When you’re starting a business, one of the first decisions you’ll face is choosing your legal structure. The Limited Liability Company—or LLC—has become increasingly popular, and for good reason. It offers a middle ground between the simplicity of a sole proprietorship and the protection of a corporation.
What Makes an LLC Different
An LLC protects your personal assets if your business runs into trouble. Say your company gets sued or can’t pay its debts—your house, car, and personal savings stay off-limits. Only what the business owns is on the line.
You also get to choose how you want to run things. Some LLC owners manage everything themselves. Others hire managers to handle day-to-day operations. A freelance graphic designer might run her single-member LLC solo, while a growing restaurant group might bring in an experienced general manager.
Then there’s taxes. Your LLC’s profits flow straight through to your personal tax return. You’re not taxed twice like corporations often are—once at the business level and again when owners take money out.
Where LLCs Came From
Germany created the first limited liability company in 1892, calling it a “Gesellschaft mit beschränkter Haftung” or GmbH. The concept was revolutionary: business owners could limit their personal risk while keeping operational control.
Wyoming brought the LLC to America in 1977, betting that this flexible structure would attract businesses to the state. The gamble paid off, especially after the IRS ruled in 1988 that LLCs could be taxed like partnerships. Within a decade, every state had adopted LLC laws.
The Real Benefits
Your assets stay yours. If a customer sues your business or a creditor comes calling, they can’t touch your personal property. This matters whether you’re running a small consultancy or a chain of retail stores.
Less paperwork than corporations. You won’t need to hold annual meetings, record minutes, or maintain extensive corporate records. File your taxes, keep basic financial records, and you’re largely set.
Adaptable management. Want to run everything yourself? Fine. Need to bring in outside expertise? That works too. The structure bends to fit your needs.
The Downsides Worth Knowing
LLCs aren’t perfect. You’ll pay self-employment tax on all your business earnings—that’s Social Security and Medicare combined, which currently runs about 15.3%. A corporation owner might only pay this on their salary, not on dividends.
State rules vary wildly. New York requires you to publish a notice in two newspapers when you form an LLC, which can cost $1,000 or more. California charges an annual minimum franchise tax of $800. Wyoming? Just $60 annually. If you do business in multiple states, you’ll need to register in each one and follow each state’s rules.
Beyond self-employment tax, keep in mind you’ll need to track and manage payroll tax obligations if you hire employees, adding another layer of administrative responsibility to your LLC operations.
How to Set Up an LLC
Pick a name. It needs to be unique in your state and include “Limited Liability Company,” “LLC,” or “L.L.C.” Check your Secretary of State’s website to see what’s available. Pro tip: search for the web domain too before you fall in love with a name.
File your paperwork. The Articles of Organization tell your state you’re forming an LLC. You’ll list your business name, address, and registered agent (that’s who receives legal documents on your behalf). Filing fees range from about $50 to $500 depending on your state.
Create an operating agreement. Even though most states don’t require this, you should make one anyway. It spells out who owns what percentage, how decisions get made, and what happens if someone wants out. This document prevents arguments later when memories get fuzzy and stakes are higher.
Is an LLC Right for You?
An LLC makes sense if you want liability protection without corporate complexity. It works well for consultants, small shops, professional services, and many online businesses. Real estate investors love them for holding rental properties.
But if you’re planning to raise venture capital or go public eventually, a corporation might serve you better. And if you’re a solo freelancer with minimal risk, the added cost and paperwork might not be worth it.
The key is matching the structure to your actual needs—not just picking what sounds impressive or what your neighbor’s cousin recommended.
The LLC Bottom Line
An LLC won’t solve all your business problems, but it does solve a big one: keeping your personal assets separate from business risk. If that matters to you—and for most business owners, it should—then the modest setup costs and annual fees are usually worth it.
Just remember that “LLC” isn’t a magic shield. You still need insurance, solid contracts, and good business practices. And those state filing requirements and self-employment taxes aren’t going away.
The best business structure is the one that fits what you’re actually building, not what sounds most legitimate on a business card. For many entrepreneurs, that’s an LLC. For others, it might be overkill or not quite enough. Talk to an accountant or attorney who understands your specific situation before you file anything. That hour of professional advice now could save you years of headaches later.
Frequently Asked Questions
Do I really need an LLC, or can I just operate as a sole proprietor?
You can absolutely operate as a sole proprietor—it’s simpler and cheaper. But you’re personally liable for everything the business does. Someone trips in your store? They can sue you personally. Can’t pay a supplier? They can come after your house. An LLC creates a legal barrier. Whether you need that barrier depends on your risk level. A wedding photographer managing appointment scheduling and client meetings probably needs it. Someone doing occasional graphic design work for friends and family? Maybe not.
Will an LLC actually save me money on taxes?
Not exactly. The pass-through taxation means you avoid the double taxation that C corporations face, but you’re still paying tax on all the profit. In fact, you’ll pay self-employment tax on your entire share of net earnings. The tax advantage is mainly that you’re not taxed twice. Some LLC owners elect to be taxed as an S corporation once they’re profitable enough—that can reduce self-employment taxes, but it adds complexity.
What happens if I need to close my LLC?
You’ll need to formally dissolve it with your state. That usually means filing dissolution paperwork, paying any outstanding fees or taxes, notifying creditors, and canceling licenses and permits. If you just stop using it without dissolving it, you’ll keep getting hit with annual fees and franchise taxes. Some people have racked up thousands in penalties for “abandoned” LLCs they thought just went away on their own.
Can I convert my existing business to an LLC?
Yes. If you’re currently a sole proprietor or partnership, you can form an LLC and transfer your business assets to it. You might need to get new licenses, update contracts, and notify clients and vendors of the change. It’s usually straightforward, though you should check with an accountant about any tax implications.
Do I need a lawyer to set up an LLC?
Technically, no. The paperwork is simple enough that many people file it themselves or use online services like LegalZoom. But having a lawyer draft your operating agreement can prevent expensive disputes later, especially if you have partners. Think of it like this: you can change your own oil, but some jobs are worth paying a professional for.
