What is a Limited Liability Company (LLC)? (2024)

A limited liability company (LLC) combines the best parts of corporations, sole proprietorships, and partnerships into one business entity. This popular choice for small businesses offers owners liability protection, a flexible management structure, and certain tax advantages.

Find out if this popular business structure is the right choice for you.

What Is an LLC?

An LLC is a type of business entity that can have one or more owners, referred to as "members." LLC members typically participate equally in the management of the business unless they elect an alternative management structure called "manager management."

An important feature of LLCs is "limited liability," which means that all LLC owners are protected from personal liability for business debts and claims. If the business itself can't pay a creditor—such as a supplier, a lender, or a landlord—the creditor can't legally come after an LLC member's house, car, or other personal possessions. Because only LLC assets are used to pay off business debts, LLC owners stand to lose only the money that they've invested in the LLC.

In addition, an LLC isn't considered separate from its owners for tax purposes. Instead, an LLC is what the IRS calls a "pass-through entity," like a partnership or sole proprietorship. A pass-through tax entity is one where the business income passes through the business to the LLC members, who report their share of profits (or losses) on their individual income tax returns.

LLC vs. Corporation

An LLC is a unique business structure. It has similar characteristics to a corporation. Yet, an LLC has advantages that a corporation doesn't have.

LLCs and corporations both:

• have limited liability for business owners
• require owners to file paperwork with the state to create them
• usually require owners to submit paperwork and fees to maintain the company's state registration, and
• can be taxed as corporations or S corporations.

However, LLCs have several advantages that corporations don't. For instance, an LLC is taxed as a partnership (as a multi-member LLC) or sole proprietorship (as a single-member LLC) by default. However, an LLC can elect to be taxed as a corporation or S corporation as noted above. In addition, LLC owners don't work as employees of the LLC—they're self-employed business owners.

In general, forming an LLC and running an LLC are less complex and require less paperwork than forming and running a corporation.

For more details, see our article on corporations and S corporations vs. LLCs.

Who Should Form an LLC?

Any person starting a business, or currently running a business as a sole proprietor, should consider forming an LLC. An LLC can be especially appealing if you're concerned with limiting your personal legal liability as much as possible.

LLCs can be used to own and run almost any type of business. However, in some states, some types of professionals must form special professional LLCs. An LLC can be used for a business of any size—from one-owner operations to businesses with many co-owners. LLCs are also the most common legal entity for commercial properties.

If you're looking for more guidance, ask yourself these questions before forming an LLC.

What Are the Benefits of an LLC?

You'll find many benefits to forming an LLC.

Personal asset protection. As noted earlier, an LLC provides its owner or owners with limited liability, meaning that you—the LLC owner—are generally not personally liable for any debts incurred by your LLC business or most business-related lawsuits. Because you're not personally liable, creditors or people who file lawsuits against your LLC can't collect against your personal assets like your personal bank accounts, personal car, or home. Instead, creditors are limited to collecting from your LLC's assets, like your business bank account.

However, it's important to note that there are situations where you'll be personally liable for your business debts, such as when you personally guarantee a loan or a creditor pierces the corporate veil.

Pass-through taxation. LLCs are taxed as pass-through entities by default. Specifically, multi-member LLCs are taxed as partnerships and single-member LLCs are taxed as sole proprietorships (known as "disregarded entities"). With a pass-through tax entity, a business's profits (or losses) pass through the business to the owner's personal tax return. Such profits are taxed at the owner's personal tax rates.

Because LLCs are usually pass-through entities, their owners can qualify for a 20% pass-through tax deduction created by the Tax Cuts and Jobs Act. This deduction took effect in 2018 and is scheduled to continue through 2025. Business owners can deduct from their personal returns up to 20% of the net business income earned by the pass-through business.

Simplicity. An LLC is the simplest business entity to form and operate. Unlike with a corporation, it's not necessary to have officers and directors, board or shareholder meetings, or the other administrative burdens that come with having a corporation.

Flexibility in ownership. There are no minimum or maximum limits on the number of owners an LLC can have. Many LLCs have only one member. But an LLC can have five, ten, or hundreds of members. Typically, members can be individuals or businesses.

Options for management. LLCs can be managed by their members—that is, all the owners share responsibility for the day-to-day running of the business. LLCs also have the option of designating one or more managers to run the business. The managers can be designated members, nonmembers, or a combination of both. (See our article on member-managed vs. manager-managed LLCs for more details on these two management structures.)

Flexibility in taxation. LLCs can also choose how they want to be taxed. As mentioned earlier, LLCs are usually taxed as sole proprietorships or partnerships. But single-member LLCs and multi-member LLCs can choose to be taxed like a corporation. You simply need to file Form 8832, Entity Classification Election with the IRS to elect corporate tax status. Your LLC can also be taxed as an S corporation. After electing corporate tax status, you'll need to file Form 2553 with the IRS.

Credibility. Forming an LLC to own and run your business helps give you credibility. It reassures customers that your business is a real business. You'll also have an official business name to use.

To learn more, see our article on the advantages of an LLC.

What Are the Disadvantages of an LLC?

While an LLC has many advantages, it's not without a few disadvantages.

Cost. It generally costs more to form and operate an LLC than a sole proprietorship or partnership. You must pay filing fees to form an LLC. Although usually not legally required, it's highly recommended for LLCs to adopt a written LLC operating agreement laying out how the LLC will be governed. Once the LLC is formed, you'll have to pay annual fees and taxes to the state. These vary from state to state but can be as high as $800 per year or more for highly profitable LLCs.

