More people are venturing into business, and you could be one of them. In fact, the U.S. Census Bureau reported 5.5 million new business applications in 2023—that’s a lot of side hustles, startups, and fresh ideas turning into profitable ventures. If you’re thinking about starting your own, one way to make it official is by setting it up as an LLC.
This guide explains what an LLC is, the types, the pros and cons, how to set one up, and how it compares with other business structures.
What Is the Meaning of LLC?
A limited liability company (LLC) is a formal business structure that separates your personal assets from your business liabilities. This setup means that if your business faces legal or financial issues, your personal assets will not be liable in lawsuits.
An LLC also offers flexible tax treatment. By default, it can be taxed as a sole proprietorship (for single-member LLCs) or a partnership (for multi-member LLCs). However, you can also elect to be taxed as an S corporation.
Some notable examples of successful LLCs include:
- Google – Converted from an incorporated company to an LLC in 2017 after Alphabet Inc. restructuring
- IBM Credit LLC – IBM’s financial services subsidiary
- Blockbuster LLC – Movie and game rental service provider
- Vivo Capital – A healthcare investment firm
- General Motors – Automotive manufacturing company
- Bristol-Myers Squibb & Gilead Sciences, LLC – Subsidiary of Gilead Sciences Inc.
- Amazon Services LLC – Amazon subsidiary
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Types of LLC
LLCs are not one-size-fits-all entities. Depending on your management style, ownership involvement, or industry, one type might be feasible for your company than another.
Here are your options:
Single-Member LLC
A single-member LLC is a legal business entity with one owner. This structure formalizes your independent work without compromising your assets.
Say you’re freelancing, selling templates online, or fixing bikes out of your garage. With a single-member LLC, you can protect your personal property, like your savings or car, in case a client sues for damages.
Multi-Member LLC
A multi-member limited liability company (LLC) is a formal business structure created by two or more individuals. It provides personal liability protection for each member while establishing a legal framework.
For instance, if you and a partner start a coffee-roasting business, one of you may oversee marketing while the other manages operations. A multi-member LLC allows you to document these roles, clarify unequal contributions, and make agreements.
Low-Profit (L3C) LLC
A low-profit limited liability company (L3C) is a type of LLC for businesses that aim to achieve a social mission while remaining financially sustainable. It combines elements of nonprofit purpose with for-profit flexibility, allowing founders to prioritize social impact over maximizing profits.
If you’re launching a business that serves a public benefit, such as a community food co-op, an L3C offers a structure that aligns with your mission. You can generate revenue, pay staff, and manage operating costs, but your primary objective remains delivering a measurable social good.
Series LLC
A series LLC allows one LLC to contain multiple series within it. This structure works well for entrepreneurs who manage multiple businesses or hold different types of assets.
For example, if you own several rental properties, like a duplex, you can assign each property to its own series to keep the finances and risks separate while managing them in one primary LLC.
Professional LLC (PLLC)
A professional LLC (PLLC) is for individuals who provide licensed professional services. This type of LLC is typically required by state law for fields such as medicine, law, accounting, architecture, or therapy. Most states also require that all members of a PLLC hold active licenses in their relevant fields.
Say you’re a therapist opening your own private practice. Or maybe you’re a CPA starting a small firm with a colleague. A PLLC lets you run the business while meeting the legal requirements for your field.
Restricted LLC
A restricted LLC is a variation of the traditional LLC available in select states, most notably Nevada. However, members cannot receive profit distributions for a specified period, typically 10 years, unless the company dissolves earlier.
This structure supports long-term business planning. For example, you might form a long-term investment company with family members or trusted partners. The goal is to retain earnings, reinvest, or preserve the business for future generations.
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Pros of an LLC
Here are the benefits you can get from an LLC:
Flexible Tax Filing
One reason people like LLCs is that they allow you to choose how your business is taxed. You’re not locked into one method, which keeps things simple by filing taxes the same way a sole proprietor would.
Everything goes on your personal return, and you avoid filing a separate business return.
