What Is an LLC?
An LLC is a business structure created by state law that separates you from your business. Here is what that separation actually does, what it does not do, and how an LLC is taxed, in plain English.
On this page
The short definition
LLC stands for limited liability company. It is a legal entity you create by filing a short document with your state, usually called the Articles of Organization or Certificate of Formation, and paying a state filing fee. From that moment, the LLC exists on paper as something separate from you personally. It can own a bank account, sign contracts, hold property, and be sued in its own name.
An LLC is not a corporation, and it is not a license. It is a state-level structure. There is no federal LLC registry, which is why the rules, fees, and deadlines differ from state to state and why this site organizes its guides by state.
What the liability shield covers, and what it does not
The main reason people form an LLC is the liability shield. If the business is sued or cannot pay a business debt, the claim generally stops at the business. Your house, your personal savings, and your car are not the business's assets, so they are usually not on the table for business obligations.
The shield has real limits, and honest guides say so up front:
- Your own actions. If you personally injure someone or commit fraud while working, you can be personally responsible. The shield protects you from the business's obligations, not from yourself.
- Personal guarantees. Landlords, lenders, and suppliers often ask owners to personally guarantee a lease or loan. Whatever you guarantee is yours personally, LLC or not.
- Mixing money. Courts can set the shield aside when an owner treats the business account like a personal account. A separate bank account and clean records are part of keeping the protection.
- Payroll and trust taxes. Money withheld from employees for taxes stays the responsible person's problem. The shield does not cover it.
How an LLC is taxed by default
An LLC is flexible on taxes, and the default needs no election at all. The IRS treats an LLC as a pass-through by default, which means the business itself does not pay federal income tax. Profits and losses pass through to the owners, who report them on their own returns.
| Owners | IRS default treatment | Where income is reported |
|---|---|---|
| One owner (single-member) | Disregarded entity | Your personal return, usually Schedule C |
| Two or more owners (multi-member) | Partnership | A partnership return, with each owner reporting a share |
| Any LLC, by election | S corporation or C corporation | Separate election forms and returns apply |
Two things people get wrong here. First, the liability shield and the tax treatment are separate questions. A single-member LLC is protected as an entity under state law even though the IRS ignores it for income tax. Second, pass-through does not mean tax-free. Owners generally owe income tax and self-employment tax on business profits whether or not the money left the business account. Elections like S corporation status change the tax picture but add payroll and filing requirements, which is a decision for a tax professional, not a default.
Owners, members, and management
LLC owners are called members. A member can be a person, another company, or in most states a trust. There is no cap on the number of members and no requirement that members be US citizens or residents, though tax reporting for foreign owners gets more complex.
An LLC is run one of two ways. In a member-managed LLC, the owners run the business day to day, which is the common setup for small companies. In a manager-managed LLC, the owners appoint one or more managers to run things, which suits passive investors. Your operating agreement, the internal document covered in our formation guide, is where this choice and the ownership split are written down.
What it costs to have one
There are two layers of cost. The first is the one-time state filing fee to create the LLC, which ranges from under $50 to several hundred dollars depending on the state. The second is the ongoing cost of keeping it in good standing: an annual or biennial report fee in most states, a registered agent if you hire one, and in a few states a real tax, such as California's $800 annual LLC tax. Our cost calculator shows both layers state by state, and every figure in it comes from an official state source.
Who usually forms an LLC
Freelancers and consultants who want a wall between client work and personal assets. Landlords holding rental property. Online sellers and creators whose side income has become real money. Partners who want ownership and management rules in writing. The common thread is not size, it is exposure: the moment a business can be sued, owe money, or sign contracts, the structure starts earning its keep.
An LLC is not always the answer. A hobby with no income, or a business that needs venture capital, may fit other structures better. The comparison with the default alternative is in LLC vs. sole proprietorship.
Common questions
Is an LLC a business license?
No. Forming an LLC creates the entity. Licenses and permits are separate, and they come from your state, county, or city depending on what the business does. Many businesses need both.
Can one person own an LLC?
Yes, in every state. That is a single-member LLC, and it is the most common kind.
Does an LLC need its own bank account?
Nothing at the filing office forces it, but yes in practice. Keeping business money separate is basic hygiene for the liability shield and for your taxes. Most banks require your formation document and an EIN to open the account.
How long does an LLC last?
Until you dissolve it or the state dissolves it for missed reports or fees. An LLC has no built-in expiration date, which is exactly why the ongoing deadlines matter.
General Information Only
LLCForming publishes general information about forming and running an LLC. It is not legal, tax, or accounting advice, and it does not create an attorney or advisor relationship. Rules vary by state and by your situation. For a decision that matters, talk to a licensed attorney or tax professional in your state.