What Is an LLC?
A limited liability company (LLC) is a business structure created under state law. It generally shields its owners, called members, from personal liability for the business's debts, and by default its profits pass through to the owners' personal tax returns. Rules for forming and running an LLC vary by state, and the IRS has its own rules for how an LLC is classified for federal tax purposes.
What the law says
- The IRS describes an LLC as a business structure allowed by state statute. Because each state may have different rules, the IRS says to check with your state before forming one. IRS, Limited Liability Company (LLC)
- Owners of an LLC are called members. Most states do not restrict ownership, so members may include individuals, corporations, other LLCs and foreign entities. There is no maximum number of members, and most states also allow single-member LLCs. IRS, Limited Liability Company (LLC)
- According to the IRS, some types of businesses generally cannot be LLCs, such as banks and insurance companies. IRS, Limited Liability Company (LLC)
- The SBA says an LLC combines benefits of the corporation and partnership structures. In most cases, members' personal assets, such as a home, car or savings, are protected if the LLC faces bankruptcy or lawsuits. U.S. Small Business Administration, Choose a business structure
- Profits and losses of an LLC can pass through to the owners' personal income without facing corporate taxes. LLC members are considered self-employed and must pay self-employment tax contributions toward Medicare and Social Security. U.S. Small Business Administration, Choose a business structure
- For federal income tax purposes, a domestic LLC with at least two members is classified as a partnership by default, and a single-member LLC is disregarded as separate from its owner, unless the LLC files Form 8832 and elects to be treated as a corporation. IRS, Limited Liability Company (LLC)
- Even when a single-member LLC is disregarded for income tax, the IRS treats it as a separate entity for employment taxes and certain excise taxes. IRS, Single Member Limited Liability Companies
- The SBA notes that many states limit how long an LLC can exist, and some states require an LLC to dissolve and re-form when members join or leave, unless the LLC has an agreement in place for buying, selling and transferring ownership. U.S. Small Business Administration, Choose a business structure
- The SBA says you will generally need to choose a business structure before registering your business with the state, and that ownership rules, liability, taxes and filing requirements can vary by state. U.S. Small Business Administration, Choose a business structure
FAQ
Can one person form an LLC?
Yes, in most states. The IRS says most states permit single-member LLCs, which have one owner.
Does an LLC protect my personal assets?
Generally, yes. The SBA says that in most instances an LLC protects members' personal assets, like a house or savings, if the business faces bankruptcy or lawsuits.
Does an LLC pay its own income tax?
Not by default. A multi-member LLC is treated as a partnership and a single-member LLC is disregarded for federal income tax, unless the LLC elects on Form 8832 to be taxed as a corporation.
Can I change from an LLC to another structure later?
The SBA says you can usually convert to a different business structure later, but restrictions based on location, tax consequences and unintended dissolution could complicate the change.
Related
- How Is an LLC Taxed?
- How to Get an EIN for an LLC
- LLC vs. Corporation: What's the Difference?
- Starting an LLC & Small Business by state
General legal information, not legal advice. Laws change and local rules can differ; check the linked official source or talk to a lawyer about your situation.