Has Fewer Formal Requirements
Running an LLC usually means less paperwork and fewer rules to follow compared to setting up a corporation.
If you don’t have time to organize board meetings or file legal reports every few months, you can keep things simple and still stay legal with an LLC.
Your Business Name Is Only Yours
When you set up an LLC, no one else in your state can register a business with the same name, giving you sole ownership of the brand you want to build. It’s especially helpful if you’re printing labels, launching a website, or planning to advertise.
However, this only protects the name in your state. If you want complete protection across the country, you’ll need to look into trademarks.
Protects Your Assets
If your business runs into lawsuits or debt, your own bank account, car, or house usually won’t be at risk. Maybe a client isn’t happy with your work and threatens to sue.
Without an LLC, they could come after your personal belongings. Otherwise, only the business is involved.
Less Restrictions on Management and Ownership
In an LLC, you don’t have to follow strict rules about roles or how many people can be involved.
Let’s say you and two friends start a small video production company. One of you handles editing, another focuses on client calls, and the third takes care of the business side. You can set it up so everyone shares responsibilities in a way that makes sense for the team.
Profits Are Distributed Based on Contributions and Performance
With an LLC, you don’t have to split profits based strictly on ownership percentages. You can decide how the money gets divided to make contributions and profit distribution fair.
For example, one person puts in most of the startup cash, another handles all the cooking, and you manage customer service and orders. Even if you each own one-third of the business, you can agree that the person doing the most work should take a bigger cut of the profits.
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Cons of an LLC
While an LLC works well for many business owners, not every type will be suitable for you. Before making a decision, it’s smart to consider the following downsides.
State Restrictions
LLC rules can shift depending on your state, affecting how you start and run your business. So before you file anything, take a quick look at your state’s LLC requirements.
For example, let’s say you’re based in California. You’ll need to pay an annual LLC fee, even if your business doesn’t make much money yet. On top of that, California has strict filing rules and deadlines you must meet.
Transferability Limitations
Changing ownership in an LLC isn’t always straightforward. Let’s say you and two friends run a custom furniture shop as an LLC. One day, you decide to move out of state and want to sell your share to someone else.
The other two must agree, and you might need to update your operating agreement or file new paperwork with the state.
It Can Be Costly to Maintain
Once you set up your LLC, you’ll have to keep up with yearly fees, filings, and sometimes extra taxes, depending on your state’s regulations. Maybe you’ll start a small online clothing shop and form an LLC in California.
Even if you make no profit your first year, you still have to pay the state’s minimum annual franchise tax.
Split Income Extra Taxes
LLCs give you tax flexibility, but that can also mean dealing with extra taxes depending on your operating agreement.
Suppose you run a small home renovation business as an LLC. You report the income on your personal tax return and pay self-employment tax on everything you earn.
That includes both your business income and what you normally think of as your paycheck. It can add up fast if you’re not setting aside money throughout the year.
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How to Start an LLC
Here’s a step-by-step guide on starting your own LLC:
Step 1: Secure Your Business Name
Before anything else, start by choosing a business name and checking its availability through your state’s online database. Make sure no one else is using it and that it meets state naming rules.
Examples of rules include requiring you to add “LLC” or restricting certain words like “authority” and “institute.”
If the name is available, register it according to state guidelines. However, if you’re not ready to launch, you can reserve it for a fee.
Step 2: Appoint a Registered Agent
An LLC must have a registered agent to receive legal and tax documents. This can be you or a service, but the agent must have a physical address in the LLC’s state and be available during business hours.
Hiring a registered agent is also useful if you want privacy, travel often, or can’t guarantee availability.
Step 3: Publish a Notice or Letter of Intent
Some states require new LLCs to publish a public notice in local newspapers. After filing, you must run the notice, usually on both daily and weekly papers, for a set period.
Once complete, the newspaper provides proof of publication, which you must file with the state.
Step 4: Create an Operating Agreement
An operating agreement outlines ownership, roles, profit sharing, and decision-making in your LLC. It’s especially useful for multi-member businesses to prevent disputes and clarify responsibilities.
