What is an LLC?

LLC stands for Limited Liability Company. Forming an LLC is one of the easiest ways to structure your business while protecting your personal assets if your business faces a lawsuit.

An LLC is the most common business structure chosen by small business owners because it offers:

Personal liability protection similar to that of a corporation.
Pass-through taxation benefits, similar to a sole proprietorship or partnership.

Ready to take the next step? You can form your LLC using our Form an LLC Guide or check out our list of the Best LLC Services for trusted providers.

How to Form an LLC in 7 Steps

In this “What is an LLC” guide, we will cover:

Understanding What is an LLC
Who Can Form an LLC
Types of LLCs
How to Form an LLC
Where Should I Form My LLC?
Frequently Asked Questions (FAQs)

Understanding What is an LLC

Unlike sole proprietorships and general partnerships, an LLC protects your personal assets if your business faces legal challenges. Additionally, LLCs are easier to manage than corporations and are not subject to double taxation.

For small business owners, an LLC strikes the perfect balance between personal asset protection and operational simplicity. An LLC can be owned by one or more individuals, referred to as “members.” A single-member LLC has one owner, while a multi-member LLC has more than one owner.

Forming an LLC offers the following benefits:

Lawsuit protection for your personal assets.
Reduced paperwork compared to corporations.
Avoidance of double taxation for your business.
Enhanced credibility in the eyes of customers and creditors.

Step 1: Select Your State

An LLC is one of many business structures available. Other common options include:

Corporations
General Partnerships
Sole Proprietorships

Recommended Service: Ready to start your LLC? Check out our top-rated LLC service provider: Northwest ($29 + state fees).

Recommended Service: If you're ready to start your LLC, check out our recommended LLC service provider: Northwest ($29 + state fees)

Advantages of an LLC

LLCs provide these key benefits to small businesses:

Limited liability protection
Pass-through taxation
Simplicity
Flexibility
Tax options
Increased credibility
Access to business loans and credit

Limited Liability Protection

LLC members are generally not personally liable for the LLC’s debts or lawsuits, provided there is no fraud or criminal behavior. This is referred to as personal asset protection.

Note: While LLCs protect personal assets, you should also consider liability insurance to safeguard your business assets against potential lawsuits.

Note:While LLCs protect personal assets, you should also consider liability insurance to safeguard your business assets against potential lawsuits.

Pass-Through Taxation

The profits of an LLC pass directly to its owners, who report their share on their personal tax returns. This eliminates the risk of double taxation, which is common in C corporations, where profits are taxed at both the corporate and individual levels.

Simplicity

LLCs are easy to form and maintain. Unlike corporations, they don’t require formal officer roles, annual meetings, or detailed records of company resolutions.

Flexibility

LLCs offer flexibility in ownership and management structures:

LLCs can be single-member or multi-member.
Multi-member LLCs can be managed by members (member-managed) or by an appointed manager (manager-managed).

Tax Options

LLCs have multiple tax options. One common choice is to be taxed as an S corporation, which is a tax designation rather than a separate business entity.

To learn more about LLC vs. S corporation, check out our LLC vs S corp guide.

Increased Credibility

By forming an LLC, your business gains credibility in the eyes of customers and partners. Including “LLC” in your business name shows you are a formal and reliable company.

Access to Business Loans

An LLC can help your business build credit, which is essential for accessing loans and credit lines.

For women-owned businesses, discover the best financing options by checking out our Top Loans for Women Entrepreneurs.

Disadvantages of an LLC

While LLCs have many advantages, there are a few downsides:

LLC owners must pay taxes on their share of the income, even if they don’t receive a distribution. This can deter some investors who prefer corporate structures.
Tax forms such as K-1 must be filed before members can complete their personal taxes, which is why some investors avoid LLCs.

For more insights into LLC taxes, check out our LLC Taxes guide.

Recommended: For more information about the advantages and disadvantages of LLCs specifically relating to taxes, check out our LLC Taxes guide.

Who Can Form an LLC

In the U.S., anyone of legal age is eligible to form an LLC, regardless of their citizenship. Ownership of an LLC is not restricted to U.S. citizens—individuals from other countries, except those under U.S. sanctions, can also form LLCs.

For more information on how to establish a business from abroad, check out our guide on How to Start a Company in the USA.

Types of LLCs

All LLCs share two key characteristics: limited liability protection and pass-through taxation, making them a hybrid of different business structures. However, specific types of LLCs suit certain business needs better. Below are the most common types of LLCs:

Domestic LLC

A “domestic LLC” refers to an LLC that operates within the state where it was initially established. When we commonly refer to an LLC, we are typically speaking about a domestic LLC.

Foreign LLC

When an LLC expands its operations to another state, it must register as a “foreign LLC” in that state. For instance, if your LLC was established in Texas and you open a location in Michigan, you would need to register your Texas LLC in Michigan as a foreign LLC.

