LLC law is governed state by state, but the framework is consistent across the country: you file formation papers with the state, obtain a federal tax ID, operate under an internal agreement among the owners, meet a short list of ongoing obligations, and follow a formal wind-down process when the business ends. Done correctly, this structure separates your personal assets from the company’s debts and lets you avoid the double taxation that comes with a traditional corporation. Done sloppily, the protection disappears.
How an LLC Gets Formed
Formation starts with a name that is distinguishable from any other entity already registered in the state and that includes a designator signaling limited liability. Acceptable designators generally include “LLC,” “L.L.C.,” and “Limited Liability Company,” with some states also permitting “LC” or “Ltd.”
Before filing anything, you need a registered agent: a person or service with a physical street address in the state of formation who can accept legal documents during business hours. A P.O. box does not qualify. You can act as your own agent, but many owners hire a service to avoid being tied to a fixed address.
The formation document itself goes by different names depending on the state: Articles of Organization in most, Certificate of Formation or Certificate of Organization elsewhere. The content is the same regardless of the label. It lists the LLC’s name, the registered agent’s name and address, how long the entity will exist, and whether members or a designated manager will run the business. Most owners write a broad purpose statement, something like “any lawful business activity,” so a future pivot into a different line of work doesn’t require amending the filing.
Most states accept online filings through the Secretary of State’s website, which is faster than mailing paper. Filing fees run from roughly $35 to $500, with most states falling between $50 and $200. Expedited processing is usually available for an extra fee. Once the state approves the paperwork, you get a stamped copy of your Articles of Organization. That is your proof the LLC legally exists, and you’ll need it to open a bank account and apply for local permits.
The next step is a federal Employer Identification Number from the IRS. Multi-member LLCs must have one because the IRS treats them as partnerships. Single-member LLCs need one if they plan to hire employees, and most banks will ask for an EIN regardless.1Internal Revenue Service. Get an Employer Identification Number Applying online through the IRS website is free and gives you the number right away. Keep the CP 575 confirmation notice; banks and lenders ask for it constantly.
How LLCs Are Taxed
One of the main attractions of an LLC is control over how the IRS taxes it. The default depends on how many members the business has. A single-member LLC is a “disregarded entity” for income tax purposes, with the owner reporting business income and expenses on Schedule C of their personal return.2Internal Revenue Service. Single Member Limited Liability Companies A multi-member LLC is taxed as a partnership by default, filing Form 1065 and issuing each member a Schedule K-1 for their share of income, deductions, and credits.3Internal Revenue Service. Limited Liability Company (LLC)
Under either default, the business itself pays no income tax. Profits pass through to members, who report them on their own returns. That avoids the double taxation that affects C corporations, where the company pays corporate tax on profits and shareholders then pay personal tax on dividends.
The downside of default LLC taxation is self-employment tax. Members who actively work in the business owe 15.3% on their share of net earnings, covering 12.4% for Social Security and 2.9% for Medicare.4Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes) For a profitable company, that number adds up fast.
An LLC that wants different treatment can file Form 8832 to be taxed as a C corporation, though most small LLCs avoid this because it brings back double taxation.5Internal Revenue Service. About Form 8832, Entity Classification Election The more common election is S corporation treatment, done by filing Form 2553.6Internal Revenue Service. About Form 2553, Election by a Small Business Corporation Under an S election, the business still avoids double taxation, but owner-employees pay themselves a reasonable salary subject to employment taxes and take the rest of the profits as distributions that are not subject to self-employment tax. For an LLC earning well above a reasonable salary, the savings on that 15.3% can be significant. The tradeoff is additional payroll paperwork and IRS scrutiny of whether the salary you set is genuinely reasonable.
Timing matters. An S election generally must take effect no more than 75 days before the filing date and no later than 12 months after it. Missing that window means waiting until the next tax year.3Internal Revenue Service. Limited Liability Company (LLC)
What the Operating Agreement Controls
The operating agreement is the private contract that governs how the LLC actually runs. Most states don’t require you to file it with any government agency, but it is the single most important document the business will ever have. It determines who makes decisions, who gets paid, and what happens when something goes wrong.
The first major choice is the management structure. In a member-managed LLC, all owners participate in daily decisions and each can bind the company to contracts. In a manager-managed LLC, one or more designated people run operations while the other members remain passive. Manager-managed setups are common when some owners are investors who don’t want to be involved in day-to-day decisions.
The agreement should spell out each member’s capital contribution, whether that is cash, property, or services. It also sets voting rights, which can be proportional to ownership percentages or allocated per person. Profit and loss allocations belong here too. Without an operating agreement, most state default rules split profits equally among members regardless of what each person invested, which surprises owners who assumed putting up 80% of the money entitled them to 80% of the profits.
Buy-Sell and Capital Call Provisions
A well-drafted agreement covers what happens when a member wants to leave, dies, becomes disabled, or ends up in a dispute with the others. Buy-sell provisions set a valuation method and give remaining members the right to buy the departing member’s interest before it can go to an outsider. Without them, a deceased member’s share could pass to an heir the other members have never met.
Capital calls deserve similar attention. These are requests for members to contribute more money beyond their initial investment. The agreement should define who can authorize a call, how much notice members receive, and what happens if someone refuses. Common consequences include diluting the non-contributing member’s ownership percentage or treating the additional contributions from other members as a loan to the company rather than new equity.
Fiduciary duties round out the core provisions. Members generally owe each other a duty of loyalty, which prevents self-dealing and competing with the company, and a duty of care, which requires making reasonably informed decisions. Many state statutes allow the operating agreement to modify these duties within limits but not to eliminate them.
