What Is an LLC?
An LLC, or Limited Liability Company, is a legal business structure that separates your personal assets from your business debts and liabilities. In simple terms, an LLC helps protect your house, car, and personal bank account if your business gets sued or owes money.
What Does an LLC Do?
The main purpose of an LLC is to create a legal separation between you and your business. Without an LLC or another type of formal entity, there will generally be no distinction between your personal and business liabilities. When you form an LLC, your business becomes a legally separate entity with its own assets and debts, protecting your personal assets.
That doesn’t mean LLC protection is unlimited. Courts can sometimes find that an LLC owner has “pierced the corporate veil” if they commit fraud, mix personal and business finances, or ignore legal formalities. But for many small businesses, an LLC provides an important layer of protection.
LLC Quick Facts
- LLC stands for “Limited Liability Company”
- LLC owners are called “members”
- An LLC can have one owner or multiple owners
- LLCs provide personal liability protection
- LLCs usually have pass-through taxation
- LLCs are formed at the state level
- Most states require a registered agent for LLCs
How Does an LLC Work?
An LLC exists as its own legal entity after you file formation documents with the appropriate state agency, usually the Secretary of State. Before you file, you’ll need to appoint a registered agent.
LLC formation documents are usually called Articles of Organization, although they may also be called Certificate of Organization or Certificate of Formation, depending on the state you’re filing in. Some states also require publication notices or additional filings.
Processing time runs from a few business days to a few weeks, depending on the state.
Once the state approves your Articles of Organization, your LLC officially exists.
Once the LLC is approved, the business can:
- Get an EIN from the IRS
- Sign contracts
- Hire employees
- Own property
- Apply for licenses
- Conduct business under the LLC name
- Open business bank accounts
Banks will usually require formation documents and an EIN before opening a business account.
Types of LLCs
There are several types of LLCs categorized by everything from ownership and location to specific business purposes.
Here are the key LLC types, defined by their ownership structure and management:
Single-Member LLC
A single-member LLC has one owner.
Single-member LLCs provide liability protection without adding much complexity.
Multi-Member LLC
A multi-member LLC has two or more owners.
Multi-member LLCs are commonly used by partnerships, family businesses, and startups with multiple founders.
Member-Managed LLC
In a member-managed LLC, the owners handle day-to-day operations themselves, rather than hiring managers.
This is the default structure in many states.
Manager-Managed LLC
In a manager-managed LLC, one or more designated managers run the business.
The managers may or may not be owners of the company.
LLC Benefits vs Disadvantages
- Liability protection can shield personal assets
- Pass-through taxation by default
- Fewer formalities than corporations
- Flexible management structure
- Can be formed by one person or multiple
- Enhances professional image
- Flexible tax election options
- LLC owners pay self-employment taxes
- Formation and annual state fees can add up
- Rules and costs vary by state
- Some investors prefer corporations
- Must keep business finances separate
- More paperwork than a sole proprietorship
- Tax or publication requirements in some states
How Are LLCs Taxed?
The IRS allows LLCs to choose how they want to be taxed in many situations. Here are some common choices:
Tax Treatment |
How It Works |
Common Users |
|---|---|---|
| Default Single-Member LLC | Taxed as a disregarded entity: Income passes through the LLC to the owner, who is taxed through their personal tax return. Owner pays self-employment taxes (15%). | Solo business owners, freelancers, consultants |
| Default Multi-Member LLC | Taxed as a partnership: Income passes through the LLC to the members, who pay taxes through their personal returns, including self-employment taxes. Must also file IRS Form 1065. | Partnerships and multi-owner businesses |
| S Corporation Election | LLCs can elect S corp taxation to potentially reduce self-employment taxes. Income is divided between payroll and distributions. Payroll is subject to self-employment tax, but distributions are not. | Growing businesses with consistent profits |
| C Corporation Election | LLCs can also elect C corp taxation structure. C corps pay corporate income tax, and shareholders also pay personal tax on distributions. This is called "double taxation." | Companies seeking outside investment or retained earnings |
LLCs vs Other Business Entities
While LLCs are a popular structure for small business owners, they’re not the only option. Here’s how LLCs compare to other business entities:
LLC |
Sole Proprietorship |
|---|---|
| Separate legal entity from the owner | Not a separate legal entity |
| Limited liability protection | No liability protection |
| State filing required | No state filing required |
| Formal structure lends credibility | Less formal structure can look less credible |
| Official name is separate from owner's name | Business name is owner's name, unless they get a DBA |
Learn more about LLCs vs Sole Proprietorships.
LLC Vs Corporation
LLC |
Corporation |
|---|---|
| Flexible management structure | Formal corporate structure |
| Fewer formalities | More compliance requirements |
| Pass-through taxation by default | Double taxation by default |
| Easier for small businesses | Often preferred for investors |
| Members own the business | Shareholders own the business |
Here’s our deep dive comparing LLCs vs Corporations.
How to Start an LLC
The exact process varies by state, but forming an LLC usually involves these steps:
1. Choose your business name
You must choose a name that isn’t currently in use in your state. You’ll probably need to include “LLC” or “Limited Liability Company.”
2. Appoint a registered agent
Designating a registered agent is almost always required for LLCs. This person or business must be able to accept service of process in person.
3. File Articles of Organization
Filing Articles with the Secretary of State (or equivalent) is what officially forms your LLC. You’ll need to pay a filing fee.
4. Get an operating agreement
Your operating agreement puts important elements of your LLC into writing, including ownership, voting rights, and how you’ll handle dissolution, among others.
5. Apply for an EIN with the IRS
An EIN (Employer Identification Number) is required for multi-member LLCs and all employers. You can get an EIN for free by going to the IRS website and applying online.
6. Open a business bank account
It’s important to manage LLC assets in a separate business bank account. If you mix LLC and personal funds, you could lose your limited liability protection.
Northwest has detailed guides on how to form an LLC in all 50 states.
Frequently Asked Questions
No. An LLC is a separate business structure from a corporation, though both provide liability protection. The main differences are in management, taxation, and formalities.
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