What is an LLC?
An LLC is a company you create by filing a short document with a US state. The IRS describes it as a business structure allowed by state statute. Once the state accepts the filing, the LLC exists as its own legal person: it can sign contracts, open a bank account, own property, hire staff, and sue or be sued in its own name.
LLC stands for limited liability company. It combines two things that used to come only in separate packages: the limited liability of a corporation and the flexible, usually pass-through, tax treatment of a sole proprietorship or partnership. The owners are called members, and the document that creates the LLC is usually called the Articles of Organization.
Each state writes its own LLC law, so the name of the formation document, the filing fee and the yearly report differ from state to state. The core idea is the same everywhere. The IRS also notes that a few types of businesses generally cannot be LLCs, such as banks and insurance companies.
What limited liability means
Limited liability means the LLC's debts and legal claims belong to the LLC, not to you personally. The US Small Business Administration puts it this way: LLCs protect you from personal liability in most instances, so your personal assets, like your car, house and savings, are not at risk if the LLC faces bankruptcy or a lawsuit.
Compare that with a sole proprietorship, where the SBA says you can be held personally liable for the debts and obligations of the business. If a sole proprietor's business cannot pay a supplier, the supplier can pursue the owner's personal assets. With an LLC, the supplier's claim is against the company.
The protection has limits set by state law and the courts. You stay responsible for anything you personally guarantee, such as a lease or loan you sign in your own name. Keep the LLC separate in practice: use a business bank account, sign contracts in the LLC's name, and do not pay personal bills from company funds. If you have a specific liability concern, ask a lawyer licensed in the state.
What is a domestic limited liability company?
A domestic limited liability company is an LLC in the state where it was formed. In any other state where it registers to do business, the same LLC is called a foreign LLC. A Wyoming LLC is domestic in Wyoming and foreign in California if it registers there.
You see both words on state fee schedules. Delaware's fee schedule lists $110 for a domestic LLC formation and $200 for a foreign LLC registration. California charges $70 for an Application to Register a Foreign LLC. The SBA explains that if your LLC conducts business activities in more than one state, you might form it in one state and then file for foreign qualification in the others.
"Domestic" and "foreign" here describe the state of formation, not the owners' nationality. An LLC formed in New Mexico by a founder in Pakistan is a domestic New Mexico LLC and a US company. That matters for federal rules too: FinCEN's beneficial ownership reporting now applies only to companies formed outside the US that register in a state, so US companies are exempt from BOI reporting. Our BOI report guide covers the 2026 rule.
Members and managers
Members own the LLC; managers run it. In many small LLCs they are the same people.
- Who can be a member: the IRS says members may include individuals, corporations, other LLCs and foreign entities, and there is no maximum number of members. Most states also allow single-member LLCs.
- Member-managed: the members make decisions and can act for the LLC. This is the usual setup for a one-owner business.
- Manager-managed: the members appoint one or more managers, who may or may not be members, to run the business. This suits LLCs with passive investors.
States ask about management in the formation document. California's Articles of Organization (Form LLC-1) asks whether the LLC will be managed by one manager, more than one manager, or all members. New Mexico's Articles must say whether the LLC is manager-managed. The details of voting, profit shares and what happens when a member leaves go in the operating agreement, which stays private.
Single-member vs multi-member LLC
The number of members decides how the IRS taxes the LLC by default. One member means a disregarded entity; two or more means a partnership.
| Point | Single-member LLC | Multi-member LLC |
|---|---|---|
| Default federal tax treatment | Disregarded entity: income is treated as the owner's | Partnership |
| Federal return | None of its own for income tax; a US individual owner reports on Schedule C, E or F of Form 1040 | Form 1065, with a Schedule K-1 for each member |
| Foreign owner | Form 5472 with a pro forma Form 1120 each year with reportable transactions | Partnership filings; take advice |
| Employment and certain excise taxes | Treated as a separate entity | Separate entity |
For a single-member LLC, the IRS page on single-member LLCs says the owner reports the LLC's activity on Schedule C, E or F when the owner is an individual, and that the LLC is still treated as a separate entity for employment tax and certain excise taxes. For a multi-member LLC, the IRS explains that a partnership files Form 1065, an annual information return, but does not pay income tax itself: it passes profits and losses through to the partners on Schedule K-1.
A single-member LLC owned by a non-US person has one extra duty. The Form 5472 instructions treat a foreign-owned US disregarded entity as a reporting corporation, and the penalty for not filing is $25,000. See our Form 5472 guide.
How the IRS taxes an LLC: entity classification
There is no separate "LLC" category in federal tax law. The IRS fits every LLC into one of three boxes: disregarded entity, partnership or corporation. The first two are the defaults; the corporation box is optional.
Default classification
The IRS says an LLC with only one member is treated as an entity disregarded as separate from its owner, and a domestic LLC with at least two members is classified as a partnership, unless the LLC files Form 8832 and elects to be treated as a corporation. Under both defaults, profit passes through to the owners, who pay tax on it whether or not the LLC pays it out.
Electing C corporation tax with Form 8832
An LLC can choose to be taxed as a corporation. The IRS says an eligible entity uses Form 8832 to elect how it will be classified for federal tax purposes. The LLC keeps its LLC legal form under state law, but for federal tax it becomes a C corporation: it pays the flat 21% corporate rate and files Form 1120 every year. Profit paid out to the owners can then be taxed again as dividends. Our LLC vs C corp comparison covers when this makes sense.
