What is a Limited Liability Company?

A Limited Liability Company, or LLC, does two jobs at once. It taxes you like a partnership. It shields you like a corporation.

In plain terms: light paperwork, profits taxed on your own return, and a legal wall between your savings and your business debts.

That wall is why most people form one. Without it, a customer dispute or an unpaid supplier reaches past the business and into your bank account.

Key takeaways

• An LLC is a state creation. You form it by filing articles of organization with a Secretary of State, and fees run from $35 in Montana to $500 in Massachusetts.
• The IRS does not have an LLC tax category. By default a single-member LLC is a disregarded entity and a multi-member LLC is a partnership.
• The 20% pass-through deduction was due to expire at the end of 2025. Legislation signed on 4 July 2025 made it permanent.
• Liability protection is real but not absolute. Personal guarantees, your own negligence and mixing personal with business money all cut through it.
• US-formed companies no longer file a beneficial ownership report. That requirement ended permanently on 14 August 2026.

What an LLC actually protects, and what it does not

The protection is real, and it has holes worth knowing before you rely on it.

What it covers: debts the business takes on in its own name, judgments against the business, and claims from suppliers or customers dealing with the company. If the LLC fails owing money, creditors generally reach company assets, not your house.

What it does not cover:

• Anything you personally guarantee. Most banks and many landlords require a personal guarantee from a new LLC with no trading history. Signing one voluntarily puts your personal assets back on the line for that specific debt.
• Your own negligence or wrongful acts. Forming an LLC does not stop somebody suing you personally for something you did. Professionals carry malpractice insurance for exactly this reason. Most licensed trades cannot use a standard LLC at all, and file a professional corporation instead.
• Unpaid payroll taxes. The IRS can pursue responsible individuals personally for trust fund taxes withheld from employees and not remitted.
• A company you have not kept separate. Paying personal bills from the business account, or the reverse, is the most common way owners hand a court a reason to disregard the entity.

The practical rule is dull and effective: separate bank account, separate records, sign contracts in the company's name, and do not treat the business account as a personal one. That habit is what makes the legal wall hold.

Key benefits of LLC formation

The structure bends to fit you. Run it member-managed and it works like a partnership, with the owners in charge. Run it manager-managed and it works more like a corporation, with appointed managers. You can also convert to a corporation later if the business heads that way.

• Personal asset protection. Your house, car and personal savings sit behind a legal boundary separating them from company debts and liabilities.
• Pass-through taxation. Profits are reported on your personal return by default, so there is no corporate-level tax layer.
• Credibility. An "LLC" after the business name changes how suppliers, lenders and customers read your invoices.
• Low maintenance. Far fewer annual formalities than a corporation, with no board of directors and no mandatory annual meetings in most states.
• Ownership flexibility. The IRS confirms members may include individuals, corporations, other LLCs and foreign entities, with no maximum number of members.

How the IRS taxes an LLC

Here is the point that confuses most first-time owners: the IRS has no LLC tax classification. An LLC is a state law entity. For federal tax it is slotted into an existing box. Which box depends on how many members it has and whether you elect otherwise.

The defaults and the forms come straight from the IRS guidance on LLCs. One timing detail in that guidance catches people out. A Form 8832 election cannot start more than 75 days before you file it, nor more than 12 months after. You cannot fix last year's structure with this year's paperwork.

Worth knowing what the entity does not change. Forming an LLC does not by itself reduce your tax bill. The default is pass-through, which is how a sole proprietorship already works. The savings people associate with an LLC usually come from a later S corporation election, which is a separate decision covered in LLC vs S corp.

Two categories cannot generally use the structure at all: banks and insurance companies.

The pass-through deduction is now permanent

If you read anything about LLC taxes written before mid-2025, this part is out of date.

Section 199A lets eligible owners of pass-through businesses deduct up to 20% of qualified business income on their personal return. It began as a temporary measure, due to expire at the end of 2025. That is why so much 2024 and 2025 planning advice warned of a coming tax cliff.

That cliff is gone. A law signed on 4 July 2025 made the 20% deduction permanent. It applies to tax years beginning after 31 December 2025 (Tax Foundation). An earlier draft of the bill raised the rate to 23%, but that did not survive. The rate stayed at 20%.

The deduction is not automatic. It phases out for higher earners and carries wage and property limits. It also treats specified service trades and businesses differently. Ask an accountant how it applies to your income rather than assuming the headline 20%.

Self-employment tax: the number people forget

Pass-through tax gets described as a benefit, and for many owners it is. It also carries a cost that catches first-time founders off guard. An employee only ever sees half of it.

As an LLC member you generally pay self-employment tax on your share of the profit. For 2026 that is 15.3%, made up of 12.4% for Social Security and 2.9% for Medicare (IRS).

The Social Security wage base rose to $184,500 for 2026 from $176,100 in 2025. Above that ceiling the marginal rate drops sharply, because only the Medicare portion continues.

This is the maths behind the S corp election. Once profit sits well above a fair salary, you can split the income between wages and payouts. That cuts the self-employment share. Below that level the extra payroll filings cost more than they save.

