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When entrepreneur and restaurateur Pinky Cole made headlines giving every graduate at Clark Atlanta University an LLC in 2022, she wasn’t just giving them paperwork—she was giving them a foundation for kick starting their own small businesses. Her gift highlighted an important question for new entrepreneurs: Why start an LLC rather than a simpler business structure like a sole proprietorship?
LLCs are popular for good reasons. They’re relatively easy to set up, offer tax advantages, and protect your personal assets. Here’s what you need to know about LLCs and how to start one.
What is an LLC?
A limited liability company (LLC) is a business entity type that protects your personal assets while offering flexible tax options for business income. LLCs combine the best elements of different business structures. Like corporations, LLCs are legally separate from their owners, which can protect entrepreneurs’ personal assets from business debts, damages, and losses. But LLCs also offer flexible tax treatment: By default, they enjoy the same pass-through tax treatment as sole proprietorships and partnerships, but they also have the option to elect to be taxed as an S corp, which can mean savings on self-employment tax. With both options, profits are not taxed at the corporate level.
LLCs can be managed either by members or by hired managers. In a member-managed LLC, the owners directly handle day-to-day operations and business decisions. A manager-managed LLC, by contrast, separate ownership from operations—the LLC members hire managers to run the business. Managers can be a designated LLC member(s), someone external to the company, or a mix of both.
If an LLC does business outside of its state of formation, it may be designated by the other states as a “foreign LLC.”
LLC vs. other business types
| LLC | Sole proprietorship | Partnership | Corporation | |
| Personal liability protection | Business is legally distinct from owner. | No legal distinction between owner and business. | No legal distinction between owners and business. | Business is legally distinct from owner. |
| Tax treatment | Flexible. Pass-through taxation is the default, but the business can elect to be taxed as an S corp. | Pass-through taxation. | Pass-through taxation, with profits and losses distributed equally among partners, unless otherwise stated in partnership agreement. | Profits are taxed twice: first at the corporate level, and then on shareholder tax returns |
| Formation complexity | Must file articles of organization with the Secretary of State. | No paperwork required. | No paperwork required, though a partnership agreement is advisable. | Must file articles of incorporation with the Secretary of State. Some states may require additional paperwork. |
| Startup cost | Filing fees can range from about $50 to $500. | No cost. | No cost. | Varies, ranging from $1,500 to $5,000. |
| Ongoing requirements | Varies by state; some require Statement of Information filings, typically every two years. | None. | None. | Annual or biennial statements and filing fees. Internal ongoing requirements include annual shareholder and director meeting minutes, refreshing bylaws, and documenting stock transfers. |
Types of LLCs
You can structure your LLC in several ways, depending on your ownership structure and operational needs.
Single-member LLC
A single-member LLC has just one owner. A single-member LLC is legally distinct from its owner in terms of liability; however, the IRS treats single-member LLCs as “disregarded entities” (businesses that are disregarded as separate entities from the owner) unless they file Form 8832 and elect corporate taxation.
Series LLC
A series LLC lets a single-master LLC own multiple independent divisions, or “series.” Each division operates independently and is responsible only for its own debts and obligations. This tiered structure means the umbrella LLC owns other LLCs, and each division can have its own members.
Forming a series LLC is possible only in some states, such as Illinois, Texas, Utah, and Wyoming.
L3C
A low-profit LLC (L3C) bridges the gap between for-profit and nonprofit organizations. This hybrid business structure attracts foundations and socially responsible investors who want to support good causes while earning returns. While L3Cs don’t have the same tax exemptions granted to traditional nonprofits, they can receive grants and program-related investments from foundations—something most for-profit businesses can’t do.
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How to start an LLC
- Choose a name for your LLC
- Choose a registered agent
- Obtain your EIN and check tax requirements
- Draw up an LLC operating agreement
- File your articles of organization
- Open a bank account for your LLC
- Obtain necessary licenses or permits
Starting an LLC involves several key steps. While specific requirements vary by state, here’s how to set up your LLC in 7 steps:
1. Choose a name for your LLC
Before settling on a name for your LLC, check your state’s business database to make sure it’s available. Each state has its own naming rules. Most states don’t allow duplicate LLC names and may require you to include “LLC” or “Limited Liability Company” in your name. You may also face restrictions on certain words or phrases you can use in your business name.
2. Choose a registered agent
Your LLC needs a registered agent—someone who receives legal documents for your business. You can act as your own registered agent, choose an LLC member, or use a third-party registered agent service.
Note: If you plan to be your own registered agent, most states require you to be physically present at your registered address during normal business hours. This is why many business owners opt for a registered agent service.
3. Obtain your EIN and check tax requirements
Get your employer identification number (EIN) from the IRS before registering with your state. You can apply for free online through the IRS website (which gives you a new EIN in just a few minutes) or by mail using form SS-4. Make sure to check your state’s specific tax requirements rules—they may have additional rules for LLCs.
Not every LLC needs an EIN. An owner of a single-member LLC that is a disregarded entity (businesses that are disregarded as separate entities from the owner) and doesn’t have employees may not need an EIN; the owner can use their social security number. Multimember LLCs must have an EIN, regardless of how the LLC is taxed.
