out. Pay yourself with transfers or owner's draws, not by swiping the business card at the grocery store.

Then handle the remaining registrations: state and local business licenses if your industry or city requires them, sales tax registration if you sell taxable goods, and any professional licenses for your field. An LLC does not replace licenses. It sits alongside them.

What it honestly costs

Formation services advertise packages from $0 plus state fees up to several hundred dollars, and it is worth being clear about what you are buying. The genuine floor is just your state's filing fee. Everything else — the "premium" packages, EIN filing, operating agreement drafting — is for things you can do yourself for free in an afternoon.

That does not make services useless. If you value convenience, want privacy protection bundled in, or simply want someone else to make sure nothing gets missed, paying is a fair trade. Just go in knowing what the money buys: time and certainty, not anything you could not do yourself.

• State filing fee: $35 to $500+, one time.
• Registered agent: $0 if you do it yourself, $50 to $300 a year otherwise.
• EIN: free. Operating agreement: free with a template.
• Annual reports: $0 to a few hundred a year, depending on the state.

The annual maintenance nobody budgets for

Forming the LLC is the exciting part. Keeping it alive is the part people forget to price in. Most states require an annual or biennial report — a short filing confirming your address, agent, and members are current — with fees ranging from zero to a few hundred dollars. Miss the deadline and the penalties start; ignore it long enough and the state administratively dissolves your LLC, which is an embarrassing way to lose your liability protection.

Calendar two dates the day you form: the annual report deadline and the registered agent renewal. Set reminders a month out. The entire maintenance burden of a single-member LLC is about an hour a year plus the fees — trivial, but only if you actually do it. An LLC is like a plant: the setup is the fun part, and then it needs occasional water forever.

What an LLC does not do

A short list, because the myths are persistent. An LLC does not reduce your taxes by default. It does not protect you from your own negligence or personal guarantees — if you personally co-sign the business loan, you are personally on the hook. It does not impress clients by itself, though some larger clients do require vendors to be formal entities. And it does not run the business for you.

What it does is draw a clean legal line between your personal life and your business life, for the price of a state filing fee and the discipline to keep the line clean. For a side business with real revenue, real clients, or any meaningful risk, that line is worth drawing. For a hobby making $200 a month, it can wait.

This is general information, not legal advice. If your situation involves partners, significant assets, or real legal exposure, talk to a business attorney before you file — an hour of advice is cheaper than a badly structured entity.