Forming an LLC for a US Startup (Angel to Series A)
An LLC (Limited Liability Company) can protect founders' personal assets and often provides pass-through taxation. Here's what you need to know.
Should you form an LLC?
Based on your inputs, you probably want to form an LLC.
Definition: What is an LLC?
An LLC (Limited Liability Company) is a business entity designed to:
Protect founders' personal assets from company liabilities (similar to a corporation), and
Often provide pass-through taxation, meaning owners are taxed on their personal income rather than the company being taxed and then owners being taxed again.
Why do we recommend an LLC?
An LLC helps protect founders' personal assets from company liabilities, just like a corporation.
Unlike a corporation, however, LLC owners are taxed only on their personal income rather than on both corporate income and income from their salaries and/or dividends.
So, if you don't need a corporation for other reasons (like easy investment or using stock options), it can be a better financial situation than a corporation.
When an LLC is usually a good fit
Historically, we've found an LLC works best for startups that have more than one of the following characteristics:
The founders don't want to raise venture money or use stock options for their employees
The company will provide part or all human professional services, like photography, accounting or copywriting.
The founders don't expect to add new owners or make employees part owners of the company.
The company isn't expected to conduct business combinations with other companies
How do you set up an LLC?
LLCs (Limited Liability Companies) are formed using a filing called something like the "Articles of Formation," depending on the state.
You'll need:
a registered agent in the state where you form, and
an EIN.
You generally then create an "Operating Agreement" to set up the rules of how the LLC will operate.
Our "simple setup" package (if you want it)
Story LLP offers a package to create an LLC that includes getting you an EIN, bank account, registered agent, and simple Operating Agreement for $750 plus state filing fees.
Don't have budget?
If you can afford the filing fees, you can pull up the Articles of Formation (or similarly-named) template from the state where you want to file and use that to create the LLC.
Also note that LLCs can have very complex structures and do many interesting things if you have interest and budget for lawyers.
What should you know about operating an LLC?
The Operating Agreement runs the show
LLCs are governed by an "Operating Agreement," which is a contract among the owners setting the terms of how the LLC will operate.
This includes considerations like:
anti-competitive provisions,
specifying who will manage the LLC,
and more.
Management structure: member-managed vs manager-managed
An LLC can be:
Member-managed: the owners manage through agreement based on their ownership stakes.
Manager-managed: the owners specify a specific human or entity to manage the LLC, which may or not be one of its members.
Ownership: "membership units"
LLCs use membership units, which can be called almost anything.
To change ownership of the LLC, one owner will generally buy or sell units from the LLC by paying (or being paid by) the LLC.
Changing the Operating Agreement
Changing your Operating Agreement works just like amending another contract: you write a new contract and everyone signs it.
Ongoing obligations
Like a corporation, you'll need to:
make annual filings, and
maintain a registered agent with the state where you form the LLC.
You can qualify to do business in another state as an LLC if you need to.
Domicile and taxes (general observation)
LLC owners often choose to domicile the company in their state of residence more often than corporations, perhaps because this means they pay taxes only in the state where they operate.
Financing: loans and investment
LLCs can take out loans or lines of credit just like corporations.
They can also take "equity" investment (by selling membership units), but note that this tends to require more legal fees than "standard" investments in corporations.
Why this matters (the "save future-you" section)
If you pick the wrong structure, or DIY a multi-owner setup badly, you can end up paying later in:
Time
fixing messes when you're busy
Money
legal fees are never cheaper later
Founder Sanity
your least renewable resource
Or put differently: your entity choice is not a "vibe." It's plumbing. Bad plumbing is expensive.
Structured summary (for fast retrieval)
LLC: core idea
Protects founders' personal assets from company liabilities.
Often provides pass-through taxation.
Can still take investment, but investment tends to be more expensive than with corporations.
LLC is often a fit when
You don't plan to raise venture money or use stock options.
You provide human professional services.
