A limited liability company (LLC) is a form of business organization in the United States that combines the limited liability of a corporation with the flexible management and tax treatment of a partnership. Its owners, called members, are generally not personally responsible for the company's debts or legal obligations, so they can lose only what they have invested. An LLC is created under state law by filing articles of organization, sometimes called a certificate of formation, with the state, and its internal rules are set out in an operating agreement among the members.
Wyoming passed the first US LLC statute in 1977, and every state had adopted one by the late 1990s. The form became widely popular after 1997, when the Internal Revenue Service introduced its "check-the-box" regulations, which let most unincorporated businesses choose their own federal tax classification. LLCs are now the most common type of new business entity formed in the United States, used by everything from one-person consultancies to large real estate and private equity structures.
How LLCs are taxed
An LLC is not a tax category in its own right. For federal income tax purposes it is classified by default according to the number of members, and it can elect a different treatment:
- A single-member LLC is by default a disregarded entity. Its income and expenses are reported on the owner's own return, for an individual usually on Schedule C.
- A multi-member LLC is by default taxed as a partnership. It files an information return on Form 1065 and gives each member a Schedule K-1 showing their share of income, which they report personally.
- Either type can elect to be taxed as a C corporation by filing Form 8832, or as an S corporation by filing Form 2553 if it meets the eligibility rules.
Under the default treatments, profits pass through to the members and are taxed once, avoiding the double taxation of a C corporation, whose profits are taxed at the company level and again when paid as dividends. Members who are active in the business usually also owe self-employment tax on their share of earnings, which is one reason some profitable LLCs elect S corporation status and pay their owners a salary.
Accounting for an LLC
For bookkeeping, the LLC is a separate accounting entity from its members, in line with the economic entity assumption. Instead of common stock and retained earnings, its equity section usually shows a capital account for each member, often called members' equity. Each account increases with contributions and the member's share of profit, and decreases with withdrawals, called distributions, and losses. Distributions are often recorded first in a drawing account and closed to the capital account at year end.
Suppose two members form an LLC, contributing $60,000 and $40,000, and agree to split profit 60:40. In its first year the LLC earns $50,000 of net income and distributes $10,000 to each member. At year end the first member's capital account is $60,000 plus $30,000 minus $10,000, or $80,000, and the second member's is $40,000 plus $20,000 minus $10,000, or $50,000. Total members' equity is $130,000. Because the LLC is taxed as a partnership, it records no income tax expense; the members pay tax on $30,000 and $20,000 respectively, whatever cash they actually took out.
Advantages, limits and comparisons
LLCs are cheaper and simpler to run than corporations, with fewer formalities such as board meetings and minutes, and profits can be split in any way the operating agreement allows rather than strictly by ownership percentage. However, investors such as venture capital funds usually prefer Delaware C corporations, because these can issue different classes of shares, grant stock options easily and go public. Limited liability can also be lost if members mix personal and business funds or use the LLC to commit fraud, a doctrine known as piercing the veil. Lenders to small LLCs often ask members for personal guarantees, which removes much of the protection in practice. LLCs that are owned by a few people resemble a closely held corporation in ownership but differ in tax and governance. Since 2024, many LLCs have also had to consider the federal beneficial ownership reporting rules, whose scope was narrowed in 2025 to foreign-formed companies.