Investment disadvantages. LLCs aren't ideal for business owners who seek outside investors. This disadvantage is particularly true if you're looking for funding for your LLC from venture capitalists, who ordinarily will only fund corporations. Corporations work best for outside investments because stock can be issued in exchange for investors' money. Outside investors can invest in LLCs and receive LLC ownership interests, but this can be more complicated than with a corporation.

How Do You Start an LLC?

Starting an LLC is relatively easy. You file articles of organization or a similar document with your secretary of state's office and then take some additional steps to get your LLC up and running.

Each state has its own unique LLC formation requirements. To learn about the specific requirements of forming an LLC in your state, choose your state from the list below:

LLC FAQ

How much does it cost to form an LLC?

The cost varies from state to state. Generally, it costs a few hundred dollars if you do all the work yourself. Most of the cost is the fee to file your articles of organization. It'll cost much more if you hire a lawyer. Our online LLC filing service offers packages starting at just $49.00.

To learn about your state's filing fees, see our article on how much it costs to form an LLC.

What does LLC stand for?

LLC stands for "limited liability company." Some people mistakenly think LLC stands for "limited liability corporation," but it's not a corporation.

How are LLCs taxed?

The default tax regime is for LLCs with a single member to be taxed as sole proprietorships, while LLCs with multiple members are taxed like partnerships. However, LLC owners have the option of having their LLC taxed as a C corporation or S corporation. You'll need to make this corporate election by filing forms with the IRS.

For details, see how LLC members are taxed.

Where should I form an LLC?

It's usually best to form your LLC in the state where your business is located. There are ordinarily no great advantages to forming your LLC in any other state. If you do form your LLC in a state where your business isn't located, then you'll need to qualify to do business in your state.

Check out our article on where to form your LLC for more guidance.

Do I need a lawyer to form an LLC?

No. You can form your LLC yourself. There's no requirement to use a lawyer.

To form an LLC confidently, and without a lawyer, use our online LLC formation service.

What's the difference between a corporation and an LLC?

Both corporations and LLCs provide their owners with limited liability. But LLCs are ordinarily taxed like sole proprietorships or partnerships. In addition, LLC owners don't work as employees of the LLC—they are self-employed business owners.

Corporate shareholders who work for the corporation must be treated like employees of the corporation. For tax purposes, corporations can be C corporations or S corporations. C corporations are separate taxpaying entities with their own low 21% tax rate. S corporations are pass-through entities—profits pass through the business and are taxed at the shareholders' individual rates.

What is the difference between a sole proprietorship and an LLC?

A sole proprietor personally owns a business and all its assets. There's no separate business entity involved. The sole proprietor is personally liable for all business debts and lawsuits, meaning creditors or lawsuit plaintiffs can reach the proprietor's personal assets to satisfy a debt or judgment.

An LLC is a separate business entity. The LLC owns the business and all its assets. The LLC members—the owners of the LLC—run the LLC. The LLC members ordinarily aren't personally liable for LLC debts and lawsuits.

For more details, read about sole proprietorships vs. LLCs."

What is a professional LLC?

In some states, individuals involved in certain types of professional practices aren't allowed to form regular LLCs. Instead, they must form professional LLCs. (In other states, professionals have the option of forming either a regular LLC or a professional LLC.)

Professional LLCs are specially designed for licensed professionals like lawyers, doctors, architects, engineers, accountants, and chiropractors. The main difference between professional and regular LLCs is that usually, all the members of a professional LLC must hold a professional license.

For details, see our article about professional LLCs.

What is a series LLC?

A series LLC is an LLC whose articles of formation allow for unlimited segregation of membership interests, assets, and operations into independent series. Each series operates like a separate entity with a unique name, bank account, and separate books and records.

For example, series LLCs can be used by real estate investors who own multiple properties. Each series isolates and protects its properties from the liabilities of the properties in other series. Companies with different profit centers can also use series LLCs to segregate and shield each business operation. Only certain states allow series LLCs.

Learn more in our article on series LLCs.

What is a single-member LLC?

A single-member LLC (sometimes shortened to "SMLLC") is an LLC owned by one person. SMLLCs are allowed in all states. Most states treat SMLLCS much the same as any other LLC. However, for tax purposes, SMLLCs are disregarded entities. They're ordinarily taxed like sole proprietorships—as if the LLC didn't exist.

How should my LLC be managed?

LLC owners have great flexibility in deciding how their entity is managed. Most LLCs are member-managed. With this approach all the members (owners) of the LLC share responsibility for the day-to-day running of the business. This approach is more common in part because most LLCs are small businesses with limited resources and they don't need a separate management level to operate.

LLCs can also elect to be manager-managed. This type of management structure means that only designated members—or certain nonmembers/outsiders, or a combination of members and nonmembers—are given the responsibility to run the business. The other members of a manager-managed LLC are passive investors who aren't involved in business operations. This form of management can be desirable for large LLCs with many members, or where some members only want to be passive investors in the business.

For more details, see our article explaining these two types of business structures.

Are there any age requirements for forming an LLC?

In general, there's nothing that prevents a minor from being a member of an LLC. However, the LLC laws of some states prohibit minors under the age of 18 from serving as organizers to form LLCs.

For details, see our article answering the question of whether minors can form LLCs.

Do I need insurance for an LLC?

A good liability insurance policy can shield your personal assets when limited liability protection doesn't. For instance, if you're a massage therapist and you accidentally injure a client's back, your liability insurance policy should cover you. You can also use insurance to protect your personal assets if your limited liability status is ignored by a court.

In addition to protecting your personal assets in such situations, insurance can protect the LLC's assets from lawsuits and claims. But your LLC won't be protected if it doesn't pay its bills: Commercial insurance usually doesn't protect personal or corporate assets from unpaid business debts, whether or not they're personally guaranteed.

For more guidance, see what types of insurance your small business needs.