Electing S corporation tax with Form 2553
An LLC owned by US residents can also elect S corporation status. The Form 2553 instructions say an entity eligible to elect corporate treatment that meets the S corporation tests is treated as a corporation from the S election's effective date and does not need to file Form 8832 as well. The form is due no more than 2 months and 15 days after the start of the tax year the election is for, or at any time during the year before.
The IRS S corporation rules limit who can use it. An S corporation can have no more than 100 shareholders and only one class of stock, and its shareholders may be individuals, certain trusts and estates. They may not be partnerships, corporations or nonresident alien shareholders. So a founder who lives outside the US and is a nonresident alien cannot own an S corporation, and an LLC with such a member cannot make the election.
A tax election changes how the LLC and its owners are taxed and can be hard to undo. Speak to a licensed tax professional before filing Form 8832 or Form 2553.
Self-employment tax for US members
Pass-through treatment avoids corporate tax, but the SBA notes that members of an LLC are considered self-employed and must pay self-employment tax contributions toward Medicare and Social Security. Nonresident aliens follow different rules, so founders abroad should get advice on their own position.
LLC vs sole proprietorship vs corporation
An LLC sits between a sole proprietorship and a corporation: it has a corporation's liability protection with a sole proprietor's single layer of tax by default.
| Point | Sole proprietorship | LLC | C corporation |
|---|---|---|---|
| Personal liability for business debts | Yes, the owner can be personally liable | Limited in most instances | Limited |
| Federal income tax | On the owner's personal return | Passes through by default; can elect corporate tax | 21% at company level, then tax on dividends |
| Owners | One person | One or more members, no maximum | Shareholders |
| State formation filing | No company is formed | Articles of Organization or similar | Articles or Certificate of Incorporation |
| Best known for | Simplicity | Flexibility for owner-run businesses | Raising investment and issuing stock |
The SBA notes that corporate profits can be taxed twice: first when the company makes a profit, and again when dividends are paid to shareholders. That is the main reason most owner-run small businesses choose an LLC. Businesses planning to raise venture capital usually choose a corporation instead; our LLC vs C corp comparison goes through the detail for founders at home and abroad.
Can a foreigner own an LLC?
Yes. Federal rules allow foreign members, and the states we cover do not require members to live in the state or in the US. What each state does require is a registered agent with a physical address in the state.
A founder abroad cannot usually get an EIN online, because the IRS online application needs an SSN or ITIN and a US principal place of business; instead they apply by phone, fax or mail. The full setup, from choosing a state to bank accounts, is in our US LLC for non-residents guide.
How much does an LLC cost?
The SBA says that in most cases the total cost to register a business will be less than $300, though fees vary by state and structure. The bigger difference between states is what you pay every year after formation.
| State | Formation fee | Yearly state cost |
|---|---|---|
| New Mexico | $50 | No annual report for LLCs |
| Wyoming | $100 | Annual report license tax, at least $60 |
| Delaware | $110 | $400 annual LLC tax, due 1 June |
| Florida | $125 ($100 plus $25 registered agent designation) | $138.75 annual report |
| California | $70 | $800 annual tax, plus a $20 Statement of Information every two years |
| Texas | $300 | No franchise tax due at or below the $2.65 million threshold, but a yearly information report |
On top of state fees, most owners pay for a registered agent every year, and some states add publication or other costs. Compare every state with our LLC state fee comparison tool, or open a state page from the US LLC states hub.
Advantages and disadvantages of an LLC
For most owner-run businesses, the advantages outweigh the extra paperwork.
- Advantages: personal assets protected in most instances; one layer of tax by default; any number of members, including foreign persons and companies; free choice of member or manager management; the option to elect corporate or S corporation tax later.
- Disadvantages: a state filing fee and, in most states, a yearly report or tax; a registered agent to maintain; self-employment tax for US members on pass-through profit; less familiar to venture investors than a corporation; extra IRS filings for foreign-owned LLCs.
How to form an LLC
Forming an LLC takes a few steps: choose a state, pick a name, appoint a registered agent, file the Articles of Organization, sign an operating agreement and get an EIN. Our how to start an LLC guide walks through each step, and our best state for an LLC comparison helps you pick the state. If you would rather hand the filings to us, our LLC formation package covers the state filing, registered agent, US address and EIN.
Sources
- IRS: Limited liability company (LLC)
- IRS: Single member limited liability companies
- IRS: Partnerships
- IRS: About Form 8832, Entity Classification Election
- IRS: Instructions for Form 2553
- IRS: S corporations
- IRS: Instructions for Form 1120
- IRS: Instructions for Form 5472
- IRS: Get an employer identification number
- SBA: Choose a business structure
- SBA: Register your business
- FinCEN: Beneficial ownership information reporting
- Delaware Division of Corporations: Fee schedule (revised 1 August 2026)
- Delaware Division of Corporations: LLC, LP and GP annual tax instructions
- Wyoming Secretary of State: Business Division fee schedule
- New Mexico Statutes: NMSA 53-19-63, LLC Act fees
- Florida Division of Corporations: LLC fees
- California Secretary of State: Domestic LLC forms and fees
- California Secretary of State: Foreign LLC forms and fees
- California Secretary of State: Articles of Organization (Form LLC-1)
- California Franchise Tax Board: Limited liability company
- Texas Secretary of State: Form 806 fee schedule
- Texas Comptroller: Franchise tax
Fees, deadlines and rules on this page were last checked on 27 September 2026.