What Is an LLC?
An LLC, or limited liability company, is a business entity created under state law. It gives a business a legal identity separate from its owner or owners and can provide liability separation between business obligations and an owner's personal assets.
LLCs are popular because they can combine liability protection with relatively flexible management and federal tax treatment. But an LLC is not a license, an insurance policy, or a guarantee that an owner can never be personally liable.
How an LLC works
An LLC is formed under the law of a state, usually by filing a formation document with the state agency that handles business registrations. The document may be called Articles of Organization, a Certificate of Formation, or something similar depending on the state.
The owners of an LLC are generally called members. An LLC can have one member or multiple members. State rules vary, so the exact formation requirements, filing fees, reports, and permitted business activities depend on where the LLC is organized.
Once formed, the LLC can generally conduct business in its own name, enter contracts, own property, open financial accounts, and incur business obligations.
What does "limited liability" mean?
Limited liability generally means that an LLC's members are not personally responsible for the company's debts merely because they own the company.
That distinction matters. A sole proprietor and the business are not separate legal entities in the same way. With an LLC, the business entity can create a legal boundary between company obligations and the owner's personal affairs.
That boundary is not absolute. Personal guarantees, an owner's own wrongful conduct, failure to follow applicable legal requirements, and other circumstances can create personal exposure. The details depend on state law and the facts involved.
Related: Does an LLC Protect Your Personal Assets?
How is an LLC taxed?
"LLC" describes a state-law business entity, not one single federal tax classification.
For federal income tax purposes, the IRS generally treats a domestic single-member LLC as disregarded from its owner unless it elects otherwise. A domestic LLC with two or more members is generally treated as a partnership unless it elects corporate treatment. Eligible LLCs can also make elections that change their federal tax classification.
Tax treatment can have significant consequences. Business owners should use current IRS guidance and consult a qualified tax professional when making tax elections.
LLC vs. sole proprietorship
A sole proprietorship generally arises when an individual operates an unincorporated business without creating a separate entity. An LLC is formed under state law and can provide legal separation between the company and its owner.
The two may sometimes receive similar federal income tax treatment, particularly a single-member LLC that is disregarded for federal income tax purposes, but they are not the same legal structure.
Compare: LLC vs. Sole Proprietorship
LLC vs. corporation
Both LLCs and corporations can create legal entities separate from their owners, but their ownership, governance, formalities, and tax options differ.
An LLC usually has members and an operating agreement. A corporation generally has shareholders, directors, officers, and corporate governance documents.
Compare: LLC vs. Corporation
Is an LLC the same as an S corporation?
No. An LLC is a type of entity created under state law. An S corporation is generally a federal tax status available to qualifying entities.
An eligible LLC can elect to be treated as an S corporation for federal tax purposes. That does not turn the LLC into a corporation under state entity law.
Read: LLC vs. S Corp
What do you need after forming an LLC?
Formation is only the beginning. Depending on the business and location, next steps may include:
- • obtaining an EIN
- • creating an operating agreement
- • registering a DBA or assumed name if the business uses one
- • obtaining required licenses or permits
- • opening a business bank account
- • satisfying initial or annual state filing requirements
- • arranging appropriate business insurance
Start with our How to Start an LLC guide for the broader sequence.
Does an LLC include business insurance?
No. Forming an LLC does not automatically insure the business.
An LLC and an insurance policy address different risks. The LLC is a legal entity. Business insurance can respond to covered claims, losses, property damage, injuries, professional allegations, and other exposures according to the terms of the policy.
For example, a customer could allege that your business caused an injury. The LLC structure may be relevant to who is legally responsible, while a general liability policy may provide defense and indemnity for a covered claim.