What an LLC is
An LLC is a separate legal entity formed by filing with a state. Its owners are called members, and they are generally not personally liable for the company's debts.
The name tells you the point: limited liability. The LLC can own property, open bank accounts, sign contracts and be sued in its own name. Members can be individuals or other companies, and there is usually no cap on the number. Many states allow single-member LLCs.
An LLC is neither a sole proprietorship nor a corporation, though it can borrow features from both. Details vary by state, so check your state's Secretary of State website. For how an LLC compares with other entities, see what a business entity is.
Liability protection and its limits
An LLC generally shields your personal assets from business debts and lawsuits, but not from personal guarantees, your own negligence or mixing finances.
If the LLC owes a supplier and cannot pay, the supplier typically cannot take your home. That is the core benefit. Limits to understand:
- Personal guarantees. If you sign one for a loan or lease, you are on the hook.
- Your own acts. You remain responsible for your own negligence or wrongdoing.
- Veil piercing. Courts can disregard the LLC if you treat it as a personal account or leave it undercapitalized.
- Taxes. Some tax liabilities can reach owners.
To keep protection strong, use a separate bank account, keep records, sign in the LLC's name and carry insurance. See personal guarantees on a line of credit.
How an LLC is taxed
By default, a single-member LLC is taxed like a sole proprietorship and a multi-member LLC like a partnership. An LLC can also elect to be taxed as an S or C corporation.
The IRS treats the LLC as a pass-through by default, so profit goes to the owners' personal returns and owners pay self-employment tax on it. Electing S-corporation treatment can change how owner pay and distributions are taxed, which some profitable owners find beneficial. The tradeoff is added payroll and compliance.
Do not choose a tax election from a headline. Ask your CPA to model your numbers. State rules matter too, including franchise taxes or annual fees in some states. Read single-member LLC taxed as an S corp and how to pay yourself for specifics.
What an LLC costs
Costs include a state filing fee, possibly annual report fees, and optional registered agent and legal help. Amounts vary widely by state.
Expect a one-time formation fee and, in many states, a yearly or biennial fee or report. A few states charge more than others, and some require publication of the formation notice. A registered agent is required in every state, and you can serve as your own or hire a service. Legal or accounting help for the operating agreement and tax setup is optional but wise.
Check the filing fee and ongoing costs on your state's official site. Do not pay for a free government step, such as an EIN. Our business startup costs guide shows where formation fits in your budget.
How to form an LLC
Choose a name, appoint a registered agent, file articles of organization, write an operating agreement, get an EIN and open a bank account.
- Pick a name that follows your state's rules and is available.
- Name a registered agent with a physical address in the state.
- File the articles of organization with the state and pay the fee.
- Write an operating agreement covering ownership, decisions, profit sharing and what happens if someone leaves.
- Get an EIN from the IRS for free at IRS.gov. See the business tax ID number.
- Open a business account and keep money separate.
- Get local licenses and permits.
A written operating agreement is valuable even for a single member, because it supports your separate status.
LLC versus sole proprietor and corporation
An LLC offers liability protection with fewer formalities than a corporation, at higher cost and paperwork than a sole proprietorship.
A sole proprietorship costs nothing to form but gives no liability separation. A corporation offers strong separation and can bring in investors through stock, but requires more formalities such as a board, bylaws and meetings. An LLC sits in the middle for many small businesses.
It is not always the best choice. A company planning to raise venture capital may prefer a C corporation. A low-risk side business may be fine as a sole proprietorship. Read what a sole proprietor is and how to choose the right business entity to weigh the options.
LLCs and business funding
Funders can work with LLCs of any size. They look at the company's revenue, time in business and credit, and often ask the owner to guarantee.
Forming an LLC does not by itself guarantee funding. Funders still review revenue, deposits and credit. Expect the owner's personal credit to matter, and a personal guarantee is common. Make sure the LLC's legal name matches your bank account, tax return and application.
ROI Funder considers LLCs with 500+ FICO, 6+ months in business and $20,000+ monthly revenue. A complete file is the application plus 3 months of business bank statements. Options include working capital, term loans and a business line of credit. Applying uses a soft credit pull and carries no obligation. Start here.
Frequently asked questions
Do I need a lawyer to form an LLC?
Not required, since you can file with your state yourself. A lawyer helps with the operating agreement and complex ownership.
Is an LLC taxed differently than a sole proprietorship?
Not by default. A single-member LLC is taxed like a sole proprietorship unless it elects another treatment.
Does an LLC protect me from every lawsuit?
No. It limits liability for business debts and many claims, but not personal guarantees or your own wrongdoing.
Can an LLC get a business loan?
Yes. Funders consider the LLC's revenue and the owner's credit. ROI Funder looks for 500+ FICO, 6+ months in business and $20,000+ monthly revenue.