What is an LLC? Detailed Answers + How to Form One

Read about LLCs and why they are important for small businesses. Includes important information and details about LLCs.

Updated on June 4th, 2019

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What is an LLC?

A Limited Liability Company, or LLC, is a business structure that combines the flexibility of a sole proprietorship or partnership with the personal asset protection of a corporation.

It is a way of structuring a business that is popular among small business owners because members of an LLC are not personally responsible for any debt or lawsuits, several options for tax and management are available, and forming and maintaining an LLC is fairly easy.

What is the purpose of an LLC?
What is the purpose of an LLC?

The purpose of a Limited Liability Company is to protect the personal assets of a company's owners from business liability, such as bankruptcy and lawsuits.

There are different types of LLCs. Businesses with operations in multiple states need different LLCs from businesses operating in only a single location. Some LLCs offer parent companies protection for all of their subsidiaries. Some LLCs only exist in one or two states.

Types of LLCs:

Type of LLC


Domestic LLC

For companies operating in the state where the LLC is formed.

Foreign LLC

For companies with operations in more than one state. A foreign LLC will have to be formed for each entity outside the original LLC's state.

Member-managed LLC

Management responsibilities are divided between individual members.

Manager-managed LLC

The members opt for a non-member to take on all of the management responsibilities.

Single-member LLC

An LLC with one owner.

Multiple-member LLC

An LLC with more than one owner.

Series LLC

A type of LLC that protects the "parent" company and all of its "child" companies against liabilities. The individual companies in the Series LLC are protected from each other's liabilities as well. Exists in only some states.

Restricted LLC

A restricted LLC prohibits certain business distributions among members for the first ten years after formation. Exists in Nevada only.


A mix of LLC, nonprofit organization, and social enterprise, an L3C is for for-profit companies with clear philanthropic and social goals.

Anonymous LLC

Does not make details of the members available to the public.

LLCs and Tax:

An LLC is a "pass-through entity," which means the business itself is not taxed. Instead, members of the LLC report profits and losses on their individual tax returns and pay income tax on their share of profits. The LLC does not pay federal income tax but is compelled to pay annual taxes in some states.

Single-member LLCs are treated by the IRS as sole proprietorships. The LLC does not pay income tax and does not need to file a return. The member, however, reports all profits and losses on Schedule C and submits it with a 1040 tax return. The member must pay income tax on all profits, even if the money stays in the business.

Multi-member LLCs are treated by the IRS as partnerships. Individual members of the LLC each pay taxes on their share of the profits, their distributive share, regardless of whether the profits were paid out to them or not. They must report profits and losses on their personal income tax returns with Schedule E attached. And while the LLC does not pay its own income tax, it must file Form 1065, and provide each member with a Schedule K-1.

LLC members are considered by the IRS to be self-employed. This means that they aren't subject to tax withholding but are responsible for estimating the amount of tax they'll owe for the year and making quarterly payments to the IRS in April, June, September, and January.

LLC state-level taxes:



Franchise Tax

A flat rate paid annually, or a percentage of annual earnings.

Unemployment & Income Withholding Tax

Only if the LLC has employees. If elected for, it is a federal income tax withheld from unemployment benefits at a flat rate of 10%.

Sales Tax

If the company sells taxable goods and services, it must be registered for a seller's permit and collect sales tax on behalf of the state.

Advantages and Disadvantages of an LLC:



Personal asset protection.

Owners pay tax on distributive share.

Pass-through taxation.

Investors don't like K-1 forms process.


Need to keep careful personal records.


If even one member leaves, entire LLC closes.

Increased credibility.

Business banking fees and monthly expenses.

Access to business loans.

What does it cost to start an LLC?
What does it cost to start an LLC?

LLC formation filing fees can cost between $50 and $500. Filing fees vary from state to state.

How to form an LLC:

To form an LLC, members must file formal documents with the state, pay filing fees, and comply with other regulations.

1. Select a state.

It is simplest to incorporate in one's home state, but some business owners look to more "business friendly" states to incorporate in. Each state differs in terms of fees and taxes and offers its own advantages and drawbacks.

Colorado, Hawaii, and Iowa have the lowest formation fee, for example, while Connecticut the highest.

Ohio and Alabama don't require corporations to file annual or biannual reports.

California's annual franchise tax is based on income and Delaware's on the number of shares and par value.

Nevada has no franchise tax at all.

