Limited Liability Company (LLC)
A Limited Liability Company (LLC) is a business structure that protects owners' personal assets from business debts and lawsuits while offering flexible tax treatment.
An LLC is one of the most popular business structures in the United States because it combines the liability protection of a corporation with the simplicity and tax flexibility of a sole proprietorship or partnership.
When you form an LLC, you create a legal separation between your personal assets (home, savings, car) and your business. If someone sues your business or your business can't pay its debts, your personal assets are generally protected.
By default, a single-member LLC is taxed as a sole proprietorship — all profits pass through to your personal return on Schedule C. A multi-member LLC is taxed as a partnership. However, LLCs have the flexibility to elect S-Corp or even C-Corp taxation if it's more advantageous.
LLCs are formed at the state level, which means requirements and fees vary. Most states require an annual filing or franchise tax. For example, California charges an $800 annual minimum franchise tax, while Wyoming has no state income tax and minimal fees.
While LLCs offer excellent liability protection, it's important to maintain the separation between personal and business finances. Commingling funds can "pierce the corporate veil" and eliminate your liability protection.
Practical Example
Mike opens a landscaping LLC with $5,000. A client sues for $200,000 after a property damage claim. Because Mike operates as an LLC and maintained proper separation of finances, only his business assets are at risk — his personal home and savings are protected.