What is an LLC?

What does LLC stand for? Plus, tax and legal considerations

LLC stands for Limited Liability Company. It's a legal wrapper around your business that does two things at once:

1. Limits your liability. If the business is sued or owes money, creditors generally can't come after your personal house, car, or savings — only company assets.
2. Stays tax-flexible. By default the IRS ignores the entity for taxes and lets profits flow through to your personal return. You can also elect S-corp or C-corp treatment later.

LLC as a business entity

Under state law, a limited liability company is its own business entity — separate from you personally.

• It can own property, sign contracts, sue and be sued, and open bank accounts.
• Members own the entity; managers (if any) run day-to-day operations.
• Members are not always on the public record in every state.
• Federal taxes pass through to members unless you elect corporate treatment.

That separation is why creditors generally cannot reach your personal assets for ordinary business debts — the core limited liability protection founders form for.

LLC vs other structures (quick comparison)

Compare in depth: LLC vs sole proprietorship · S-corp vs LLC · LLC vs C-corp

Limited liability protection — what it actually covers

Limited liability protection means business creditors generally cannot reach your personal home, car, or savings — only company assets.

The shield holds when you:

• Keep separate bank accounts
• Sign contracts in the entity's name
• Maintain an operating agreement

Main advantages: flexible tax, fewer formalities than a corporation, open to US and non-US owners. Main drawbacks: state fees, self-employment tax on active profits, and VC preference for C-Corps.

Pros and cons of this structure

Types of limited liability companies

Common categories founders encounter:

• Single-member — one owner; reported on your personal return by default
• Multi-member — partnership taxation by default
• Manager-managed — managers run day-to-day; members can be passive
• Series structure — internal liability compartments (select states only)
• Professional (PLLC) — for licensed professions where required
• Low-profile formation — Wyoming, New Mexico, Delaware, Nevada limit public member disclosure

Articles of organization

Articles of Organization (sometimes Certificate of Formation) are the one-page state filing that creates the entity. They typically include:

• Company name and registered agent
• Principal address and management structure
• Organizer signature

Filing fees range from $35 to $500 depending on state. Once the Secretary of State accepts the filing, the company legally exists.

Formation process overview

1. Pick a state. Usually your home state. Wyoming, Delaware, and New Mexico are popular for non-residents.
2. Pick a name. Must include "LLC" or "L.L.C." and be unique in your state's records.
3. Appoint a registered agent with a physical address in your formation state.
4. File Articles of Organization with the state and pay the filing fee.
5. Get an EIN from the IRS so you can open a bank account and file taxes.

Formation requirements

To form a limited liability company in any US state you need:

• A unique business name ending in "LLC" or "L.L.C."
• A registered agent with a physical street address in your formation state
• Articles of Organization filed with the state (sometimes called Certificate of Formation or Certificate of Organization)
• The state filing fee — ranges from $40 to $500 depending on state
• An EIN from the IRS (free) to open a bank account and file taxes
• An operating agreement (required in CA, DE, ME, MO, NY; best practice everywhere)

No minimum capital. No US residency requirement. No US-citizen requirement for members.

Key benefits

Real-world examples

This structure is used by everything from one-person freelancers to billion-dollar subsidiaries. Common examples:

• Solo consultants & freelancers — designers, developers, marketers operating as a single-member LLC
• Real estate holding companies — one LLC per property to isolate liability
• Ecommerce stores — Shopify and Amazon sellers protecting personal assets
• Small agencies & studios — multi-member LLCs with profit-share among partners
• Subsidiaries of large corporations — Chrysler Group LLC, Anheuser-Busch LLC, Hertz Vehicles LLC

Tax overview

By default, the entity pays no federal income tax. Profits and losses pass through to members' personal returns:

