What is LLC (Limited Liability Company)?
An LLC is a US business entity that combines limited liability with flexible tax treatment. Single-member LLCs default to disregarded entity status (taxed as sole proprietor on Schedule C). Multi-member LLCs default to partnership taxation (Form 1065). LLCs can elect S-corp or C-corp tax treatment via Form 8832/2553.
Current Rate (Calendar year (default))
Default pass-through; can elect S-corp (15.3% SE saving) or C-corp (21% flat)
Example
A single-member LLC earning $100,000 profit defaults to Schedule C taxation: 15.3% SE tax on net SE earnings + federal income tax at marginal rate. Electing S-corp treatment can save ~$6,000–$10,000 of FICA at this income level.
How LLC (Limited Liability Company) works in United States
The LLC is the most popular US business structure for small businesses. It combines the limited liability of a corporation with the flexibility of a partnership, and crucially, the IRS lets you choose how you want it taxed.
**Default taxation by member count**
**Single-member LLC:** Treated as a 'disregarded entity' by default. All profit flows directly to the owner's Form 1040 Schedule C, subject to self-employment tax (15.3%) and income tax. Exactly like a sole proprietor from a tax standpoint — but with liability protection.
**Multi-member LLC:** Treated as a partnership by default. Files Form 1065, issues K-1s to each member. Each member pays income tax on their share, and managing members pay self-employment tax on their distributive share.
**Tax elections available**
**S-corp election (Form 2553):** The most popular tax optimization. The LLC pays the owner W-2 wages (subject to FICA) and distributes the remaining profit as a K-1 distribution (not subject to self-employment tax). Net saving: 15.3% SE tax on distributions, offset by added payroll costs. Typically worthwhile above $80,000-$100,000 net profit.
**C-corp election (Form 8832):** Rarely chosen due to double taxation, but may be used when venture funding requires C-corp status or for QSBS eligibility.
**State LLC fees**
Formation and annual fees vary dramatically by state: - Delaware: $90 formation + $300/year franchise tax - California: $70 formation + $800/year minimum franchise tax (highest in the US) - Wyoming: $102 formation + $62/year — popular for low cost and privacy - Florida: $125 formation + $138.75/year
An LLC does not need to be formed in the state where you do business — many founders use Delaware or Wyoming for favorable laws, then 'foreign qualify' in their home state.
**Operating agreement**
Even in states where it is not legally required, an operating agreement is strongly recommended. It documents ownership percentages, voting rights, profit distribution rules, what happens if a member wants to leave, and manager vs. member-managed structure. Without one, state default rules apply.
Related terms
An S-corporation is a US entity that elects pass-through taxation under Subchapter S. The corporation itself pays no federal income tax; profits flow to shareholders' personal returns. Limited to 100 shareholders, all US individuals (or certain trusts), and one class of stock. Owner-employees must pay 'reasonable compensation' as W-2 wages subject to FICA.
A C-corporation is a US business entity taxed separately from its owners under Subchapter C of the Internal Revenue Code. It pays 21% federal corporate income tax on profits, and shareholders pay personal tax on dividends — the 'double taxation' of C-corp profits. Most VC-backed startups are Delaware C-corps.
Form 1065 is the annual return for US partnerships and multi-member LLCs taxed as partnerships, due 15 March for calendar-year filers. The partnership does not pay federal income tax; profits flow to partners via Schedule K-1.
Confused by United States accounting jargon?
AccountsOS explains United States terms in plain English and applies the right rules to your books automatically.
Try Free