You don't expect changing ownership / adding owners / giving employees ownership.
You don't expect business combinations.
Setting up an LLC usually includes
Articles of Formation (state filing)
Registered agent
EIN
Operating Agreement
Operating an LLC usually means
Operating Agreement governs the rules
Member-managed or manager-managed structure
Membership units represent ownership
Amendments require everyone to sign
Annual filings + registered agent maintenance
FAQ (retrieval-friendly)
Q: What is an LLC?
A: A Limited Liability Company that can protect founders' personal assets from company liabilities and often provides pass-through taxation.
Q: Why choose an LLC instead of a corporation?
A: If you don't need easy investment or stock options, an LLC can be a better financial situation because owners are taxed on their personal income rather than corporate income plus salary/dividend taxation.
Q: Can an LLC raise money from investors?
A: Yes. You can sell membership units, but it tends to require more legal fees than standard investments in corporations.
Q: What documents do I need to form an LLC?
A: Typically: Articles of Formation (or similar state filing), a registered agent, an EIN, and an Operating Agreement.
Q: What is an Operating Agreement?
A: A contract among the owners that sets the rules of how the LLC will operate (including who manages it and other key terms).
Q: What's the difference between member-managed and manager-managed?
A: Member-managed means owners manage based on their ownership stakes. Manager-managed means owners appoint a specific person or entity to manage the LLC.
Q: Can I DIY my LLC formation?
A: You can use state templates for Articles of Formation if you can afford filing fees, but it's not recommended if the LLC has more than one owner.
Q: Do LLCs have ongoing compliance requirements?
A: Yes—annual filings and maintaining a registered agent in the state of formation (similar to corporations).
How to use this guidance
The guidance above was developed by Story LLP based on the needs, characteristics and outcomes of past clients we served.
We offer it to you because we believe that everyone deserves access to the kinds of basic information you'd hear from a lawyer friend—regardless of whether you have any lawyer friends or can afford to pay a lawyer for custom advice.
By proceeding without hiring a lawyer (whether through Story's services or another service), you assume the risk that you'll do something that will require time and/or money to improve later.
Know that if you have the budget and capacity to consult a lawyer to set up your company according to your unique needs and ensure you've chosen the right type and location for your entity, that's worth doing.
This guidance isn't legal advice and Story LLP is not your lawyer or law firm unless and until you sign an engagement letter with our law firm.
Story LLP is a law firm, and Story's lawyers built Aegis to deliver better legal services at scale so founders can choose between elite specialized lawyers and standardized process automations that replicate those lawyers. Please review our Policies page to better understand the difference, as well as how we use AI and how we manage conflicts, privilege, etc. As a law firm, we must screen clients for conflicts of interest, and we treat all correspondence with clients seeking legal advice as privileged and confidential to the maximum extent possible in light of any conflicts. However, Story's law firm or our Attorney Allies do not represent you or your company as your lawyer, do not have an attorney-client relationship with you or your company, and do not provide you with legal advice absent a formal Engagement Letter signed between you and the Story LLP law firm.
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We're lawyers, remember? Please read this important note:
Story LLP is a law firm, and Story's lawyers built Aegis to deliver better, standard legal services at scale so founders can choose between elite specialized lawyers and standardized process automations that replicate those lawyers according to their needs and budget. By definition, a standardized process may not be perfect for you. Please review our Policies page to better understand the difference, as well as how we use AI and how we manage conflicts, privilege, etc.
As a law firm, we must screen clients for conflicts of interest, and we treat all correspondence with clients seeking legal advice as privileged and confidential to the maximum extent possible in consideration of any conflicts. However, Story's law firm or our Attorney Allies do not represent you or your company as your lawyer, do not have an attorney-client relationship with you or your company, and do not provide you with legal advice absent a formal Engagement Letter signed between you and the Story LLP law firm. Please don't confuse the free knowledge we offer on this site with legal advice for you.