The limited liability company, or LLC, is the most popular legal structure for new small businesses in the United States, and for good reason. It separates your business debts and liabilities from your personal assets, keeps taxes relatively simple, and involves far less paperwork than a corporation. Best of all, you can usually form one yourself online in an afternoon.
This guide explains what an LLC is, its pros and cons, and the exact steps to form one. Requirements and fees vary by state, so always confirm details with your state’s business filing office. This article is general information, not legal or tax advice.
What Is an LLC?
An LLC is a business entity created under state law. Its owners are called members. An LLC can have one member (a single-member LLC) or many (a multi-member LLC). The key feature is limited liability: in general, members are not personally responsible for the company’s debts and legal judgments, so creditors of the business cannot come after your home or personal savings.
Pros and Cons of an LLC
Advantages
- Personal asset protection when the LLC is properly formed and maintained.
- Pass-through taxation by default, so profits are taxed once on the owners’ personal returns rather than at the company level.
- Flexible management and ownership arrangements spelled out in your operating agreement.
- Credibility with customers, suppliers, and banks.
- Tax options, including electing S corporation status later if it saves you money.
Disadvantages
- Filing and ongoing fees, including annual reports in most states. Some states are expensive. California, for example, charges a minimum annual franchise tax of $800.
- Self-employment tax generally applies to members’ share of profits under default tax treatment.
- Protection is not absolute. You can still be personally liable for your own negligence or for debts you personally guarantee, and mixing personal and business funds can weaken your protection.
Step 1: Choose Your State
For most small businesses, the right answer is the state where you live and operate. You may hear about forming in Delaware, Wyoming, or Nevada, but if you do business in your home state, you will usually have to register there as a foreign LLC anyway. That means paying two sets of fees and maintaining two registered agents.
Step 2: Choose a Business Name
Your LLC name must be distinguishable from other businesses registered in your state and must include a designator such as LLC, L.L.C., or Limited Liability Company. Certain words, like bank or insurance, may require extra approval. Search your state’s business database first, then check the federal trademark database and available domain names. Some states let you reserve a name for a small fee while you prepare your filing.
Step 3: Appoint a Registered Agent
Every LLC must have a registered agent with a physical address in the state who can receive legal documents and official notices during business hours. You can act as your own registered agent, ask a trusted person, or pay a registered agent service. A service keeps your home address off public records and ensures notices are never missed.
Step 4: File Your Articles of Organization
To create the LLC, you file a formation document with your state, usually called the Articles of Organization (some states call it a Certificate of Formation or Certificate of Organization). You typically provide the LLC name, registered agent, principal address, management structure, and organizer information.
State filing fees range from about $35 in Montana to $500 in Massachusetts, with most states falling somewhere around $50 to $200. Online filings are often approved within days, though some states take longer.
Step 5: Create an Operating Agreement
An operating agreement sets out who owns what percentage of the company, how decisions are made, how profits are divided, and what happens if a member leaves or dies. A handful of states, including California, Delaware, Missouri, and New York, require LLCs to have one. Even where it is optional, it is strongly recommended, and it helps demonstrate that the LLC is a separate entity. You do not usually file it with the state.
Step 6: Get an EIN
An Employer Identification Number is required if your LLC has more than one member or has employees, and banks typically ask for one to open a business account. Single-member LLCs without employees can sometimes use the owner’s Social Security number for taxes, but an EIN helps keep your personal number private. Apply online for free on the IRS website.
Step 7: Meet Any Publication or Reporting Requirements
A few states, such as New York and Nebraska, require new LLCs to publish a notice of formation in local newspapers, which can add meaningful cost. Check your state’s rules.
On beneficial ownership reporting: under an interim rule issued by FinCEN in March 2025, companies created in the United States are exempt from federal beneficial ownership information (BOI) reporting, while foreign companies registered to do business in the US must still file. Some states have their own rules, however. New York’s LLC Transparency Act, for example, requires many LLCs formed or registered in New York to report ownership information to the New York Department of State. Because these rules have changed several times, verify the current requirements when you form your LLC.
Step 8: Open a Business Bank Account
Use your formation documents, EIN, and operating agreement to open a dedicated business checking account. Run all business income and expenses through it. Keeping money separate is one of the most important things you can do to protect your limited liability.
Step 9: Get Licenses and Permits
Forming an LLC does not give you permission to operate. Depending on your business and location, you may need a city or county business license, a state sales tax permit, professional licenses, zoning approval, or health permits. Contact your local government to confirm.
How LLCs Are Taxed
- Single-member LLC: treated by default as a disregarded entity. Profits and losses are reported on the owner’s personal return, typically on Schedule C.
- Multi-member LLC: treated by default as a partnership. The LLC files an informational partnership return, and each member receives a Schedule K-1 to report their share.
- S corporation election: an LLC can elect S corporation tax status by filing IRS Form 2553. Owners who work in the business then take a reasonable salary, and remaining profits may avoid self-employment tax. This can save money once profits are high enough to justify the added payroll costs.
- C corporation election: less common for small businesses, but possible by filing Form 8832.
Talk with a CPA before making a tax election. The right choice depends on your profits, your state, and your long-term plans.
Keeping Your LLC in Good Standing
- File your annual or biennial report and pay any state fees or franchise taxes on time.
- Keep your registered agent information current.
- Maintain separate bank accounts and clear financial records.
- Sign contracts in the LLC’s name, not your own.
- Update your operating agreement when members or ownership change.
Should You Use an LLC Formation Service?
Filing directly with your state is usually the cheapest route, and most state websites make it straightforward. Formation services charge an extra fee for convenience, document templates, and registered agent service. Either approach works. Just read the fine print on any service, as some add recurring charges.
Forming an LLC is one step in a bigger process. Our guide on how to start a small business in the USA covers everything from validating your idea to launch, and how to write a business plan step by step will help you plan your finances before you file.