2. Name your LLC.

Different states have different naming rules for LLCs but usually the name cannot be the same as another LLC's. The name must end with "Limited Liability Company", "Limited Company," "LLC," "L.L.C.," or "Ltd. Liability Co.," and the name must not violate any trademarks. Some words such as Bank, Insurance, Corporation or City are also prohibited by some states.

Approach your state's LLC office to find out whether your proposed name is available for your use. You can, in most cases, reserve your LLC name for a short period of time.

There is no need to register the name because it is automatically registered when you file your articles of organization.

3. Choose a registered agent.

A registered agent is a person or business officially chosen by the company to receive and send papers such as state filings and legal action documents on its behalf.

The registered agent must be a resident of the state in which the LLC is to be formed. You can act as your own registered agent if filing for a Domestic LLC.

4. File the articles of organization.

Articles of organization is a legal document you need to fill in and file along with a fee with the Secretary of State. Different states have different requirements, fees, and processes for filing articles of organization. Visit your state's Secretary of State website for more specific information, but usually, the information required is:

  • The name of the LLC.
  • The address of the LLC.
  • The members of the LLC (some states require addresses, too).
  • The registered agent.
  • The starting date of the LLC.
  • Whether it will be member-managed or manager-managed.
  • Business activities.
States that require publication of intent to incorporate:
  • Arizona.
  • Nebraska.
  • New York.

5. Create an operating agreement.

Although not required by any state, an operating agreement guides business decisions and states clearly the rules, regulations, and provisions by which the business will be governed. It shows who owns and manages the LLC, how profits are shared, and how future problems will be resolved.


What type of business is an LLC?

An LLC, or Limited Liability Company, is a type of business that is taxed like a sole proprietorship or partnership and protects its owners from business liability.

What is a member of an LLC?

A member of an LLC is an owner of the company registered as an LLC.

What type of entity is an LLC?

An LLC is a legal entity that defines the characteristics of a business's structure.

What is an LLC good for?

An LLC is good for offering a small business owner personal protection from liability, and pass-through taxation.

What are the benefits of an LLC?
What are the benefits of an LLC?
  • Personal asset protection.

  • Flexible management structure.

  • Pass-through taxation.

  • Ease of maintenance.

  • Business credibility.

What are the disadvantages of an LLC?

Members must pay tax on their distributive shares, and keep detailed personal records. The LLC has to issue K-1 forms, which investors dislike. And, if one member leaves the LLC, it closes altogether.

How do LLC owners get paid?

LLC members/owners are paid a percentage of profits according to the number of shares they own individually. How profits are divvied up among members is stated clearly in the LLC's operating agreement, and needs to be reported to the IRS by filing Form 1065.

How are LLC's taxed?

A Limited Liability Company (LLC) is what is known as a "pass-through entity," which means the business itself is not taxed. Members of the LLC report profits and losses on their individual tax returns and pay income tax on their share of profits. The LLC does not pay federal income tax but is compelled to pay annual taxes in some states.

What is the owner of an LLC called?
What is the owner of an LLC called?

The owner of a Limited Liability Company is called a member. An LLC can have more than one member.

What does an LLC protect you from?

A Limited Liability Company protects you, the owner, from personal liability for the business's debt and lawsuits that may be taken against the business.

Do you have to pay yourself a salary in an LLC?

Members of an LLC are paid their share of the company's profits. Exactly how profits are divided among members is stated in the LLC's operating agreement.

What expenses can be by an LLC?

Most of the expenses related to running the business can be deducted as business expenses. Things like rent, phone, and office supplies are examples of such expenses.

What are the tax benefits of having an LLC?

The main benefit is that you avoid double taxation. The LLC does not pay income tax on any profits, the owners pay income tax on their individual share of the profits only.

Can I convert my sole proprietorship to an LLC?

Converting your sole proprietorship to an LLC is the very same process of forming an LLC: choose a state to operate in, choose a name that hasn't already been taken, appoint a registered agent, file articles of organization, create an operating agreement, and comply with the state regulations.

What's the difference between LLC and sole proprietor?

A sole proprietorship and an LLC are the same in terms of tax and management, but an LLC offers the added benefit of separating the business owner from the business in terms of finances.

How long will it take to form an LLC?

Forming an LLC can take anything between 10 working days and 3 weeks, depending on the state in which the LLC is being formed. For an extra fee, most states offer an expedited formation process.