What is an LLC?

Published Wednesday 20 August 2025

Table of contents

• What is an LLC?
• Pros of an LLC
• Cons of an LLC
• Examples of current LLC business structures
• LLCs vs partnerships
• Ready to set up your LLC? Manage it easily with Xero
• FAQs on LLCs

Key takeaways

• An LLC is a business that's separate from its owner(s), giving them some protection against the business’s debts.
• All sizes and types of businesses use the LLC business structure for its liability protections, and the ownership and taxation flexibility it offers.
• The LLC structure has advantages: liability protection, flexibility with taxation, and profit distribution choices, for example. But they’re also more challenging to set up, and can have a higher tax bill overall than other structures.
• Ask your lawyer or accountant whether an LLC structure is right for your business.

What is an LLC?

A limited liability company (LLC) is a business structure that legally separates the business and its owner or owners. The owners (also called members) are not personally liable for the debts of the business in most cases.

An LLC can be taxed like a sole proprietor, a partnership, or a corporation, and in some cases you can change how your LLC is taxed as it grows even though it differs from a traditional corporate structure in how ownership and liability are handled.

To help you compare:

• LLCs vs sole proprietorships, here’s more about sole proprietorships
• LLCs vs corporations, here’s info on corporations, including S corporations

Pros of an LLC

The LLC structure is popular because it offers business owners both flexibility and protection. Check out some of the benefits of an LLC.

Your personal assets are protected

As the term “limited liability” suggests, if your LLC goes belly up, you as the owner (member) may not be held personally liable for all the acts or debts of the business. This helps protect your personal assets, like your home and savings.

But LLC liability protection is “limited”. An LLC doesn’t magically protect its owners from everything – you could still be pursued through the courts for acts of negligence, for example.

You have choices on taxation

With an LLC, you can choose to be taxed as a sole proprietor, a partnership, an S-corporation, or a C-corporation. A tax advisor can talk with you about LLC tax advantages and tell you which approach offers the best outcomes. Your preference may change as you grow.

You have flexibility with ownership structure and how to distribute profits

An LLC can have as many owners (called members) as it likes, and those members can be people or other businesses. The LLC ownership structure is highly flexible, allowing members to decide how to allocate income and responsibilities.

Check out this U.S. Small Business Administration (SBA) resource to learn more about the LLC business structure and other options.

Cons of an LLC

Although LLCs have plenty of pluses, there are some disadvantages, too.

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

You must register the LLC with the state, pay setup and renewal fees, and (ideally) draft an operating agreement. Some states have extra tax requirements for LLCs, too. This SBA resource walks you through the business registration process.

It can be harder to find investor capital

Many investors prefer to invest in corporations because:

• LLC pass-through income is taxed as self-employment income, while the dividends received through a corporation are taxed as investment income – a lower rate
• They don't want to deal with potential state tax issues related to LLCs
• Venture capital funds often can’t invest in LLCs if they have tax-exempt partners who cannot receive income from active trade

LLC profits may be taxed more heavily

Unless you form a C-corporation or elect to be taxed as an S-corp, all of an LLC's profits are subject to self-employment tax. That can get expensive, especially for investors who don't work in the company. Check out the IRS's guide to LLC taxation for details.

Examples of current LLC business structures

Businesses of all types, sizes, and industries (like tech, retail, and professional services) use the LLC business structure.

• Solo entrepreneurs might set up as an LLC because it allows solo ownership and protects the owner – someone who runs a seasonal lawn care company with modest revenue might set up as an LLC.
• Large businesses benefit in this way too – for instance, Google is an LLC owned by Alphabet Inc. (which is a C-corp).
• LLCs can be useful for family businesses focused on succession planning. The LLC structure lets older family members own most of a farm’s assets, while younger family members do the work and claim most of its profits.

LLCs vs partnerships

An LLC is a business that exists separately from its owners, while a partnership is an unincorporated group of two or more members operating a business together.

There are both differences, and overlaps between these two structures.

Forming LLCs and partnerships

• You form an LLC by registering it with your state authority.
• You create a partnership by making an agreement to go into business with one or more people (or an entity). Some states require you to register partnerships, but most do not.

Ownership

• An LLC can have any number of members.
• A partnership must have two or more owners.

The owners of partnerships and LLCs don’t have to be individuals – they can be entities (eg a corporation) instead.

Protections against business liabilities

Unlike a general partnership—and more like a corporate structure—an LLC gives owners limited personal liability for business debts.

• The LLC business structure provides some liability protection for its owners.
• Members of a general partnership are liable for all their business's liabilities.

Taxation

Both LLCs and partnerships are flow-through entities –meaning their profits (or losses) flow to the members who are then taxed individually.

If you register your partnership as an LLC (see above) you’ll have more flexibility for your business taxes, making it easier for your business to grow with you. You can, for example, choose to be taxed as an S-corp, which is more complicated but can offer some tax benefits. A general (non-LLC) partnership doesn't have this option.

A few states, like California and Tennessee, have special tax filing requirements and fees for LLCs. For more about partnerships and LLC vs corporations, check the IRS's guide to LLC filing as partnerships or corporations.

Ready to set up your LLC? Manage it easily with Xero

If you’re leaning toward setting up an LLC, it’s a good idea to get input from a lawyer or accountant first on how to form an LLC. They can help you weigh up the benefits—like liability protection and flexible tax options—against the extra setup involved.

Once you’ve got the green light, Xero can help you stay on top of your finances from day one. Try Xero for free and keep your business running smoothly, right from the start.

FAQs on LLCs

If you're thinking about forming a limited liability company, you probably have a few questions. From setup time to management structure, here are some common queries about LLCs — and what they mean for small businesses like yours.

Do I need an LLC for my business?

That depends on the nature of your business and its needs. If you’re a freelancer or solopreneur, a sole proprietorship may be all you need. But if you have growth plans, for example, an LLC might be your thing – it can protect you from legal and financial difficulties, and give you more options for your taxes. So do your research and get legal and tax advice first.

How long does it take to set up an LLC?

It depends on the method you use. If you file online, approval should be instantaneous. But if you’re applying by mail, be patient – LLC paperwork sent by mail 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 – someone who receives official or legal documents (such as subpoenas) on the LLC’s behalf. You can nominate anyone aged over 18 as the registered agent – you can name yourself, an employee, or a third party like your accountant. Some states even let you register entities – like a corporation – as your agent.

Who can form an LLC?

It varies a bit but in principle, just about anyone can form an LLC. There are no residency or legal requirements, although some states require that members and/or managers must be at least 18 years old or the age of consent. Check your state’s limited liability company formation requirements web page for more info..

How should I manage my LLC?

You can manage your LLC in several ways. Some or all your LLC's members (owners) can be involved in its management and operations – this setup is known as a member-managed LLC. You can also hire managers to handle day-to-day decisions, which might be a good idea if you have (or plan to have) lots of members in the business. Use your LLC operating agreement to set out the management arrangements for your business.