What Is a Limited Liability Company (LLC)?

A limited liability company, usually shortened to LLC, is a business structure created under the law of a US state. The company is a legal entity separate from the people who own it, who are called members. It can own property, sign contracts and be sued in its own name.

What an LLC does

The main reason people form one is limited liability. The US Small Business Administration says an LLC protects you from personal liability in most instances. In practice, if the business owes money or is sued over a business matter, creditors can usually reach the company's assets, not your personal savings or home. The protection has limits. It does not cover your own wrongdoing or debts you guaranteed personally, and it can weaken if you mix business and personal money.

How an LLC is taxed

By default, a single-member LLC is treated like a sole proprietorship for federal income tax, so profits pass through to the owner's personal return. A multi-member LLC is treated like a partnership by default. An LLC can elect other tax treatment. States may add their own fees and taxes, so check the state where you form it.

An example

A student who sells printed products online might form an LLC to separate the business from personal assets, open a business bank account in the company's name and keep clear records. The same student could instead trade as a sole proprietor with less paperwork and less protection.

Related terms

See sole proprietorship, registered agent, operating agreement and EIN. For the steps and costs, read our guide to US LLC formation.