Forming an LLC in the United States

A Limited Liability Company (LLC) is a hybrid business structure authorized by state statute in all fifty US states and the District of Columbia. It combines the limited liability shield of a corporation with the operational flexibility and tax treatment of a partnership. The result is a business form widely used by both domestic and foreign entrepreneurs for operations ranging from freelance consulting to real estate holdings to technology ventures.

Liability Protection

The defining characteristic of an LLC is personal asset protection. When properly maintained, an LLC creates a legal separation between business obligations and the personal assets of its members (owners). Creditors of the LLC generally cannot reach members' personal bank accounts, real property, or other individual holdings to satisfy business debts. This protection is not absolute - it can be lost through certain conduct described in the "Piercing the Corporate Veil" section below.

Pass-Through Taxation

By default, the IRS does not treat an LLC as a separate taxable entity at the federal level. A single-member LLC is classified as a "disregarded entity," meaning all income and expenses are reported on the member's personal tax return (Schedule C of Form 1040 for US persons). A multi-member LLC is classified as a partnership and files an informational return (Form 1065), with each member receiving a Schedule K-1 reflecting their share of income, deductions, and credits. No entity-level federal income tax is owed in either default classification.

Tax Election Flexibility

LLCs possess a distinctive advantage: the ability to elect different federal tax treatments without changing the underlying business structure. An LLC may elect to be taxed as an S-Corporation (by filing Form 2553) or a C-Corporation (by filing Form 8832). This flexibility allows the same legal entity to optimize its tax posture as business circumstances evolve. For a detailed comparison, see the LLC vs Corporation page.

Operational Flexibility

Unlike corporations, LLCs are not required to maintain a board of directors, hold annual shareholder meetings, or keep formal corporate minutes. Governance rules are established by the Operating Agreement, which can be tailored to nearly any management structure the members choose - from a single owner making all decisions to a multi-manager structure with detailed voting procedures.

Forming an LLC is not a one-time event. Maintaining good standing with the state requires ongoing compliance. Failure to meet these obligations can result in penalties, loss of good standing, administrative dissolution of the LLC, and - in extreme cases - loss of liability protection.

The Operating Agreement is the internal governance document of an LLC. While it is not filed with the state, it is the single most important document defining how the LLC operates, how decisions are made, and how members' rights and obligations are structured.

Why It Matters

Without an Operating Agreement, the LLC is governed by the default rules of the state's LLC statute. These default rules may not reflect what the members actually intended. For example, many state default rules provide for equal profit sharing regardless of capital contributions, require unanimous consent for major decisions, and allow members to freely transfer their interests. An Operating Agreement overrides these defaults with rules tailored to the specific business.

Key Provisions to Include

• Member contributions and ownership percentages: Document each member's initial contribution (cash, property, services) and the corresponding ownership interest.
• Management structure: Specify whether the LLC is member-managed (all members participate in daily operations) or manager-managed (designated managers handle operations while other members remain passive).
• Voting rights and procedures: Define which decisions require simple majority, supermajority, or unanimous consent. Establish procedures for meetings, quorum, and proxy voting.
• Profit and loss allocation and distributions: Specify how profits and losses are allocated (which may differ from ownership percentages) and when and how cash distributions are made.
• Transfer restrictions and buyout provisions: Address how membership interests can be transferred, rights of first refusal, buy-sell triggers (death, disability, departure), and valuation methods for buyouts.
• Dissolution and winding-up: Specify the events that trigger dissolution and the procedure for winding up business affairs and distributing remaining assets.

Banks Require It

Virtually every US bank requires a copy of the Operating Agreement to open a business account. Even for single-member LLCs, banks want to verify who has authority over the account and how the LLC is governed. An LLC without an Operating Agreement may face significant delays or denials in opening banking relationships.

For related contract templates that your LLC may need, see the Service Agreement and NDA template pages.

The Employer Identification Number (EIN) is a nine-digit number assigned by the IRS to identify business entities for tax purposes. It functions as the business equivalent of a Social Security Number. Every LLC that has employees, files certain tax returns, or opens a business bank account needs an EIN.

Application Methods (Form SS-4)

Common Issues

• Name mismatch: The LLC name on the SS-4 must exactly match the name on file with the state. Any discrepancy will cause rejection.
• Responsible party: The IRS requires a "responsible party" who controls or manages the entity. For single-member LLCs, this is the sole member. The responsible party must have an SSN, ITIN, or foreign identification.
• Phone application discontinued: The IRS no longer processes EIN applications by phone for international applicants. Fax or mail are the only options for those without SSN/ITIN.

"Piercing the corporate veil" is a legal doctrine through which courts disregard the LLC's separate legal identity and hold members personally liable for business obligations. While LLC formation creates a presumption of limited liability, that presumption can be overcome when the LLC is not operated as a genuine separate entity.

Courts consider multiple factors, and no single factor is automatically decisive. However, the following are the most commonly cited grounds:

An LLC formed in one state is a "domestic" LLC in that state. If the same LLC conducts business in another state, it must register as a "foreign LLC" in that second state. "Foreign" in this context means out-of-state, not international.

When Is Foreign Registration Required?

Each state defines "doing business" or "transacting business" differently, but common triggers include: having a physical office or employees in the state, holding real estate, maintaining inventory, and conducting repeated or sustained business transactions with state residents. Merely having a bank account in a state or occasional sales to state residents generally does not trigger registration requirements.

Nexus and Tax Implications

"Nexus" refers to the level of connection between a business and a state that triggers the state's jurisdiction to impose taxes. Physical nexus (offices, employees, inventory) is the traditional standard. Economic nexus, established by many states following the 2018 Supreme Court decision in South Dakota v. Wayfair, can trigger sales tax collection obligations based on revenue or transaction thresholds even without physical presence. Understanding nexus is critical because operating in a state without proper registration and tax compliance can result in penalties, back taxes, and loss of the right to bring legal claims in that state's courts.

Costs of Foreign Registration

Foreign LLC registration typically costs $50-$500 per state for the initial filing, plus ongoing annual report fees and a registered agent in each state. These costs add up and are a primary reason why forming in your home state (or the state where you primarily operate) is often the most cost-effective approach for businesses with a clear geographic focus.