Key Takeaways

  • LLC laws vary by state but consistently provide members with liability protection and pass-through taxation.
  • Members can include individuals, corporations, and foreign entities, depending on state restrictions.
  • LLCs are governed by operating agreements and must comply with annual reporting, naming rules, and tax obligations.
  • Piercing the corporate veil is a risk when members mix personal and business finances or commit misconduct.
  • There are key differences between single-member and multi-member LLCs, including tax treatment and legal documentation requirements.
  • Professional LLCs (PLLCs) have specific laws for licensed professionals.

LLC laws are established by each state to govern the formation and establishment of a business entity known as a limited liability company. An LLC is a separate legal entity from the business owner and can do business, open a bank account, and pay taxes individually. Business owners often opt to form an LLC to enjoy limited liability protection, along with beneficial pass-through taxation. An LLC can have one or many owners, referred to as members.

Who Can Form an LLC?

This business entity is best suited for those who:

  • Are engaged in any activity that increases the risk of their business being sued or accruing large amounts of debt
  • Have substantial personal assets that they want to shield from business liability

Certain business types are ineligible to create an LLC. While the specific prohibitions vary by state, they often include banking, insurance, trusts, and professionals such as lawyers, doctors, accountants, and architects. Check the laws in your state before submitting your LLC registration forms.

What Is a Professional LLC (PLLC)?

Certain licensed professionals—such as doctors, lawyers, and architects—may be required to form a professional limited liability company (PLLC) instead of a standard LLC. State laws often restrict which professions must use this structure and what ownership requirements apply.

Key aspects of PLLCs include:

  • All members must be licensed in the profession
  • Subject to additional oversight from licensing boards
  • Offers liability protection for business debts but not personal malpractice

Always verify with your state’s licensing board to ensure you select the appropriate business structure.

How Is an LLC Formed?

Most states require four simple steps to form an LLC, although laws may vary in your location.

  • First, choose a name for your LLC that isn't already used by another business in your state. You should also follow the specific naming guidelines in your state.
  • File articles of organization and pay the required fee.
  • Create an operating agreement that details the management of the LLC, including rights, responsibilities, and ownership percentages of all members.
  • In some states, you need to publish a notice about the formation of your LLC in a local newspaper as designated by the secretary of state. 

Single-Member vs. Multi-Member LLCs

LLCs can be owned by one person (single-member) or two or more (multi-member). While the formation process is similar, there are differences in legal and tax treatment:

  • Tax filing: Single-member LLCs are disregarded entities for federal tax purposes, reporting income on Schedule C. Multi-member LLCs must file IRS Form 1065.
  • Operating agreements: More crucial for multi-member LLCs to establish dispute resolution procedures and ownership percentages.
  • Asset protection: Courts may scrutinize single-member LLCs more closely in veil-piercing cases.

Understanding these distinctions can help structure your LLC for maximum protection and efficiency.

Does My LLC Need an Operating Agreement?

In most states, an LLC operating agreement is not legally required, but it's a good idea to create one if your LLC has more than one member. This legally binding document dictates rules for profit and loss percentages, establishes member voting rights, and describes the procedures for meetings and other important operations. Having an LLC operating agreement in place can also help establish the existence of your business with the court if your limited liability comes into question. If you do not have an operating agreement in place, the business will be subject to default state rules if member disagreements arise.

LLC Compliance and Maintenance Requirements

Once formed, LLCs must follow specific legal obligations to remain in good standing. Common compliance requirements include:

  • Annual or biennial reports: Most states require updates on member/manager info and registered agent details.
  • Franchise taxes: Some states, like California and Delaware, impose an annual franchise tax or minimum fee.
  • Recordkeeping: Accurate financial records, meeting notes, and membership changes should be documented.
  • Licenses and permits: Depending on your industry and location, your LLC may need local or federal licenses.

Failure to meet these requirements can result in administrative dissolution or loss of liability protection.

How Does Establishing an LLC Affect Liability?

Limited liability protection means that members are not personally responsible for the LLC's financial obligations and debts. This means that their personal assets are protected from legal judgments and creditor actions. However, the extent of this protection varies by state and by circumstance. Before establishing an LLC, it's important to understand how this business entity will affect:

  • Personal liability for business debts
  • Personal liability for the actions of other members or employees in the course of doing business
  • Personal liability for your own business-related actions
  • Business liability for the personal debts of its members

With a limited liability company, you will not be personally liable for the debts of the business. This means that if the business is sued or pursued by creditors, your personal assets and bank accounts are safe. The exception is if you personally guarantee a business loan or credit card, a step sometimes required by creditors who don't want to be out of luck if your business closes. 

If other members or employees commit wrongdoing in the course of doing business, you will not be held responsible. Although the involved members and the LLC itself may be found liable for their actions, members who were not involved in the illegal or negligent actions will not be personally liable. 

All states hold LLC owners personally liable for wrongdoing they commit while doing business. This can include instances where a member injures someone due to negligence, does not deposit taxes taken out of employee wages, intentionally harms an individual or the company through an illegal or reckless action, or mixes personal and business affairs or accounts.

Personal debts of members cannot be satisfied by seizing LLC assets. However, a creditor of an LLC member can order the court to have the LLC pay the debt, foreclosing on the member's ownership interest in the LLC, and/or request that the LLC be dissolved by the court.

What Is “Piercing the Corporate Veil”?

Although LLCs offer liability protection, courts can “pierce the corporate veil” if members misuse the business structure. This legal doctrine allows personal liability when:

  • Members commingle personal and business finances
  • The LLC is undercapitalized for its obligations
  • Fraud or misrepresentation occurs
  • Corporate formalities are ignored (e.g., failure to keep records or hold meetings)

To preserve liability protection, members must maintain the LLC as a separate legal entity and follow all legal formalities.

Understanding State-Specific LLC Laws

LLC law is governed at the state level, meaning each jurisdiction has its own set of requirements and regulations. These laws determine:

  • How LLCs are formed and dissolved
  • The filing fees and renewal deadlines
  • Annual reporting or franchise tax obligations
  • Required disclosures, such as registered agent information
  • Naming conventions (e.g., prohibitions on certain words)

Some states are more business-friendly—Delaware and Wyoming, for example, offer favorable tax structures and streamlined filing processes. Business owners should always consult their state’s Secretary of State website or an attorney to ensure compliance with relevant statutes.

Frequently Asked Questions

  1. Can anyone form an LLC in any state?
    Most people can form an LLC in any state, but specific professions and foreign entities may face restrictions. Check your state’s formation rules for eligibility.
  2. What happens if I don’t follow my state’s LLC laws?
    Failing to meet reporting, tax, or legal requirements can result in penalties, loss of good standing, or even dissolution of the LLC.
  3. What’s the difference between an LLC and a PLLC?
    A PLLC is designed for licensed professionals and includes stricter regulatory oversight. A standard LLC is suitable for general businesses.
  4. Can I be sued personally if I have an LLC?
    Generally no, but if you commingle funds, commit fraud, or don’t follow LLC formalities, a court can hold you personally liable.
  5. Do I need a lawyer to form an LLC?
    While not required, a lawyer can ensure your LLC complies with state law, especially if your business has multiple members or professional licensing concerns.

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