Keeping the LLC in Good Standing
Nearly every state requires periodic reports, filed annually or every two years, that update the state on the company’s current address, registered agent, and management. Fees range from nothing in some states to several hundred dollars in others. Missing a deadline triggers late penalties, and continued delinquency leads to administrative dissolution.
Administrative dissolution is as serious as it sounds. The state revokes the LLC’s legal existence, which means the liability shield disappears, and members can become personally exposed to business debts incurred while the entity was dissolved. Most states allow reinstatement by paying back fees and penalties, but the gap in coverage creates real risk.
Multi-member LLCs taxed as partnerships must also file Form 1065 with the IRS each year and furnish a Schedule K-1 to every member.7Internal Revenue Service. LLC Filing as a Corporation or Partnership Late or incomplete K-1s carry a $340 penalty per partner per month, up to 12 months, which escalates quickly for an LLC with several members.8Internal Revenue Service. Instructions for Form 1065 (2025)
One recent source of confusion is beneficial ownership reporting under the Corporate Transparency Act. As of March 2025, FinCEN issued a rule exempting all domestically formed entities from the requirement to report beneficial ownership information. The reporting obligation now applies only to foreign entities registered to do business in the United States. If your LLC was formed in any U.S. state, you do not need to file a BOI report.9Financial Crimes Enforcement Network. Beneficial Ownership Information Reporting
Keeping the Liability Shield Intact
The entire point of forming an LLC is the liability shield that keeps your personal assets separate from business debts and lawsuits. The shield is not automatic. Courts can disregard the LLC’s separate existence and hold members personally liable through a process called piercing the veil, and it comes down to the same handful of failures almost every time.
Commingling funds is the most common trigger. Using the business bank account to pay personal rent, buy groceries, or cover a car payment tells a court that the LLC isn’t really operating as a separate entity. Undercapitalization is another red flag. If you formed an LLC without putting in enough money to cover reasonably foreseeable obligations, courts view the entity as a shell. Failing to observe basic formalities, including documenting major decisions, maintaining separate financial records, and keeping the LLC’s identity clear in contracts, compounds the problem.
Even a well-maintained LLC has limits. If you personally guarantee a business loan or lease, you are on the hook regardless of the LLC’s involvement. Members who commit fraud, make knowing misrepresentations, or engage in illegal conduct can be sued individually. The IRS and state tax agencies can hold members personally responsible for unpaid payroll taxes and trust fund obligations. The LLC protects you from routine business debts, not from your own wrongdoing or obligations you voluntarily assumed in your personal capacity.
Professional bookkeeping and documented decision-making are the best defenses against veil-piercing claims. If you can show that the LLC maintained its own bank accounts, kept records of important decisions, filed its own taxes, and generally operated as a distinct business, piercing the veil becomes very difficult for any creditor to accomplish.
When Licensed Professionals Need a PLLC
Licensed professionals, including doctors, lawyers, accountants, and architects, face an extra wrinkle. Many states require these practitioners to form a Professional LLC rather than a standard LLC. The formation process is similar, but a PLLC requires proof of current licensure, and ownership is restricted to people who hold the relevant license. The critical limit on protection is that PLLC members remain personally liable for their own malpractice. If a doctor in a medical group commits a negligent act, the PLLC shields the other doctors from that liability, but it does not shield the doctor who made the error. The rules vary by state, so checking your state’s specific requirements before filing is essential.
Doing Business in Another State
When an LLC does business in a state other than where it was formed, that second state generally requires it to register as a “foreign” entity. The term does not mean international. It just means the LLC was formed somewhere else. Activities that trigger the requirement include having employees, a physical office, or a warehouse in the other state, or conducting regular, ongoing transactions there. Purely interstate commerce, maintaining a bank account, or attending occasional meetings usually do not count.
The consequences of operating without registering are practical. Most states deny unregistered foreign LLCs access to their court system, meaning the LLC can be sued in that state but cannot file its own lawsuits to enforce contracts or collect debts until it registers. States also assess fines, penalties, and back taxes for the period the LLC operated without authorization. For any LLC with customers, employees, or property in more than one state, foreign qualification is not optional.
How to Dissolve an LLC
Ending an LLC follows a formal process that protects both the members and any creditors. The first step is a vote to dissolve, conducted according to whatever procedure the operating agreement specifies. Without an operating agreement, state default rules control the vote threshold. The decision should be recorded in the company’s minutes.
After the vote, you file Articles of Dissolution (sometimes called a Certificate of Dissolution or Certificate of Cancellation) with the state. Fees vary. Some states charge nothing, others charge a modest amount. This filing puts the public on notice that the company is winding down.
The winding-up period follows, during which the LLC liquidates assets, notifies creditors, and settles outstanding debts. Creditors get paid before members receive anything. After all liabilities are satisfied, remaining assets go to members based on their ownership interests or whatever the operating agreement specifies. Skipping this step or distributing assets to members before creditors are paid can expose members to personal liability for unpaid business debts.
Dissolution does not end your obligations to the IRS. You need to file a final tax return for the year the business closes. An LLC taxed as a partnership files Form 1065 with the “final return” box checked and marks each Schedule K-1 as final.10Internal Revenue Service. Closing a Business An LLC taxed as a corporation also files Form 966 reporting the dissolution. Single-member LLCs file a final Schedule C with the owner’s personal return.
To close the EIN and the IRS business account, you send a letter to the IRS Cincinnati office that includes the LLC’s legal name, EIN, address, and the reason for closing. The IRS will not close the account until all required returns are filed and all taxes are paid.10Internal Revenue Service. Closing a Business Skipping these final steps does not make the tax obligations go away; it just adds penalties and interest while the IRS waits for returns that never arrive.