What is an LLC?
What is an LLC? A Limited Liability Company is a US business structure that protects your personal assets from business debts and lawsuits — and lets you choose how you're taxed. The default choice for most new US businesses. Form yours with ClearFormation.
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:
- Limits your liability. If the business is sued or owes money, creditors generally can't come after your personal house, car, or savings — only the LLC's assets.
- Stays tax-flexible. By default the IRS ignores the LLC for taxes and lets profits flow through to your personal return. You can also elect to be taxed as an S-corp or C-corp later.
LLC vs other structures (quick comparison)
| Liability shield | Default tax | Paperwork | |
|---|---|---|---|
| Sole proprietorship | None | Pass-through | None |
| LLC | Yes | Pass-through (choosable) | Light |
| S-Corp | Yes | Pass-through | Medium |
| C-Corp | Yes | Double taxation | Heavy |
Compare in depth: LLC vs sole proprietorship · S-corp vs LLC · LLC vs C-corp
Pros and cons of LLCs
Advantages
- Limited liability for owners
- Pass-through taxation by default
- Flexible management and ownership
- Fewer formalities than a corporation
- Works for US and non-US owners
Disadvantages
- State filing and annual report fees
- Self-employment tax on active member profits
- Not the standard structure for VC rounds
- Liability shield requires separate banking and compliance
- Some states impose franchise taxes (CA, DE, TX)
Types of LLCs
Common LLC categories founders encounter:
- Single-member LLC — one owner; default disregarded entity for tax
- Multi-member LLC — partnership taxation by default
- Manager-managed LLC — managers run day-to-day; members can be passive
- Series LLC — internal liability compartments (select states only)
- Professional LLC (PLLC) — for licensed professions where required
- Low-profile LLC — Wyoming, New Mexico, Delaware, Nevada limit public member disclosure
Articles of organization
Articles of Organization (sometimes Certificate of Formation or Certificate of Organization) are the one-page state filing that creates the LLC. They typically list the LLC name, registered agent, principal address, management structure, and organizer signature. Filing fees range from $35 to $500 depending on state. Once the Secretary of State accepts the filing, the LLC legally exists.
LLC formation process overview
- Pick a state. Usually your home state. Wyoming, Delaware, and New Mexico are popular for non-residents.
- Pick a name. Must include "LLC" or "L.L.C." and be unique in your state's records.
- Appoint a registered agent with a physical address in your formation state.
- File Articles of Organization with the state and pay the filing fee.
- Get an EIN from the IRS so you can open a bank account and file taxes.
LLC requirements
To form an LLC 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.
LLC benefits
Personal asset protection
Creditors and lawsuits target the LLC, not your house, car, or savings.
Tax flexibility
Pass-through by default; elect S-corp or C-corp later as you grow.
Credibility
Banks, vendors, and clients take an LLC more seriously than a sole prop.
Simple paperwork
Far less administrative overhead than a corporation.
Privacy (in some states)
Wyoming, New Mexico, and Delaware keep owner names off public records.
Perpetual existence
The LLC continues if owners change, unlike a sole proprietorship.
Examples of LLCs
LLCs are 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
LLC tax overview
By default, an LLC pays no federal income tax. Profits and losses pass through to members' personal returns:
- Single-member LLC — reported on Schedule C of Form 1040
- Multi-member LLC — 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
LLC legal considerations
The liability shield is real but not automatic. Courts look at whether you treat the LLC as a separate business: separate bank account, signed operating agreement, contracts in the LLC name, adequate capitalization, and filed annual reports. Mixing personal and business money is the most common reason shields fail ("piercing the corporate veil"). Domestic US LLCs are exempt from FinCEN BOI reporting after the March 2025 interim final rule.
Is an LLC a good idea for my business?
An LLC is a good default if you have any meaningful liability exposure, sign contracts, hire people, or want a business bank account. It's usually overkill for a zero-revenue hobby with no third-party risk. It's the wrong structure if you're raising US venture capital — investors want a Delaware C-Corp. If you're unsure, read do you need an LLC to start a business.
Single-member LLCs
A single-member LLC has one owner. The IRS disregards it for tax purposes by default — profits go on Schedule C. You still get liability protection at the state level if you maintain formalities. Foreign-owned single-member LLCs must file Form 5472 + pro-forma Form 1120 annually regardless of revenue. See single-member LLC guide.
LLCs and asset protection
The core promise of an LLC is that business creditors generally cannot reach your personal home, car, or savings — only LLC assets. Real estate investors often use one LLC per property (or a series LLC) to isolate liability. The shield fails if you commingle funds, operate fraudulently, or ignore state compliance. An operating agreement and dedicated banking are minimum hygiene.
Running an LLC
Day-to-day operation means: sign contracts as the LLC (not personally), deposit revenue in the business account, pay yourself via distributions or payroll (if S-Corp), file annual state reports, issue 1099s to contractors, and keep books that match tax filings. Multi-member LLCs should document major decisions and follow the operating agreement for profit splits and exits.
Dissolving an LLC
When you wind down, file Articles of Dissolution with the state, pay outstanding franchise taxes and annual reports, cancel the EIN with the IRS, close the bank account, and notify vendors. Skipping formal dissolution leaves you on the hook for annual fees until the state administratively dissolves you — often with penalties. See how to close an LLC.
Common LLC 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.