4. Draw up an LLC operating agreement
If you have a multimember LLC, create a written operating agreement that outlines day-to-day business operations, member duties and rights, how to handle asset distribution if a member leaves, and dissolution procedures.
5. File your articles of organization
Submit your articles of organization to your state’s Secretary of State office. Most states offer online filing options and provide standard forms to complete. You can handle this step yourself or work with an attorney or filing service.
State filing fees vary by state. Filing fees are $500 in Massachusetts, $300 in Texas, and $50 in Missouri, with most states charging between $100 and $300.
6. Open a bank account for your LLC
After completing your operating agreement, open a business bank account. You’ll typically need your EIN or Social Security number (SSN), LLC formation documents, and operating agreement to set up your account. You can also open a business credit card, which can help you keep personal and business expenses separate, build business credit, and earn business-related rewards and benefits.
7. Obtain necessary licenses or permits
Depending on your industry, you may need business licenses, professional permits, industry-specific certifications, or state and federal registrations.
LLC formation rules vary by state, so check your local requirements. While you can complete most steps yourself, a legal professional can ensure you’ve met all requirements, especially if you’re forming a multimember LLC or operating in a regulated industry.
Benefits and challenges of starting an LLC
Limited liability and flexible tax treatment can help many small business owners. But these features aren’t always advantages—they depend on your specific situation. Here’s what to consider before starting an LLC:
Benefits of an LLC
An LLC’s benefits range from soft advantages, like how customers and investors perceive your company, to more consequential ones, like liability protections for members.
Protection from personal liability
Because an LLC is a legal entity separate from its members, your personal assets are typically protected from business debts and losses. If your LLC faces bankruptcy or lawsuits, your personal finances usually stay safe. However, this protection is not absolute (more on this below).
Simple setup process
You often can complete LLC registration online by filing forms and paying a filing fee. Many states process applications within a few business days.
Professional credibility
An LLC structure signals stability to customers and potential employees. This formal business structure can help you build trust more readily than a sole proprietorship.
Access to capital
The structured nature of an LLC can make your business more attractive to investors and lenders. Many see LLCs as more established and reliable than informal business structures.
Tax advantages
LLCs avoid double taxation through pass-through taxation, which means owners don’t pay taxes twice on the same money. Members pay federal income tax only on their share of LLC earnings, and the company doesn’t pay separate federal corporate income taxes. LLCs can also choose to be taxed as an S Corp, which can reduce self-employment taxes for owners who are also employees of the business.
LLC owners may also be eligible for the qualified business income (QBI) deduction, a pass-through deduction that lets some self-employed individuals and business owners deduct up to 20% of their business income on their personal tax returns.
Challenges of an LLC
While there are many advantages of starting and running your business as an LLC, there are some potential disadvantages:
Startup costs
LLC formation fees range from $40 to $500, depending on your state. You’ll also pay fees for:
- Name reservation
- Registered agent services
- Publication requirements (in some states)
- Annual or biennial statement filing fees
Limited protection in some cases
While LLC members’ personal assets are typically safe from business litigation, this protection isn’t absolute. A judge may rule that personal assets aren’t protected if LLC members haven’t followed proper business practices. The liability shield may not extend to members who:
- Commit fraud during business operations
- Fail to pay required taxes
- Inappropriately mix personal and business finances
- Personally guarantee a business loan or debt
Even though LLC assets are legally separate from personal assets, maintaining this separation requires careful attention to legal and financial requirements. Proper record-keeping and strict separation of business and personal finances help ensure your LLC’s liability protection remains intact.
Record-keeping requirements
LLCs need more documentation than sole proprietorships, such as formation documents and employment tax records. Multimember LLCs must also keep detailed records to help prevent disputes if members leave or the business closes.
Complex dissolution process
Closing an LLC takes considerable effort. You must:
- File dissolution forms with your state
- Document member votes to close
- Notify creditors
- Settle business debts
- Alert tax agencies
- Distribute remaining assets according to your operating agreement
LLC guidance by state
Starting an LLC gives your business a strong foundation—protecting your personal assets while keeping taxes flexible. Whether you’re launching a side hustle or scaling a growing brand, the right business structure matters. Once your LLC is set up, the next step is turning your idea into a business.
How to start an LLC FAQ
Should I form an LLC for my side hustle?
Consider forming an LLC if you want personal liability protection or want the option to be taxed as an S corp. Your decision should align with your business goals and circumstances.
What are alternative business types to LLCs?
If you don’t want to form an LLC, you can structure your business as a:
- C corporation
- General partnership
- Limited partnership
- Limited liability partnership (LLP)
- Sole proprietorship
Each structure has its own benefits and requirements. Choose the one that best fits your business needs, growth plans, and risk tolerance.
What happens if an LLC member wants to leave the business?
When a member exits an LLC, follow your operating agreement’s terms, which should spell out how ownership transfers work, how to value the departing member’s share, and whether remaining members get first rights to buy that share. A lack of clear terms can lead to disputes and potentially force the LLC to dissolve.
