What Is an LLC? Definition, Types and Cost

An LLC, or limited liability company, is a business entity created by filing a formation document with a state and paying the state's fee. Once approved, it can own property, sign contracts and be sued in its own name, and its owners, called members, are generally not personally liable for its debts. The IRS taxes it as a sole proprietorship, a partnership or a corporation, depending on its members and its elections.

Forming one costs $35 in Montana to $520 in Massachusetts, and most states then want a report every year or two. This guide covers what an LLC is, how it differs from the other common structures, the types you will see named (single-member, multi-member, professional and series), how it is taxed, and what it costs in the ten largest states.

What an LLC is, in plain terms

The IRS puts it in one line: "A Limited Liability Company (LLC) is a business structure allowed by state statute." Every state and the District of Columbia has an LLC statute, and an LLC exists from the moment the state accepts its formation filing. Most states call that filing the articles of organization; Texas calls it a certificate of formation and Pennsylvania a certificate of organization. The state keeps the record: the company's name, its registered agent, its address and, in many states, the people who manage it.

Three features define the structure. It is a separate legal person: the company, not you, is the party to its leases, loans and contracts. Its owners have limited liability: a claim against the company is generally limited to the company's assets. And it is flexible: the members decide in an operating agreement how profit is split, who makes decisions and what happens when someone leaves, with the state statute filling any gaps.

Who can own one is broad. Per the IRS, "Most states do not restrict ownership, so members may include individuals, corporations, other LLCs and foreign entities," and there is no cap on the number of members. A few types of business generally cannot be LLCs, banks and insurance companies among them. You will also see LLC expanded as "limited liability corporation." That is a common slip: an LLC is a company, not a corporation, and the difference matters for taxes and paperwork (more below).

What limited liability covers, and what it does not

Limited liability is the reason most owners form an LLC. If the company is sued, defaults on a loan or cannot pay a supplier, the creditor's claim runs against the company's bank account, equipment and receivables. Your house, savings and personal accounts are generally out of reach.

The protection is real but not absolute. It does not cover what you do personally: a member who causes an injury, commits fraud or commits professional malpractice is liable for their own conduct. It does not cover what you guarantee: a personal guarantee on a lease or loan is a promise from you, not the company. And it can fail when owners ignore the separation. Courts can disregard the LLC (lawyers call it piercing the veil) when the company and its owner are treated as one, for example when personal and business money run through the same account or the company never had the money to meet its obligations. A separate bank account, an operating agreement and contracts signed in the company's name are the everyday habits that keep the line clear.

How an LLC differs from a corporation and a sole proprietorship

The three structures most small businesses choose between differ in how they start, who owns them and how they are taxed. The short version is below; the full comparisons are in LLC vs corporation and LLC vs sole proprietorship.

A corporation offers the same liability shield, but with a fixed governance structure and, unless it elects S corporation status, a second layer of tax when profit is paid out. A sole proprietorship has no paperwork and no shield. The LLC sits between them: the shield of a corporation with the tax treatment and flexibility of a sole proprietorship or partnership by default.

Single-member and multi-member LLCs

A single-member LLC has one owner. For federal income tax, the IRS says an LLC with only one member is treated as "an entity disregarded as separate from its owner" unless it elects otherwise. In practice the owner reports the company's profit on Schedule C of their own return, exactly as a sole proprietor would, while the LLC still exists, and still shields its owner, under state law. Disregarded is a tax word, not a legal one.

A multi-member LLC has two or more owners and, by default, is classified as a partnership for federal income tax. It files a partnership return each year and gives each member a K-1 showing their share of profit or loss, which they report personally. Because several people now share the company, the operating agreement does real work: how profit is divided (it does not have to follow ownership percentages), who can sign for the company, how decisions are made, and how a member leaves or is bought out. When a single-member LLC adds a member, its default tax treatment changes to a partnership; a CPA can handle that changeover.

Member-managed or manager-managed

Separately from the number of owners, an LLC is either member-managed (the owners run it and can each act for it, the usual choice for small companies) or manager-managed (the members appoint one or more managers, who may or may not be members, and the rest are passive investors). Many states ask on the formation filing which one you are, and the operating agreement spells out what managers can do.

Professional LLCs (PLLCs)

A professional limited liability company is an LLC formed by licensed professionals to practice their profession: doctors, dentists, lawyers, accountants, architects and engineers are the usual examples, though each state sets its own list. Where a state offers the PLLC form, licensed professionals generally must use it rather than a regular LLC, the members typically must hold the relevant license, and the state may want the licensing board's approval before or with the filing. The name usually ends in PLLC or P.L.L.C. A few states do not let some professions use an LLC at all and point them to a professional corporation instead, so the licensing board's rules are the first thing to check.

