How to Start an LLC in the United States

What Is an LLC?

A Limited Liability Company (LLC) is a business structure that combines the liability protection of a corporation with the tax flexibility and simplicity of a sole proprietorship or partnership. It’s the most widely chosen entity type for new businesses in the United States — and for good reason.

When you form an LLC, you create a legal entity that is separate from you personally. This means your personal assets — your home, car, savings — are protected from business debts and lawsuits. At the same time, an LLC avoids the double taxation and rigid formalities of a traditional corporation.

Key Characteristics of an LLC

An LLC offers a unique combination of features that make it suitable for businesses of almost any size and type. Owners of an LLC are called “members,” and the company can be managed by its members directly or by appointed managers. There are no restrictions on the number of members, and members can be individuals, other LLCs, corporations, or foreign nationals.

Unlike corporations, LLCs are not required to hold annual meetings, maintain a board of directors, or issue stock. The operating agreement — a private internal document — governs how the LLC is managed, how profits are distributed, and what happens if a member leaves or the company dissolves.

How LLCs Are Taxed

One of the biggest advantages of an LLC is tax flexibility. The IRS doesn’t have a specific “LLC” tax classification — instead, LLCs choose how they want to be taxed. This gives you options that no other business structure offers.

Default Taxation: Pass-Through

By default, a single-member LLC is taxed as a sole proprietorship, and a multi-member LLC is taxed as a partnership. In both cases, profits “pass through” to the members’ personal tax returns. The LLC itself does not pay federal income tax. This avoids the double taxation that C-Corporations face — where profits are taxed at the corporate level and again when distributed as dividends.

S-Corp Election: Save on Self-Employment Tax

LLCs earning $60,000 or more in net profit per year can elect S-Corporation tax status by filing IRS Form 2553. This allows members to split income into a “reasonable salary” (subject to payroll taxes) and “distributions” (not subject to self-employment tax). The savings typically range from $3,000 to $15,000+ per year depending on income level.

C-Corp Election: For Growth and Investment

LLCs can also elect to be taxed as a C-Corporation by filing IRS Form 8832. This is less common but can make sense for LLCs planning to raise venture capital, issue stock options, or retain significant earnings at the 21% flat corporate tax rate.

Do You Need an Operating Agreement?

Yes. Even if your state doesn’t legally require one, an operating agreement is essential for every LLC. Here’s why:

Banks require an operating agreement to open a business bank account. Without one, you’ll be turned away at the door. Beyond banking, an operating agreement defines the rules of your LLC — who owns what, how decisions are made, how profits are split, and what happens if a member leaves or the company dissolves.

Without an operating agreement, your LLC defaults to your state’s LLC statute — which may not align with your intentions. For example, most states default to equal profit sharing regardless of capital contributions. If one member invested $90,000 and another invested $10,000, they’d still split profits 50/50 under default rules.

Download our free operating agreement template to get started, or use a formation service that includes a custom operating agreement in their package.