Everything You Need to Know About LLCs
An LLC (limited liability company) is a business entity created under state law. Its owners are called members. Once the state accepts your filing, the LLC exists as a separate legal person: it can sign contracts, open bank accounts, own property and be sued in its own name. This guide explains how that works in practice, what an LLC costs and when another structure might suit you better.
What Does LLC Stand For?
LLC stands for limited liability company. "Limited liability" means each member's risk is limited to what they put into the business. If the company owes money it cannot pay, creditors generally cannot take the members' personal homes, cars or savings. Wyoming created the first LLC law in 1977; today every state and Washington DC allows them.
An LLC is not a corporation, and it is not "incorporated". It sits between a sole proprietorship and a corporation: it has the liability shield of a corporation but far fewer formal rules.
How Does an LLC Work?
You form an LLC by filing a short document — usually called Articles of Organization (some states, such as Texas and Delaware, call it a Certificate of Formation) — with the Secretary of State and paying a filing fee. The document lists the company name, its registered agent and sometimes its members or managers.
Inside the company, an operating agreement sets the rules: who owns what percentage, how profits are split, how decisions are made and what happens if a member leaves. An LLC can be member-managed (the owners run it day to day) or manager-managed (the owners appoint one or more managers, who may or may not be members).
Types of LLCs
- Single-member LLC — one owner. Taxed like a sole proprietorship by default.
- Multi-member LLC — two or more owners. Taxed like a partnership by default.
- Professional LLC (PLLC) — for licensed professionals such as doctors, lawyers or accountants in states that require it.
- Series LLC — offered in some states, lets one LLC hold separate "series" with their own assets and liabilities.
- Foreign LLC — an LLC formed in one state and registered to do business in another.
How Are LLCs Taxed?
The IRS does not have a separate "LLC" tax category. Instead, an LLC is taxed in one of these ways:
- Disregarded entity (single-member default): profit is reported on the owner's personal return (Schedule C for US individuals).
- Partnership (multi-member default): the LLC files Form 1065 and gives each member a Schedule K-1.
- S corporation (by election): can reduce self-employment tax once profits are high enough. See S-Corp election and our guide LLC vs S-Corp.
- C corporation (by election): the company pays corporate tax at the federal rate of 21%.
Members who actively work in a default-taxed LLC generally pay self-employment tax on their share of profit. States may add their own taxes or fees — for example California's $800 annual franchise tax.
Pros and Cons of an LLC
| Advantages | Disadvantages |
|---|---|
| Protects personal assets from business debts and lawsuits | Costs more to set up than a sole proprietorship (state filing fee) |
| Pass-through taxation — no double tax by default | Active members usually pay self-employment tax on all profit |
| Few formalities and simple management | Annual reports and fees in most states |
| Flexible ownership and profit sharing | Venture capital investors usually prefer a C corporation |
| More credibility with banks, clients and platforms | Protection can be lost if you mix personal and business money |
LLC vs Other Business Structures
- Sole proprietorship — no filing needed, but no liability protection: you and the business are the same person. Read LLC vs sole proprietorship.
- S corporation — a tax status, not an entity. An LLC or corporation can elect it. Read LLC vs S-Corp.
- C corporation — best for raising money from investors and issuing stock, but profits can be taxed twice.
- Nonprofit — for charitable or educational purposes; can apply for tax-exempt status.
Not sure which fits? Take our two-minute business entity quiz.
How Much Does an LLC Cost?
The main cost is the state filing fee, which ranges from about $35 to $500 depending on the state. Most states also charge an annual or biennial report fee. On top of that you may pay for a registered agent, an EIN service and an operating agreement if you use a formation company.
Incofile packages start at $99 plus the state fee, which we show before you pay. See every state's fee on our LLC cost calculator or read how much it costs to start an LLC.
How to Keep Your Liability Protection
Courts can "pierce the veil" and hold members personally liable if the LLC is treated as an extension of its owner. Protect yourself by:
- Keeping a separate business bank account and never mixing personal and business money.
- Signing contracts in the company's name ("Acme LLC, by Jane Smith, Member").
- Having a written operating agreement and keeping basic records.
- Filing your annual report and keeping a registered agent so the company stays in good standing.
- Carrying appropriate business insurance.
Who Should Form an LLC?
An LLC is a strong fit for freelancers and consultants, e-commerce and Amazon sellers, real-estate investors, small agencies, family businesses and founders outside the US who want a US company. If you plan to raise venture capital or issue stock options soon, a C corporation is usually a better choice. When you are ready, form your LLC online or follow our step-by-step guide on how to start an LLC.
Frequently Asked Questions
What is an LLC in simple terms?
An LLC is a type of business you register with a US state. It is legally separate from you, so its debts are generally not your personal debts, and by default its profits are taxed only once, on the owners' returns.
Is an LLC a corporation?
No. An LLC is its own type of entity created under state LLC laws. It can choose to be taxed as a corporation (C or S), but legally it remains an LLC.
Can one person own an LLC?
Yes. A single-member LLC has one owner and is the most common type. It is taxed like a sole proprietorship unless it elects otherwise.
Do I need an EIN for my LLC?
A multi-member LLC, an LLC with employees and any LLC taxed as a corporation must have an EIN. Single-member LLCs usually need one anyway to open a bank account and work with payment processors.
Do I need an operating agreement?
A handful of states require one by law, and banks often ask for it. Even where it is optional, a written operating agreement protects your liability shield and prevents disputes between members.
Can a non-US citizen own an LLC?
Yes. No state requires LLC members to be US citizens or residents. Non-residents can form and run a US LLC entirely online.
How long does it take to form an LLC?
It depends on the state: some approve filings the same day, others take a few weeks. Expedited processing is available in many states for an extra fee.
Does an LLC protect me from everything?
No. You are still personally responsible for your own wrongful acts, personal guarantees you sign and taxes you personally owe. Liability protection also depends on keeping business and personal finances separate.