An LLC (Limited Liability Company) is the most popular legal structure for small businesses in the United States. It combines the liability protection of a corporation with the simplicity and pass-through taxation of a partnership. This guide walks through every decision and every dollar — from state selection to operating agreements, from BOI compliance to choosing between sole-prop and S-Corp taxation.
What an LLC actually does
An LLC separates your personal assets from your business assets. If the business is sued, in most cases your house, car, and personal bank account cannot be touched. This protection — the "corporate veil" — is the single biggest reason to form an LLC. It costs $40 to $500 to set up and a few dozen dollars a year to maintain. Compare that to the average cost of one personal-injury or contract lawsuit and the math is obvious.
What an LLC does not do:
- It does not reduce your taxes by itself. By default, an LLC's profits flow to your personal return and are taxed exactly the same as a sole proprietorship.
- It does not protect you from your own personal guarantees. If you sign a lease or loan personally, the LLC veil does not protect that obligation.
- It does not protect you from your own torts. If you personally injure someone through negligence, the LLC does not shield you.
Step 1: Choose a state
The rule of thumb is simple: form your LLC in the state where you physically operate. If you live in California and your customers are in California, form in California. Why? Because if you form in Wyoming but operate in California, you must "foreign qualify" the LLC in California — paying both states' annual fees, both states' franchise taxes, and dealing with two registered agents.
Two exceptions justify forming out of state:
- You are a non-US resident. Wyoming is the standard choice for its low annual fee ($62), strong privacy, and equal banking acceptance.
- You are forming a passive holding company. Wyoming or Delaware can hold assets, IP, or other LLCs without operating in any state.
Use our 50-state comparison to see the full numbers. The cheapest states for 5-year total cost are Kentucky, New Mexico, Missouri, and Wyoming. The most expensive are California, Massachusetts, and New York (when publication is factored in).
Step 2: Pick a name and check availability
Your LLC's legal name must:
- End with "LLC", "L.L.C.", or "Limited Liability Company" (state-specific abbreviations).
- Not duplicate an existing entity in the state.
- Not include restricted words ("Bank", "Insurance", "Trust") without licensing.
Check name availability in the Secretary of State's database before filing — and ideally also check the USPTO for federal trademark conflicts. A clean name on the state register but a federal trademark conflict is a real problem if you grow.
Step 3: Appoint a registered agent
Every state requires a registered agent — a person or service with a physical address in the state who accepts legal documents on behalf of the LLC. You can be your own registered agent if you have a physical address in the state and are available during business hours. Pros: free. Cons: your home address becomes a public record, and you must be reachable for service of process. Hiring a service ($25-$300/year) buys privacy and reliability.
The major reputable services are Northwest Registered Agent, ZenBusiness, and Harbor Compliance. We disclose all affiliate relationships in our affiliate disclosure.
Step 4: File Articles of Organization
This is the form that creates the LLC. Most states accept online filing for $40-$500. The information required is minimal: name, registered agent, members or manager, principal office address. Processing time ranges from 1 business day (Wyoming, Colorado) to 2-3 weeks (California, New York without expedited service).
Step 5: Draft an Operating Agreement
Most states do not require an operating agreement to be filed. But you should still draft one. The operating agreement:
- Defines who owns what percentage
- Specifies who can make which decisions
- Lays out profit and loss allocation (default is pro rata to ownership)
- Establishes succession planning if a member dies or wants to exit
- Reinforces the corporate veil (courts look for evidence the LLC was treated as separate from owners)
A bare-bones operating agreement runs 5-10 pages. Templates from reputable services or attorneys cost $0-$300. Skipping this step is a common mistake.
Step 6: Get an EIN from the IRS
The EIN (Employer Identification Number) is the LLC's federal tax ID. It is required to open a business bank account, hire employees, and file taxes. With an SSN or ITIN, the IRS online application takes 5 minutes and is free. Non-residents must fax Form SS-4 and wait 4-6 weeks (see our non-resident guide).
Step 7: File the FinCEN BOI report
The Corporate Transparency Act (CTA) requires almost every LLC to file a Beneficial Ownership Information (BOI) report with the Treasury's FinCEN within 90 days of formation. The report includes each beneficial owner's name, date of birth, residential address, and a copy of a government ID. The report is not public, but it is mandatory. Civil penalties run up to $591/day for noncompliance. The filing itself is free at boiefiling.fincen.gov.
Step 8: Open a business bank account
Mixing personal and business funds is the fastest way to lose the corporate veil. Open a dedicated business checking account before you accept your first payment. For US residents, Bluevine, Mercury, Relay, Chase, and your local bank all work. For non-residents, see our banking guide.
Step 9: Choose your tax classification
By default, a single-member LLC is taxed as a sole proprietorship and a multi-member LLC is taxed as a partnership. Owners can elect S-Corp or C-Corp tax treatment by filing Form 8832 (or Form 2553 for S-Corp).
- Default pass-through: Simple. Profits hit your personal return. Subject to self-employment tax (15.3% on the first $176,100). Best for businesses earning under $50k net.
- S-Corp election: The LLC pays you a "reasonable salary" subject to FICA, and the remainder passes through as a distribution free of SE tax. Saves money once net profit exceeds ~$50k. Costs $1,500-$3,000/year in payroll and admin.
- C-Corp election: The LLC pays 21% federal corporate tax on profits. Distributions to owners are taxed again as dividends. Rarely advantageous for a small business unless you are reinvesting heavily or planning a VC round.
Use our S-Corp savings calculator to find your specific crossover.
Common mistakes that cost real money
- Forming in Wyoming/Delaware while operating elsewhere. You end up paying two states' fees and dealing with foreign qualification.
- Missing the BOI deadline. $591/day is not a typo.
- Commingling funds. Using the business bank account for personal expenses (or vice versa) can pierce the corporate veil in a lawsuit.
- Skipping the operating agreement. When co-founders fall out, the default state rules apply — and they rarely match what you wanted.
- Forgetting the annual report. Late fees range from $25 to $400; states will administratively dissolve LLCs that go too long without filing.
Where to go next
Read our Delaware vs Wyoming comparison, model your specific scenario with the tax calculator, or take the 5-question jurisdiction quiz to see your shortlist.