An LLC is a U.S. business structure that provides limited liability for members, flexible taxation (default pass-through with options to elect corporate tax treatment), and fewer formalities than a corporation. Formation involves filing articles of organization with the state, designating a registered agent, obtaining an EIN when needed, and adopting an operating agreement. State fees, ongoing reports, and specific rules vary by state.

What an LLC Is

A limited liability company (LLC) is a U.S. business structure that combines elements of corporations and partnerships. Owners are called members. An LLC is a separate legal entity, which can shield members from personal liability for most company debts and claims, subject to exceptions.

Key Benefits

Limited liability

Members generally avoid personal liability for business obligations so long as they keep business and personal affairs separate, follow formalities, and do not sign personal guarantees. Courts can still "pierce the corporate veil" in cases of fraud, undercapitalization, or commingling of assets.

Flexible taxation

By default, a single-member LLC is treated as a disregarded entity (taxed like a sole proprietorship) and a multi-member LLC is taxed like a partnership. An LLC can also elect to be taxed as an S corporation or a C corporation by filing the appropriate IRS forms (for example, Form 2553 for an S election). This makes LLCs flexible for tax planning.

Operational flexibility

LLCs allow flexible profit distributions and management structures. Members can choose member-managed or manager-managed arrangements. LLCs do not have the same formal corporate requirements - such as mandatory annual shareholder meetings or board minutes - though keeping records and an operating agreement helps protect liability and clarify expectations.

How to form an LLC

  1. Choose a state and a name that meets state naming rules. All 50 states (and the District of Columbia) permit LLC formation.
  1. File Articles of Organization (or a similar formation document) with the state's Secretary of State (or equivalent) and pay the filing fee. Fees and procedures vary by state.
  1. Designate a registered agent to receive legal notices in the state of formation.
  1. Obtain an Employer Identification Number (EIN) from the IRS if you will hire employees or if the LLC has multiple members. Single-member LLCs without employees can sometimes use the owner's Social Security number for federal tax purposes, but obtaining an EIN is common.
  1. Create an operating agreement to document ownership percentages, profit distribution, decision-making, transfer rules, and dissolution procedures. Even when not legally required, an operating agreement is strongly recommended.
  1. Comply with ongoing state requirements, which may include annual reports and state-level taxes or fees.

When an LLC may not be best

For businesses planning to seek venture capital, or for companies that expect to go public, a C corporation is often a better fit because of established corporate governance and stock structures. Consult a lawyer or tax advisor for situations involving complex financing, employee equity plans, or international operations.

Bottom line

An LLC offers liability protection, tax flexibility, and operational simplicity for many small and medium businesses. Proper documentation, separate finances, and routine compliance are essential to preserve those benefits.

FAQs about Limited Liability Company

Does an LLC always avoid double taxation?
By default, LLCs use pass-through taxation (single-member: disregarded entity; multi-member: partnership), which avoids corporate-level tax. However, an LLC can elect to be taxed as an S or C corporation, which changes tax treatment. Consult a tax advisor for your situation.
Do I need an operating agreement?
While some states do not legally require an operating agreement, you should have one. It establishes ownership, management rules, profit distribution, and reduces disputes. Courts also look to operating agreements when evaluating liability issues.
Can creditors reach my personal assets?
Generally no, but personal guarantees, fraud, commingling of funds, or inadequate capitalization can expose personal assets. Maintain clear separation between business and personal finances.
Where do I file to form an LLC?
You file formation documents - usually called Articles of Organization or a Certificate of Formation - with the state agency that handles business registrations (typically the Secretary of State). Requirements and fees vary by state.
Can an LLC have only one owner?
Yes. Single-member LLCs are common and receive default tax treatment as disregarded entities for federal tax purposes, although state rules and tax elections may vary.