Two things do not change. A PLLC is taxed like any other LLC. And the shield works the way it does for every professional: it protects you from the company's debts and from a colleague's malpractice in most states, but never from your own professional negligence, which is what malpractice insurance is for.

Series LLCs

A series LLC is a single LLC divided into separate compartments, called series or cells, each of which can hold its own assets, have its own members and run its own business. Delaware's LLC Act is the model: under 6 Del. C. section 18-215, "A limited liability company agreement may establish or provide for the establishment of 1 or more designated series." Real estate investors use the structure to hold each property in its own series, and funds use it to separate investment pools, without forming a new LLC every time.

The appeal is that, where the statute's record-keeping and notice conditions are met, the debts of one series are meant to stay with that series. The caution is that only some states have a series statute, the protection is less tested in states that do not recognize series or in bankruptcy, the federal tax treatment of each series is not fully settled, and banks, lenders and title companies are less used to them. For most owners with one business, a standard LLC is simpler; for several properties or ventures, the choice between a series LLC and several separate LLCs is a conversation for an attorney who knows your state.

How an LLC is taxed

The LLC has no federal tax category of its own; it borrows one. The default depends on the number of members, and the company can elect a different one. In one line each:

• One member, by default: a disregarded entity. Profit goes on the owner's Schedule C, with self-employment tax.
• Two or more members, by default: a partnership. The LLC files a partnership return; each member reports a share.
• Elect C corporation treatment: file Form 8832. The LLC pays corporate income tax and members are taxed on dividends.
• Elect S corporation treatment: file Form 2553. Profit still passes through, owners who work in the business take a reasonable salary through payroll, and the company must meet the S corporation rules (no more than 100 owners, one class of ownership). When that pays off is in LLC vs S corp.

The IRS's own summary of these classifications is on its limited liability company page. States add their own layer. California charges every LLC an $800 annual tax, Texas brings LLCs into its franchise tax system (most small ones owe nothing but still file a report), Tennessee's annual report fee is $300 a year minimum, up to $3,000, and Delaware charges an annual LLC tax instead of a report, at $400 from the June 1, 2027 payment. Which classification suits a given business is a question a CPA can confirm with your numbers.

What an LLC costs in your state

The state's fees are the fixed cost of an LLC: a one-time filing fee to form it, and in most states a recurring report fee to keep it in good standing. Here is what the ten most populous states charge, each row linking to that state's full cost page.

Across all 50 states and DC the formation fee runs from $35 to $520, with a median of $100. Alabama, Arizona, Missouri, New Mexico, Ohio and South Carolina have no recurring LLC report, and 5 more states require one but charge nothing for it. Arizona, Nebraska and New York add a newspaper publication requirement in some or all cases, a cost paid to the newspapers rather than the state. Every state's figures are in LLC cost by state.

Beyond the state's fees, most owners budget for a registered agent (free if you serve as your own and have a street address in the state, a yearly fee if you hire one), an operating agreement, and the time to keep separate books.

Advantages and disadvantages of an LLC

Advantages

• Personal assets are generally shielded from the company's debts and lawsuits.
• Pass-through taxation by default, with the option to elect corporate or S corporation treatment later.
• Few required formalities compared with a corporation; no board or mandatory annual meeting in most states.
• Flexible ownership and profit-sharing, set by the members in the operating agreement.
• Credibility with banks, clients and platforms that want to contract with an entity.

Disadvantages

• A state filing fee to form and, in most states, a recurring report with late fees and eventual dissolution if missed.
• Entity-level state taxes or fees in a few states, whatever the profit.
• Active members pay self-employment tax on their share of profit under the default taxation.
• Equity investors, venture funds in particular, usually expect a corporation instead.
• The shield depends on discipline: separate accounts, records and contracts in the company's name.

How to form an LLC

Forming an LLC is one state filing plus a few setup steps. In order:

1. Choose the state. Usually the one where you live and do business; forming elsewhere generally means registering in your home state as well and paying both.
2. Check the name. It must be distinguishable from names already on the state's record and end in LLC or an allowed variation (see LLC name rules).
3. Name a registered agent with a street address in the state, available during business hours.
4. File the formation document with the state's fee and wait for the state's published processing time.
5. Sign an operating agreement, even as a single member; banks often ask for one.
6. Get an EIN from the IRS (how it works for an LLC is at llc-ein.com), then open the company's bank account and register for state taxes and licenses.

The state-by-state version of these steps is in how to register an LLC, and the longer walk-through in how to start an LLC.