If you're interested in expanding your business, we provide the articles of organization for forming a foreign LLC in all 50 states.

Professional LLC

A Professional LLC (PLLC) is a limited liability company created for individuals or groups providing professional services, such as medical or legal practices. To establish a professional LLC, some members must hold valid state licenses that verify their professional qualifications.

It’s important to note that in a professional LLC, personal liability protection does not cover claims related to professional malpractice. For this reason, consulting with a legal expert is recommended before forming a professional LLC.

Series LLC

A Series LLC allows one overarching or “parent” LLC to provide liability protection to several distinct “child” businesses, each known as an individual protected series. Each child business operates independently, shielding its assets from the liabilities of the others within the same series LLC.

Currently, only seventeen states permit the formation of a series LLC, including:

Alabama, Delaware, Washington D.C., Illinois, Indiana, Iowa, Kansas, Minnesota, Missouri, Montana, Nevada, North Dakota, Oklahoma, Tennessee, Texas, Utah, and Wisconsin.

How to Form a Limited Liability Company

Creating an LLC is straightforward. Our state-specific LLC formation guides break down the process into six simple steps. Choose your state from the dropdown menu to get started.

As mentioned above, you can form yourself using the guide below, or use our recommended LLC formation service: Northwest ($29 + state fees).

Six Basic Steps to Start an LLC

Starting an LLC involves a few essential steps. Below is a simplified breakdown of the process to help guide you through.

Step 1: Select Your State

The first step in forming an LLC is choosing the state where you plan to operate. Since each state has different requirements for LLC formation, it’s important to familiarize yourself with the specific rules in your chosen location.

Step 2: Name Your LLC

Selecting a unique and compliant name for your LLC is crucial. Make sure the name adheres to your state’s naming regulations and is not already in use by another business.

Step 3: Choose a Registered Agent

Every LLC needs to designate a registered agent to handle legal documents and notices on behalf of the company. This agent can be an individual or a service provider authorized to operate in the state.

Step 4: File the Articles of Organization

The next step involves filing the Articles of Organization with your state. This document officially registers your LLC with the state government, making it a legally recognized entity.

Step 5: Create an Operating Agreement

An operating agreement outlines the structure and operational procedures of your LLC. While not mandatory in all states, it is highly recommended for managing internal governance and preventing disputes.

Step 6: Get an EIN

An Employer Identification Number (EIN) is required for tax purposes and hiring employees. You can obtain your EIN through the IRS, either online or by mail.

For a detailed, state-specific guide on forming your LLC, select your state from the options below.

Who Will Manage Your LLC?

Most LLCs are member-managed, meaning the members themselves handle the company’s daily operations. However, some LLCs choose to appoint a manager to oversee operations, known as manager-managed. This distinction is vital, and the structure should be clearly outlined in the LLC’s operating agreement, which is a legal document agreed upon by all members.

For more information on choosing between member-managed and manager-managed structures, refer to our Member-Managed vs Manager-Managed LLC guide.

Where Should I Form My LLC?

A common question for new business owners is deciding where to form their LLC. While there’s considerable attention on forming an LLC in states like Delaware, Nevada, and Wyoming, the best approach for most small business owners is to establish the LLC in the state where the business operates.

Domestic LLCs: A Simple Approach

Consider the following scenarios:

Scenario A: John starts a business in Michigan and forms his LLC in Michigan. He pays the required state fees and keeps his business compliant with minimal hassle.

Scenario B: Mike starts his business in Michigan but forms his LLC in Delaware. Since the business operates in Michigan, Mike must also register a foreign LLC in Michigan, which means paying fees and handling paperwork in two states. As a result, Mike spends more money and time than John.

Why Form in Delaware?

Delaware has business-friendly laws, which is why large corporations and investors often prefer forming LLCs there. However, for most small businesses, the added complexity and costs of forming in Delaware and registering a foreign LLC in their home state outweigh the benefits.

What About Wyoming and Nevada?

Wyoming and Nevada offer relaxed business laws, but forming your LLC in these states while operating elsewhere still requires registering as a foreign LLC in your home state. This doubles your expenses and administrative burden, just like forming in Delaware.

When to Form an LLC Outside Your Home State

If your business operates in multiple states, forming in Delaware, Nevada, or Wyoming might make sense. In these cases, you’ll need to register as a foreign LLC in each state where your business has a physical presence. The benefits of forming in these states depend on the specific needs of your business.

For more details, check out our Best State to Form an LLC guide.

What States Are Popular for Small Businesses?

Most small businesses choose to form their LLCs in Texas and Florida due to favorable tax rates and fees. These states consistently rank high in satisfaction among business owners. However, forming your LLC in Texas or Florida only makes sense if your business operates within those states.

Is an LLC right for your business? If so, then get started today by forming an LLC with our recommended LLC formation service: Northwest ($29 + state fees)