The short version
An LLC is a legal entity that exists because a state says so. The IRS describes it as a business structure allowed by state statute, and each state has its own rules. You form it by filing a document with a state office, usually the Secretary of State, and paying that state's fee. See what each state charges in the state fees hub.
How an LLC is taxed by default
The IRS does not have a separate "LLC" tax category. By default:
- A domestic LLC with one member is disregarded as separate from its owner for income tax. Profit is reported on the owner's own return.
- A domestic LLC with two or more members is classified as a partnership.
- For employment taxes, a single-member LLC is still treated as a separate entity.
- An LLC can elect to be taxed as a corporation with Form 8832, and an eligible LLC can elect S corporation status with Form 2553. Read LLC, C-Corp or S-Corp before choosing.
The SBA notes that LLC members are treated as self-employed and pay self-employment tax on their share of earnings.
Advantages people look for
- Liability protection. The SBA says an LLC protects owners from personal liability in most instances, so the owner's personal assets generally are not exposed to the business's debts or lawsuits.
- Pass-through taxation. Profits and losses pass through to the owners' personal income without a separate corporate-level tax.
- Fewer formalities than a corporation. Many states do not require a board, annual shareholder meetings or minutes for an LLC.
- Flexible ownership. An LLC can have one owner or many, and the owners can be individuals or companies.
Drawbacks to weigh
- State fees. Every state charges a formation fee and many charge a yearly report or tax. See annual report and franchise tax by state.
- Self-employment tax. Members generally pay it on their earnings (SBA).
- Protection is not absolute. "Generally" matters: how courts treat a particular LLC depends on the facts and the state. Keep business and personal money separate and ask a licensed attorney about your situation.
- Investors. Some investors prefer corporations. See LLC, C-Corp or S-Corp.
How an LLC is run
An LLC can be managed by its members or by managers named in its operating agreement. The operating agreement guide explains the document, and the types of LLC page covers single-member, multi-member and other variations.
What forming an LLC does not do
- It does not give you a visa, residency or permission to work in the US. Talk to an immigration attorney about status.
- It does not remove your tax obligations. Owners who live outside the US should read LLC taxes for foreign owners.
Steps to form one
- Choose a state (see best state for an LLC).
- Choose a name that meets that state's rules.
- Appoint a registered agent in that state.
- File the formation document and pay the state fee.
- Write an operating agreement.
- Request an EIN from the IRS.
- Keep up with each state's yearly requirements.
Next step
Ready to form yours? Start your LLC with Coral Filings and we handle the state filing, the registered agent and the EIN request. Want to compare filing fees first? Open the state fees hub for all 50 states and D.C.
Frequently asked questions
Is an LLC a corporation?
No. An LLC is a separate type of entity under state law. It can elect to be taxed as a corporation by filing IRS Form 8832, but that is a tax choice, not a different company.
Does an LLC pay its own federal income tax?
Not by default. A one-member LLC is disregarded for income tax and a multi-member LLC is classified as a partnership. An LLC that elects corporate treatment is taxed as a corporation.
Do I need to live in the US to own an LLC?
State rules differ, but at least some states, such as Texas, say they do not restrict who can own an interest in an entity. You will need a registered agent in the state. See the guide for non-US residents.
Does an LLC give me personal liability protection no matter what?
No. The SBA says protection applies in most instances, not all. Outcomes depend on the facts and the state, so ask a licensed attorney.
Can an LLC be taxed as an S corporation?
An eligible LLC can elect it with Form 2553 if it meets the IRS requirements, including having no nonresident alien shareholders. Ask a CPA before electing.
This page is general information, not legal or tax advice. For your specific situation, talk to a licensed attorney or CPA.