What Is an LLC?
A limited liability company is a US business structure that separates the owners' personal assets from the business's debts and is usually taxed as a pass-through.
How it works
An LLC is created by filing formation papers with a state, usually the secretary of state's office. The owners are called members. The company is its own legal entity, so in general the members are not personally responsible for the company's debts, though there are exceptions, such as personal guarantees and fraud.
By default, the IRS treats a one-member LLC as part of its owner for income tax purposes and a multi-member LLC as a partnership. Profits and losses pass through to the members' personal returns. An LLC can also elect to be taxed as a corporation. The IRS business structures page explains the defaults.
Rules differ by state. Filing fees, annual reports, and franchise or minimum taxes vary, and some states tax LLCs in ways that surprise founders. Ask an accountant how your state and situation are taxed.
Example
For example, two friends form an LLC for a design studio and each owns 50 percent. At year end each reports half the profit on a personal return, and the LLC itself typically pays no federal income tax.
Why founders care
An LLC is often the simplest way to get liability protection for a small or early business, with flexible management and less paperwork than a corporation. The trade-off is that LLCs are less familiar to many venture investors, who often prefer a C corporation for its standard share structure. Some founders start as an LLC and convert later, and conversion has legal and tax consequences worth checking first.
Common mistakes
- Skipping a written operating agreement and relying on state default rules.
- Mixing personal and business money, which can weaken the liability shield.
- Forming an LLC without asking how it fits a future fundraising plan.
Frequently asked questions
What does LLC stand for?
LLC stands for limited liability company. It is a business entity created under state law that typically shields its owners from personal liability for the company's debts, while allowing profits to pass through to the owners' tax returns.
LLC vs C corporation: which is better for a startup?
It depends on the plan. LLCs are flexible and simple, while C corporations are the usual choice for startups planning to raise venture capital. State and tax rules differ, so confirm the details with an attorney and an accountant.
Related terms
Go deeper
- LLC vs C Corp for Startups: How to Choose GuideLLC vs C corp for startups: how each is taxed, what investors expect, why Delaware is common, and what to ask your lawyer and accountant before you file.
- Startup Legal Checklist: What to Handle Early GuideStartup legal checklist for first-time founders: entity, founder agreements, IP, EIN, licenses, contracts and privacy. A starting point for an attorney talk.
All 70 startup terms · More terms starting with L · Guides
General information, not legal, tax or financial advice. Reviewed 11 November 2026.