• Single owner — reported on Schedule C of Form 1040
• Multiple owners — files Form 1065 and issues K-1s to members
• Self-employment tax — members owe 15.3% on their share of profits
• State taxes — vary; some states impose a franchise tax (California $800/year, Delaware $300/year) or gross receipts tax
• S-corp election — file Form 2553 to be taxed as an S-corp; usually pencils out above ~$60–80k/year of net income

Legal considerations

The liability shield is real but not automatic. Courts look at whether you treat the company as a separate business:

• Separate bank account and signed operating agreement
• Contracts in the entity name and filed annual reports
• Adequate capitalization for the business you run

Mixing personal and business money is the most common reason shields fail. Domestic US entities of this type are exempt from FinCEN BOI reporting after the March 2025 interim final rule.

Is this structure a good fit for my business?

• Good fit if you have liability exposure, sign contracts, hire people, or need a business bank account.
• Overkill for a zero-revenue hobby with no third-party risk.
• Wrong fit if you are raising US venture capital — investors want a Delaware C-Corp.

Unsure? Read do you need an LLC to start a business.

Single-member structures

• One owner; IRS treats it as a disregarded entity by default — profits on Schedule C.
• You still get state-level liability protection if you keep formalities.
• Foreign-owned single-member LLCs must file Form 5472 + pro-forma Form 1120 yearly.

See single-member LLC guide.

Asset protection

• Business creditors generally cannot reach your personal home, car, or savings.
• Real estate investors often use one entity per property to isolate risk.
• The shield fails if you mix funds, commit fraud, or skip state compliance.
• An operating agreement and dedicated banking are minimum hygiene.

Running the business

Day-to-day operation means:

• Sign contracts as the entity, not personally
• Deposit revenue in the business account
• Pay yourself via distributions or payroll if you elect S-Corp
• File annual state reports and issue 1099s to contractors
• Keep books that match tax filings

Multi-member companies should document major decisions and follow the operating agreement for profit splits and exits.

Dissolving the entity

• File Articles of Dissolution with the state.
• Pay franchise taxes and file any overdue annual reports.
• Cancel the EIN, close the bank account, and notify vendors.

Skipping formal dissolution leaves you on the hook for annual fees. See how to close an LLC.

Key terms (members, managers, and filings)

Here are the terms you will see on filings, bank forms, and tax paperwork:

• Members — the owners of the LLC. A single member owns 100%; multi-member LLCs split ownership via the operating agreement.
• Managers — people authorized to run day-to-day operations. In a member-managed LLC, all members manage; in a manager-managed LLC, designated managers (who may be passive investors) handle operations.
• Articles of Organization — the state filing that creates the LLC (sometimes called Certificate of Formation). Lists name, registered agent, and principal address.
• Operating agreement — the internal contract between members covering profit splits, voting, capital calls, and exit rules. Required in California, Delaware, Maine, Missouri, and New York; essential everywhere else.
• Registered agent — a person or company with a physical in-state address that accepts lawsuits and state mail on the LLC's behalf.
• EIN — the IRS-issued federal tax ID (one of the main business identification numbers). Required for banking and multi-member LLCs. See our EIN application guide.

Common mistakes

• Mixing personal and business money

  Paying personal expenses from the LLC account is the #1 way courts pierce the liability shield. Open a separate business bank account on day one.

• Skipping the operating agreement

  Even single-member LLCs need one. Without it, default state law fills the gap — and California, Delaware, Maine, Missouri, and New York legally require one.

• Forming in Wyoming or Delaware when you live in California

  You'll still owe California's $800 franchise tax and have to register as a foreign LLC. Form in your home state unless you have a specific reason not to.

• Forgetting the annual report or franchise tax

  Most states require an annual or biennial filing. Miss it and the state administratively dissolves your LLC — wiping out your liability shield retroactively.

• Using your home address as registered agent

  It becomes part of the public record and a target for service-of-process. Use a commercial registered agent.

Sources

• IRS — Limited Liability Company (LLC)
• SBA — Choose a business structure
• FinCEN — Beneficial Ownership Information