A Limited Liability Company (LLC) combines the liability protection of a corporation with the flexibility and tax advantages of a partnership. LLCs have become the most popular business structure for small businesses due to this combination of benefits.

Forming an LLC is relatively straightforward, but understanding the requirements and options helps you create a strong foundation for your business.

Advantages of the LLC Structure

Liability protection shields members' (owners') personal assets from business debts and lawsuits. Unlike sole proprietors and general partners, LLC members don't risk their homes, savings, and other personal property for business obligations.

Pass-through taxation means profits flow directly to members' personal tax returns—no entity-level taxation like C corporations face. LLCs can also elect corporate tax treatment if that becomes advantageous.

Management flexibility allows LLCs to structure operations however works best. No required board of directors, officer positions, or annual meetings. Operating agreements can customize nearly everything about how the LLC functions.

Formation Steps

LLC formation involves several key steps. First, choose a name that complies with state requirements—typically including "LLC" or "Limited Liability Company" and not being too similar to existing registered businesses.

File Articles of Organization with your state's business filing agency—usually the Secretary of State. This document establishes the LLC and includes basic information like name, registered agent, principal address, and management structure.

Filing fees range from under 0 to several hundred dollars depending on the state. Processing times vary from same-day to several weeks.

Registered Agent Requirement

Every LLC must designate a registered agent—a person or company authorized to receive legal documents on the LLC's behalf. The registered agent must have a physical address in the state of formation (not a P.O. box).

You can serve as your own registered agent if you have a physical address in the state and are available during business hours. Many business owners use professional registered agent services for convenience and privacy.

Registered agent services typically cost 0-300 annually. They ensure documents are received and forwarded promptly, important for responding to lawsuits or government notices.

Operating Agreements

The operating agreement is the LLC's governing document, specifying how the business operates, how profits are distributed, how decisions are made, and what happens when members leave or the LLC dissolves.

While not all states legally require operating agreements, every LLC should have one. Without it, state default rules govern—which may not match your intentions. An operating agreement also strengthens liability protection by demonstrating the LLC is a real, functioning entity.

Key provisions include member capital contributions, profit and loss allocation, voting rights and decision-making, member withdrawal and transfer restrictions, and dissolution procedures.

Single-Member vs. Multi-Member LLCs

Single-member LLCs have one owner. For federal tax purposes, they're disregarded entities—income and expenses flow directly to the member's personal tax return (Schedule C for individuals).

Multi-member LLCs default to partnership taxation, filing informational returns (Form 1065) and providing K-1s to members showing their share of income. Members report this on personal returns.

Either type can elect corporate tax treatment if beneficial. S corporation election can reduce self-employment taxes in certain situations.

Ongoing Compliance

LLCs have ongoing requirements varying by state. Most states require annual reports with nominal fees. Some states impose franchise taxes or minimum taxes on LLCs regardless of income.

Maintain records, keep finances separate from personal accounts, and document major decisions. These practices preserve liability protection and demonstrate the LLC is genuinely operating as a separate entity.

Some states (like California) have annual minimum taxes even for inactive LLCs. Understand your state's requirements before forming.

Choosing Formation State

Most small businesses should form in their home state—where they operate and conduct most business. Forming elsewhere (Delaware, Nevada) requires registering as a foreign LLC in your home state anyway, adding cost without benefit for most businesses.

Delaware and Nevada offer advantages primarily for larger businesses or those expecting litigation or significant investor activity. For typical small businesses, home state formation is simpler and cheaper.

Getting Legal Help

While LLC formation can be handled independently or through online services, an attorney adds value by drafting operating agreements tailored to your situation, advising on management and ownership structure, ensuring compliance with state requirements, and identifying potential issues early. For multi-member LLCs especially, professional drafting of the operating agreement prevents disputes and protects all members' interests. The investment in proper formation pays dividends in avoided problems later.