Even if your state does not require it, it helps prove your LLC is a separate legal entity and can support loan or investor applications.
Step 5: Prepare and Submit Your Articles of Organization
Next, you must prepare and submit your articles of organization. Most states let you do it online. You’ll fill in basic information like your business name, address, registered agent, and the owner. Once you pay the filing fee (usually from $50 to $300), you’re officially in business.
Some states process it in a few days, others take a couple of weeks. Once approved, you’ll get a confirmation or certificate showing that your LLC is registered.
Step 6: File a BOI Report
If you’re forming an LLC outside the U.S., you need to file a beneficial ownership information (BOI) report with FinCEN.
FinCEN is the government agency that handles financial crimes. You only need to file this report once, unless your ownership or business details change later.
At the same time, there’s no fee. You can submit it online through the BOI E-Filing website.
Step 7: Obtain Licenses, EIN, and Sales Tax ID
Once your LLC is official, you’ll need to obtain your business licenses, an EIN from the IRS, and a sales tax ID if you’re selling products.
Let’s say you’re starting a home cleaning service. Depending on your state or city, you might need a local business license to legally offer services.
Next, apply for an EIN. Even if you don’t have employees yet, this number helps you open a business bank account, file taxes, and build business credit. You can get one online from the IRS for free.
Step 8: Set Up a Business Bank Account
Now that your LLC is up and running, it’s time to open a business bank account. This helps keep your personal money separate from your business income.
To open the account, you’ll need your LLC paperwork, EIN, and a copy of your operating agreement. Once it’s set up, keep all business-related income and spending in that account.
Step 9: Register Your LLC In Other States
If you do business outside your home state, you might need to register your LLC in those other states as well. Each state has different rules about management, operating agreements, licenses, and permits, so it’s a good idea to review the policies.
Usually, it involves filling out a short form and paying a fee. You’ll also need to name a registered agent in that state.
Step 10: Maintain Your LLC’s Reputation
Once your LLC is up and running, you’ll need to keep up with a few ongoing tasks to stay in good standing with the state. If you miss a deadline for your annual report or forget to pay the renewal fee, it could put your LLC at risk, and your state might even dissolve it.
To avoid these mishaps, mark your calendar with schedules like annual filings, tax deadlines, and business license renewals. If you hired a registered agent service, they might send reminders, but keeping your own list ensures you stay on top of your legal obligations.
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LLC vs. Other Business Structures
Choosing a business structure depends on your management plans, risk tolerance, and current lifestyle. Here’s a side-by-side comparison to help make the decision easier:
| Structure | How It Works | What It’s Good For | Real-Life Example |
|---|---|---|---|
| LLC | Keeps your personal and business finances separate. Flexible with taxes. | Small businesses that want protection without strict rules. | You run a growing dog treat bakery from home. An LLC protects your savings if someone claims your product made their pet sick. |
| Sole Proprietorship | Easiest to set up. No separation between you and the business. | Freelancers or solo sellers just starting out. | You sell handmade earrings on Etsy and just want to test the waters without paperwork. |
| Partnership | Two or more people share the business. You split profits and responsibilities. | Friends or family going into business together. | You and your cousin start a lawn care business and want to share everything 50/50 without forming a corporation. |
| Corporation | A more complex structure. Strict rules. Separate legal entity. | Startups planning to raise money or hire investors. | You’re building a tech app and want to offer shares to early investors. A corporation makes that process cleaner and easier to manage in the long term. |
| Cooperative | Owned and operated by its members, who share decision-making and profits equally or proportionally. | Groups that value democratic control, like artist collectives, food co-ops, or small producer alliances. | You and a group of local farmers form a co-op to pool resources, share equipment, and sell produce at better prices through a joint brand. |
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Wrapping Up
Launching a business doesn’t have a universal approach. But if you’re looking for structure, flexibility, and protection, an LLC offers a practical starting point. Whatever your management agreement will be, there’s an LLC model designed to support your vision and workflow.
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