What is an LLC? Pros, cons, taxes for your business

Published Saturday 28 February 2026

Table of contents

• What is an LLC?
• Pros of an LLC
• Cons of an LLC
• Examples of current LLC business structures
• How to form an LLC
• LLCs vs partnerships
• Manage your LLC with Xero
• FAQs on LLCs

Key takeaways

• Choose an LLC structure to protect your personal assets from business debts while gaining flexible tax options, as you can elect to be taxed as a sole proprietor, partnership, S-corp, or C-corp depending on your business needs.
• Complete the LLC formation process by registering your unique business name with your state, filing articles of organization, designating a registered agent, and obtaining an EIN from the IRS.
• Create an operating agreement even if your state doesn't require one, as this document outlines ownership percentages, profit distribution, and management responsibilities that protect all members.
• Consider the drawbacks before forming an LLC, including higher setup complexity than sole proprietorships, potential difficulty attracting investors, and self-employment tax on all profits unless you elect corporate taxation.

What is an LLC?

A limited liability company (LLC) is a business structure that legally separates the business from its owner or owners. The owners (also called members) aren't personally liable for the business's debts in most cases.

An LLC can be taxed like a sole proprietor, a partnership, or a corporation. According to the Internal Revenue Service (IRS), a single-member LLC is by default treated as an entity disregarded from its owner (like a sole proprietorship) unless it elects to be taxed as a corporation.

To help you compare business structures, here are some resources:

• Compare LLCs to sole proprietorships: Learn more about sole proprietorships
• Compare LLCs to corporations: Learn more about corporations, including S corporations

Pros of an LLC

LLCs offer business owners flexibility and protection in a single structure. Here are the key benefits.

Your personal assets are protected

Limited liability means you're not personally responsible for your LLC's debts in most cases. Your personal assets, like your home and savings, stay protected if the business fails.

However, this protection has limits. You could still face personal liability for acts of negligence or fraud.

You have choices on taxation

LLCs offer flexible tax treatment. You can choose to be taxed as:

• a sole proprietor
• a partnership
• an S-corporation
• a C-corporation

A tax advisor can help you choose the best option for your situation. Your preference may change as your business grows.

You have flexibility with ownership structure and how to distribute profits

LLCs have no ownership limits. Your LLC can have as many members as you need, and those members can be individuals or other businesses.

Members also decide how to split income and responsibilities. Learn more about LLC structures and other options from the U.S. Small Business Administration (SBA).

Cons of an LLC

LLCs have drawbacks to consider before you decide on this structure.

The LLC setup process is more complex than sole proprietorships and partnerships

Setting up an LLC involves several steps:

• registering with your state
• paying setup and renewal fees
• drafting an operating agreement (recommended)
• meeting any state-specific tax requirements

The SBA's business registration guide walks you through the process.

It can be harder to find investor capital

Many investors prefer corporations because:

• tax treatment: LLC income is taxed as self-employment income, while corporate dividends are taxed at lower investment income rates
• state tax complexity: LLCs can create state tax complications investors want to avoid
• fund restrictions: venture capital funds with tax-exempt partners often can't invest in LLCs

LLC profits may be taxed more heavily

Self-employment tax applies to all LLC profits unless you elect S-corp or C-corp taxation. The IRS clarifies that for employment tax purposes, even a single-member LLC is considered a separate entity from its owner.

See the IRS guide to LLC taxation for more details.

Examples of current LLC business structures

Businesses of all types, sizes, and industries use the LLC structure. Here are a few examples:

• Solo entrepreneurs: A seasonal lawn care company owner might choose an LLC for liability protection while keeping solo ownership
• Large corporations: Google operates as an LLC owned by Alphabet Inc. (a C-corp)
• Family businesses: Farm families use LLCs for succession planning, letting older members own assets while younger members work and claim profits

How to form an LLC

Forming an LLC involves a few key steps. Requirements and costs vary by state, but here's the general process.

1. Choose and register your business name. Your LLC name must be unique in your state and typically include "LLC" or "Limited Liability Company." Most states let you check name availability online for free.
2. Designate a registered agent. This person or service receives legal documents on your LLC's behalf. You can name yourself, an employee, or hire a registered agent service ($50–$300 per year).
3. File articles of organization with your state. This is the official document that creates your LLC. Filing fees range from $50–$500 depending on your state.
4. Create an operating agreement. While not required in every state, this document outlines ownership percentages, profit distribution, and management responsibilities. For example, accounting best practices suggest that if the LLC has a finite life, that end date should be disclosed. This detail is typically found in an operating agreement. It's a smart safeguard for any LLC with multiple members.
5. Obtain an Employer Identification Number (EIN). Apply for free through the IRS. You'll need an EIN to open a business bank account, hire employees, and file taxes.
6. Understand your state's ongoing requirements. Many states require annual reports and fees to keep your LLC in good standing. These typically range from $20–$500 per year.

LLCs vs partnerships

An LLC is a registered business entity that exists separately from its owners. A partnership is an unincorporated arrangement where two or more people operate a business together.

Here's how they compare.

Forming LLCs and partnerships

The formation requirements differ between these two structures:

• LLC formation: Register with your state authority
• Partnership formation: Make an agreement to go into business with one or more people or entities (most states don't require registration)

Ownership

The ownership requirements also vary:

• LLC ownership: Any number of members (individuals or entities like corporations)
• Partnership ownership: Two or more owners required (individuals or entities)

Protections against business liabilities

The liability protection differs significantly:

• LLC protection: Owners have limited personal liability for business debts
• Partnership liability: Partners are personally liable for all business debts

Taxation

Both LLCs and partnerships are pass-through entities. Profits and losses flow to the members, who report them on their individual tax returns. In fact, the IRS states that a domestic LLC with at least two members is automatically classified as a partnership for federal tax purposes unless it chooses to be taxed as a corporation.

However, LLCs offer more tax flexibility. You can elect to be taxed as an S-corp or C-corp, which partnerships can't do.

Keep in mind that some states, like California and Tennessee, have special LLC tax requirements and fees. See the IRS guide to LLC filing as partnerships or corporations for more details.

Manage your LLC with Xero

Talk to a lawyer or accountant before forming your LLC. They can help you decide if this structure fits your business needs.

Once your LLC is set up, you can manage your finances from day one with Xero. Get one month free and keep your business running smoothly.

FAQs on LLCs

Here are answers to common questions about forming and running an LLC.

Do I need an LLC for my business?

It depends on your business needs. A sole proprietorship may work if you're a freelancer or solo business owner. An LLC makes more sense if you want liability protection, tax flexibility, or plan to grow. Get legal and tax advice before deciding.

How much does it cost to form an LLC?

LLC formation costs range from $50–$500 depending on your state's filing fees. Ongoing costs include annual report fees ($20–$500) and optional registered agent services ($50–$300 per year).

How long does it take to set up an LLC?

Online filing typically gets approved within minutes–a few days. Mail applications can take several weeks to process.

Do I need a registered agent for an LLC?

Yes. Nearly every state requires LLCs to have a registered agent who receives official or legal documents on the LLC's behalf.

You can name yourself, an employee, or hire a registered agent service. A third party like your accountant can also serve as your registered agent. Some states also allow corporations to serve as registered agents.

Who can form an LLC?

Almost anyone can form an LLC. There are no residency requirements. Some states require members or managers to be at least 18 years old. Check your state's LLC formation requirements for specifics.

How should I manage my LLC?

LLCs offer two main management structures:

• Member-managed: Some or all owners handle daily operations and decisions
• Manager-managed: Hired managers run day-to-day operations, which works well for LLCs with many members

Define your management structure in your LLC operating agreement.