A Limited Liability Company (LLC) is a business structure formed at the state level that provides personal liability protection for its owners, who are called members. Because an LLC is considered a separate legal entity, members are generally not personally responsible for business debts, lawsuits, or contractual obligations, provided the business is properly maintained.
What you’ll learn
What you’ll learn
Updated: February 26, 2026
How do you form an LLC?
To form an LLC, owners must file articles of organization (or a similar formation document) with their state’s Secretary of State and pay any required filing fees. Many states also require annual reports or franchise taxes to maintain good standing. Businesses that hire employees must obtain an Employer Identification Number (EIN).
How are LLCs taxed?
For federal tax purposes, LLCs are treated as pass-through entities by default. A single-member LLC is considered a disregarded entity, meaning the business does not file a separate federal income tax return. Instead, profits and losses are reported on the owner’s personal return. Multi-member LLCs are generally taxed as partnerships. LLCs also offer tax flexibility. An LLC may elect to be taxed as a corporation by filing Form 8832 or choose S Corporation tax treatment by filing Form 2553 with the IRS.
According to CPA and CFA Tom Brock, here’s two sides to consider when it comes to choosing an LLC.
Pros of an LLC
“One of the biggest advantages of an LLC is strong personal liability protection. Members’ personal assets are generally shielded from business debts and legal claims. LLCs also offer flexible tax treatment and fewer formal governance requirements than corporations.”
Potential drawbacks of an LLC
“One key disadvantage is that LLC members typically pay self-employment tax on all business profits. Compared to an S Corporation — where owners split income between salary and distributions — this can result in higher overall tax liability. Electing S Corp tax status may reduce that burden, but adds some administrative complexity.”
— Tom Brock, CFA, CPA
All of this is achievable with a relatively simple governance structure and fewer formalities than required by corporations. An LLC does not require extensive charters and agreements, board meetings or extensive recordkeeping. Furthermore, an LLC has no ownership restrictions, allowing unlimited members, including individuals, corporations, and foreign investors.
Using LLC in a sentence
“I wasn’t sure which business structure to choose, but I decided on an LLC because I wanted to protect my personal assets while I tested my new business idea.”
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