What Is An LLC? Overview Of The Key Features (2026)

What an LLC Is and How It Works

Every state allows LLC formation. LLCs only exist when they are registered in accordance with state law. In other words, there is no such entity as an unregistered or “common law” LLC.

An organizer files the Articles of Formation or Articles of Organization. In most states, the organizer need not be an LLC member. The Articles are typically short, specifying only the company’s name and its registered agent. However, organizers should check the state’s filing requirements.

Once the government accepts the articles, the state recognizes the LLC, and the company protects members according to the state’s laws.

How LLC Liability Protection Works

One of the key benefits of an LLC is that it limits the personal liability of LLC members for company liabilities. This limitation will generally ensure all of the following:

• Members cannot be sued personally for the company’s acts.
• Members are not personally liable for the company’s debts.
• If the company is sued, the members’ personal assets are not at risk.

This general principle has exceptions, including piercing the corporate veil. If the corporate veil is pierced, members lose their liability protection.

Additionally, some parties, like lenders, may require personal guarantees from members. Thus, members may voluntarily accept liability for these business obligations.

How LLCs Are Taxed

The IRS has two types of taxation. Corporate taxation means that the IRS treats the entity as a taxpayer, subject to income taxes. As a result, corporations face “double taxation” because the corporation pays income taxes on its profits, then shareholders pay income tax when it distributes those profits as dividends to them.

Pass-through taxation means that a partnership does not pay income taxes on its profits. Instead, the partnership’s profits are allocated to the partners. The partners then pay income taxes on their share of the partnership’s profits.

Pass-through taxation means that dollars earned by the business are only taxed once. However, this taxation is based on the profits allocation, not the profits distributed. Thus, partners risk paying income taxes on profits they never took out of the company.

The IRS allows LLCs to elect corporate or pass-through taxation. Although most LLCs will elect pass-through taxation, the flexibility to choose is a benefit of LLCs.

Single-Member vs. Multi-Member LLCs

LLCs can have one or more members. Single-member LLCs have just one member. Multi-member LLCs have two or more members. There is no upper limit to the number of members an LLC may have.

Pros and Cons of an LLC

Selecting an entity type could involve tradeoffs. The pros of an LLC include the following:

• Limited liability
• Pass-through LLC taxes
• Flexible enough to be tailored to unique situations, such as family businesses
• Less mandatory paperwork, such as stock certificates and bylaws
• Fewer formalities, such as annual shareholder meetings and board meetings required for corporations

LLCs also have the following cons:

• Unwieldy as the number of members increases
• Investment usually means ownership
• Many lenders will expect personal guarantees from members for business loans
• Selling membership shares can be difficult

These features are broad generalizations. A business attorney can help you identify the best entity type for your specific needs.

LLC vs. Sole Proprietorship and Corporation

Single-member LLCs are alternatives to sole proprietorships and single-shareholder corporations. In comparing an LLC vs. sole proprietorship, a single-member LLC provides limited liability, while a sole proprietorship does not. Moreover, when comparing an LLC vs. corporation, single-member LLCs usually involve less paperwork than single-shareholder corporations and, more importantly, can avoid double taxation.

Multi-member LLCs are alternatives to partnerships, limited partnerships and corporations. Again, multi-member LLCs are the only entity type among these options to provide both limited liability and pass-through taxation.

How to Form an LLC Step by Step

The first step in forming an LLC is to choose a name. Consider doing some research on the availability of the name because your state will likely reject your filing if the name matches an existing LLC.

Pick a resident agent for your company. The resident agent must reside in your state. They will accept any legal papers served on the company.

Prepare the Articles of Organization and file them with the state. The fee will probably be due at this time as well. Depending on your state, you may need to prepare and file an operating agreement. Even if you do not need to file it, consider preparing one so you have a basic framework for your company’s governance and day-to-day management.

How Much an LLC Costs

LLCs usually incur an initial filing fee when filing the Articles of Organization. This fee ranges widely. Montana charges just $35 to file a non-series LLC, while Delaware charges $110.

LLCs may be renewed annually or biennially. The LLC members typically submit the current member list and pay a tax or fee. Minnesota charges no annual fee, while California charges an annual $800 tax.

Is an LLC Right for Your Business?

LLCs were designed for small, closely-held businesses. They provide greater protection than sole proprietorships and, in many cases, lower taxation than corporations. A lawyer can help you decide whether an LLC is right for your unique circumstances.