What is an LLC (and do you need one?)

A limited liability company (LLC) is a business structure created under state law. It sits between a sole proprietorship and a corporation: it keeps the business’s debts separate from your personal assets in most cases, without the formalities of a corporation.

Key point An LLC protects you from the business's debts, not from your own actions or from guarantees you sign. And it isn't a one-time purchase: most states charge you every year to keep it.

What an LLC is

You create an LLC by filing a formation document with a state, usually called articles of organization or a certificate of formation. The owners are called members. The IRS notes that most states don’t restrict who can own an LLC, there is no maximum number of members, and a single person can own one.

The Small Business Administration describes it as a structure that lets you “take advantage of the benefits of both the corporation and partnership business structures.”

What “limited liability” protects

The main idea is simple: the LLC’s debts belong to the LLC. If the business owes money or loses a lawsuit over a business contract, creditors generally go after the company’s assets, not your house or personal savings.

Compare that with a sole proprietorship, where, in the SBA’s words, “your business assets and liabilities are not separate from your personal assets and liabilities.” Without an LLC (or a corporation), you can be held personally liable for the business’s debts.

What it doesn’t protect

The protection has limits, and they matter:

  • Personal guarantees. If you sign a loan, lease or credit line personally, you are on the hook for it. State laws let members agree to be personally liable, and lenders and landlords may ask you to.
  • Your own wrongful acts. An LLC doesn’t shield you from liability for harm you personally cause. Washington’s LLC law, for example, says a member “is personally liable for such person’s own torts.”
  • Piercing the veil. Courts can disregard the LLC and hold the owners liable, much as they do with corporations. Mixing personal and business money is one of the classic reasons. Keep a separate bank account and keep the LLC’s records in order.

Exactly how these rules apply depends on your state’s law and the facts, which is why the SBA says LLCs protect you “in most instances,” not always.

How an LLC is taxed

For federal taxes, an LLC is flexible:

  • One member: by default the IRS treats it as a “disregarded entity.” The profit goes on your personal return, much like a sole proprietorship.
  • Two or more members: by default it is taxed as a partnership.
  • By election: an LLC can choose to be taxed as a corporation (Form 8832) or, if it meets the S corporation rules, as an S corporation (Form 2553). Those rules include having no nonresident alien owners, so it isn’t available if any owner is neither a US citizen nor a US resident for tax purposes.

States have their own rules, and some charge LLCs a yearly tax or fee no matter how much they earn. California charges at least $800 a year, even with no income, and it also applies to out-of-state LLCs doing business in California.

What it costs to keep one

Forming an LLC is only the first bill. To keep it in good standing you typically need:

One change to know about: in August 2026 FinCEN made final a rule that exempts companies created in the US from beneficial ownership (BOI) reporting. Only certain companies formed under the laws of another country and registered to do business in the US still have to file, and they report only their foreign owners, unless an exemption applies.

Do you need one?

An LLC is worth considering if your business has real risk of debts or claims, if you want to keep business and personal finances clearly separate, or if clients and banks expect you to operate through a company. A sole proprietorship costs nothing to start and may be enough for a low-risk side project.

Whatever you decide, look at the cost over several years, not just the first one. Our calculator shows what each formation service and your state charge in year 1 and after.

General information, not legal or tax advice. LLC rules vary by state and change over time; check the sources below or talk to a lawyer or tax professional about your situation.

Sources

Checked October 8, 2026.

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