Where the LLC came from

The structure is younger than most people assume, and the history explains why it looks the way it does.

Wyoming passed the first LLC statute in 1977. It was drafted for an oil company, Hamilton Brothers, which wanted a US entity with corporate liability cover and partnership tax treatment. Alaska was asked first and turned it down twice. Wyoming passed it on the first try.

Then it stalled. For a decade the IRS would not say how these firms would be taxed. Without that answer, other states had no reason to copy the statute. The ruling came in 1988, take-up spread through the early 1990s, and all 50 states now have LLC laws.

That fifty-year path is why an LLC is state law with federal tax bolted on later, not one clean federal structure. It is also why the rules differ so much from state to state.

How common are LLCs?

More common than any other partnership form, though the honest answer is that nobody can give you a clean total.

The IRS Statistics of Income programme counted over 4.5 million partnership returns for tax year 2023, up 1.7% on 2022. Those returns covered more than 30.2 million partners. 72.7% of them came from LLCs, the largest partnership type for over two decades (IRS SOI).

Read that number carefully, because it is often misquoted. It counts roughly 3.3 million LLCs taxed as partnerships. Every single-member LLC is invisible in it. Those file on Schedule C beside sole proprietors, with no marker to set them apart. The real total is higher and genuinely unknown.

New formations are easier to count. The US Census Bureau recorded 491,941 business applications in March 2026 alone, seasonally adjusted. Of those, 144,952 were high-propensity ones: the applications most likely to lead to hiring.

What it costs to form and keep one

Two separate bills, and only one of them is optional.

State filing fee. Unavoidable, set by your state, and paid whether you file yourself or use a service. It runs from $35 in Montana to $500 in Massachusetts. Many states then charge an annual or biennial report fee on top.

Service fee. Optional. You can file the articles of organization yourself. Formation services sell convenience, compliance tracking and a registered agent.

The service fee is the part that gets advertised, and it is the smaller number over time. The recurring cost is the registered agent:

Totals are our own calculation from each provider's published rates on 18 August 2026, cheapest formation plan plus registered agent, excluding state fees. The full field sits on our best LLC services chart, and the method is in how we rank.

Domestic vs. foreign LLCs

A domestic LLC operates in your home state and is the cheapest choice. You need a foreign LLC registration once you do business across state lines: filing in one state, say, but opening a shop in another.

Foreign registrations cost more and can require an agent in each state. Filing away from home does not remove the duty to register at home as well. That is why the "form your LLC in Delaware" advice rarely pays off for a small business. You end up paying two states instead of one.

Ongoing requirements

Registered agent. Required in most states. The agent takes service of process and state mail at a physical address during business hours, and that address goes on the public record. A paid service is worth it, and every brand on our chart offers one.

Annual report. Most states want a filing each year or every two years, usually with a fee. Rules vary widely, and missing one can put the company out of good standing. Check your own state's deadline before paying anybody to track it for you.

BOIR: no longer required. The Beneficial Ownership Information Report applied to most US LLCs from 2024. FinCEN then exempted US-formed companies permanently, on 14 August 2026. Foreign entities registered to do business in a US state are still in scope. See our guide on what a BOIR report is.

Business licenses. Rules vary by business type, state, county and city. Formation services can find and file the licenses you need in all 50 states.

Three-step LLC formation process

1. Enter your company name and address.
2. Designate a registered agent.
3. Pay the filing service fee plus your state's filing requirement.

From there the service takes over. It checks your name is free, prepares the Articles of Organization, and files them with the Secretary of State. Approved documents land in an online dashboard. Our step-by-step walkthrough is in how to register a business.

Frequently asked questions

Where should I register my LLC? File in your home state unless you genuinely conduct multi-state business. Out-of-state filing adds fees and administrative work without removing your home-state obligations.

What are the tax implications? Taxes follow where the business operates, not where it was filed. Filing an LLC in one state while operating in another does not change what you owe at home. Federally, a single-member LLC is disregarded and a multi-member LLC is a partnership unless you elect otherwise.

Does an LLC save me tax? Not by itself. The default treatment is pass-through, which is how a sole proprietorship already works. Savings usually come later from an S corporation election once profit supports it.

Do I need an operating agreement? Only a handful of states require one, but write it anyway if you have co-owners. It sets out ownership percentages, profit splits and what happens when somebody leaves. Without it, your state's default rules apply, and they may not be what you all assumed.

Is an LLC better than a sole proprietorship? It is better at one specific thing: separating your personal assets from business liabilities. It also costs more and carries more paperwork. The comparison is set out in LLC vs sole proprietorship, and if you are weighing a corporation instead, start with LLC vs corporation.

Do I need expedited filing? Rush services cost extra but let you start trading sooner. ZenBusiness includes 1-day processing on its Pro package at $199 plus state fees, or sells it as a $79 add-on to the free Starter plan. Standard processing there takes 7 to 10 business days.

Tax figures cited from IRS guidance for the 2026 tax year and provider prices read on 18 August 2026. Rules and prices change. This content should not be interpreted as legal, financial or accounting advice; confirm your own position with a qualified professional.