The short answer
An LLC, or limited liability company, is a business structure created under a state's law. Its owners are called members. Once the state files the LLC's articles of organization, the LLC is a legal person of its own: it signs contracts, owns property, opens bank accounts and owes its debts in its own name, while its members generally aren't personally liable for them.
It sits between a sole proprietorship and a corporation. Like a corporation it shields its owners; like a sole proprietorship or a partnership, its profit is taxed on the owners' own returns unless it chooses otherwise, and it can be run with far less formality than a corporation.
What the liability shield covers, and what it doesn't
The shield means a creditor of the LLC, or someone who wins a judgment against it, can collect from what the LLC owns but generally not from its members' homes, savings or wages. It has limits:
- Your own acts. You remain liable for harm you cause yourself, such as your own negligence or fraud, whether or not you were acting for the LLC.
- Personal guarantees. Landlords, banks and suppliers often ask a new LLC's owner to guarantee its debts personally. A guarantee you sign puts your own assets back on the line.
- Treating the LLC as yourself. Courts can disregard the LLC and hold its owners liable when they mix personal and business money, leave the LLC without the money to meet its obligations, or ignore its separate existence. A separate bank account and clean records are what keep the shield in place.
How the IRS taxes an LLC
An LLC is a state-law entity, not a federal tax category, so the IRS classifies it by how many members it has and what it elects:
| The LLC | Taxed by default as | Where the profit is reported |
|---|---|---|
| One member | A disregarded entity, as part of its owner | The owner's own return (Schedule C for an individual) |
| Two or more members | A partnership | The LLC files a partnership return, and each member reports a share |
| Either, after an election | A corporation (Form 8832) or an S corporation (Form 2553) | The corporation's return, or an S corporation's return with each owner's share |
An owner who reports the LLC's profit personally also pays self-employment tax on it, 15.3% for Social Security and Medicare, once net earnings from self-employment reach $400 in a year. Electing S corporation status changes that for owners who work in the business: see LLC vs S corp.
Even a one-member LLC is a separate entity for employment taxes and certain excise taxes, so an LLC with employees needs its own EIN.
Who can own one
Most states don't restrict who may be a member: individuals, corporations, other LLCs and foreign companies can all own one, and there's no maximum number of members. A few kinds of business generally can't be LLCs, such as banks and insurance companies, and some states require licensed professionals such as doctors and lawyers to use a professional LLC or a professional corporation instead.
Who runs it
An LLC is either member-managed, run by its owners directly, or manager-managed, run by managers the members appoint, who can be members themselves or outsiders. Some states ask which on the articles of organization. The operating agreement sets the rest: who decides what, how profit is split, and what happens when a member leaves. Without one, the state's LLC law supplies default rules.
How you form one
- Choose a name the state will accept: one distinguishable from every name on its register, with an ending such as LLC (naming rules, name check).
- Name a registered agent with a street address in the state, to receive legal papers.
- File the articles of organization with the state's filing office and pay its fee. Eight states call it a certificate of formation and eight a certificate of organization.
- Sign an operating agreement with every member.
- Get an EIN from the IRS, free: how to get an EIN.
- Keep it in good standing: file the state's annual report and pay any state tax.
Each state's guide to starting an LLC has its form, fees and steps.
When an LLC isn't the right fit
- You'll sell shares to many investors. A corporation is built for issuing stock; an LLC's ownership is a membership interest set by the operating agreement.
- Your business can't be one. Banks and insurance companies generally can't, and licensed professions may need a professional form in your state.
- You only need a name. If liability isn't a concern yet, a sole proprietor can trade under a registered DBA for a smaller fee: see LLC vs sole proprietorship.
Sources
- Limited liability company (LLC), IRS
- Single member limited liability companies, IRS
- Self-employment tax (Social Security and Medicare taxes), IRS
- Each state's formation document and fee: our state guides, from the filing offices' own pages.
Common questions
What does LLC stand for?
Limited liability company: a business structure created under a state's law whose owners, called members, generally aren't personally liable for the company's debts.
Is an LLC a corporation?
No. It's formed under a different law and run more flexibly, with no board of directors or shareholder meetings required. It can choose to be taxed as a corporation, or as an S corporation, by filing an election with the IRS.
Can an LLC have just one owner?
Yes. Most states allow single-member LLCs, and the IRS treats one as a disregarded entity by default, so its income goes on the owner's own tax return.
Do I need an LLC to start a business?
No. Someone who starts a business alone without forming anything is a sole proprietor. An LLC adds a liability shield and a name the state registers, for a filing fee and usually a yearly report.
How is an LLC taxed?
By default, an LLC with one member is taxed like a sole proprietorship and one with two or more like a partnership: the profit passes through to the owners' returns. It can elect to be taxed as a corporation or an S corporation instead.