Key Takeaways

  • LLC regulations vary by state but include universal requirements like having a registered agent, filing Articles of Organization, and adhering to naming rules.
  • Ownership reporting is now required under the Corporate Transparency Act, impacting many small LLCs.
  • LLCs must meet ongoing compliance duties such as filing annual reports, renewing licenses, and maintaining business records.
  • LLCs offer liability protection, flexible profit distribution, and pass-through taxation, but members are responsible for self-employment taxes.
  • Choosing between member-managed and manager-managed LLCs can affect operations and compliance requirements.
  • Professional and foreign LLCs face additional formation and reporting obligations.
  • Penalties for noncompliance may include dissolution, loss of liability protection, or fines.

Although there are several LLC regulations to follow, a limited liability company is a simple business structure for owners of small businesses to create. Forming an LLC has advantages over other business structure, including taxation and separation of the personal and business assets for owners.

Although some regulations for LLCs vary depending on the state in which it was formed, there are standard rules that all states apply to them. Besides submitting the forms required to create the LLC, business owners have additional work to do. The LLC must remain in good standing to maintain the liability protection it needs in case it faces litigation. Owners have ongoing tasks to do in order to keep all of the LLC's protections and advantages in effect.

Forming an LLC

All states require the same basic steps for starting an LLC:

  • The business name that is selected must be unique, distinguishable from every other business registered in the state. You can check at most states' Secretary of State website by running a search on registered business names.
  • LLC names must include the terms LLC, Ltd., or limited liability company.
  • LLC owners who are using names that are different from their own must file a DBA form, which stands for “doing business as.” These are usually filed with both the state and the county.
  • Every LLC must file articles of incorporation, which explains how many owners it will have and how it will operate. Contact the state office to obtain the necessary form.
  • LLCs must have a registered agent who is appointed to receive communication on the company's behalf. It must also have a registered street address at which it can receive communications from the state government.
  • States charge filing fees to form LLCs, and these range widely.
  • Every state has its own requirements for licenses and permits you must obtain before doing business.
  • LLCs must obtain an Employer Identification Number from the IRS if it plans to hire employees.

Choosing a Management Structure

LLCs must choose between two management structures: member-managed and manager-managed.

  • Member-managed LLCs: All members (owners) participate in the day-to-day operations. This is the default management style unless otherwise stated in the Articles of Organization.
  • Manager-managed LLCs: The members designate one or more managers—who may or may not be members—to handle operations, while non-managing members remain passive investors.

The management style impacts legal responsibilities and should be clearly outlined in the operating agreement to comply with LLC regulations and prevent internal disputes.

Rules for LLC Membership

LLC owners are also referred to as members, and a few rules apply to these as well.

  • LLCs can have an unlimited number of members, or may also only have one member. Single-member LLCs are now allowed in every state in the U.S.
  • LLCs may be owned by individuals, other LLCs, foreign organizations or corporations.
  • A board of directors is not required for an LLC, nor does it need to keep meeting minutes.
  • LLCs may be managed by their members or by non-members, although in some states the LLC must have at least one manager who is a member.
  • If one of the LLC members decides to leave the organization, the LLC has to be dissolved and re-formed with the new group of members.

Reporting Beneficial Ownership Under the Corporate Transparency Act

As of January 1, 2024, most LLCs must comply with the Corporate Transparency Act (CTA) by filing beneficial ownership information with the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). This rule is designed to increase transparency and reduce illegal activity like money laundering.

Under this regulation:

  • LLCs formed before January 1, 2024 must report beneficial owners by January 1, 2025.
  • New LLCs formed in 2024 must file within 90 days of formation.
  • Beneficial owners include individuals who own at least 25% of the company or exercise substantial control.

Failure to comply may result in penalties of up to $500 per day and potential criminal charges.

LLC Regulations From the IRS

LLCs are not recognized as entities by the IRS for taxation purposes. Therefore, tax filing is not a difficult process, although it depends on how many members the LLC has. The LLC can also elect to file as a corporation. It is considered a disregarded entity if it has only one member, or a partnership if it has more than one. Most LLCs do not pay income tax at the corporate level unless they elect to be taxed as a corporation.

States do not always follow the same regulations as the IRS for tax purposes. Therefore, no matter what the federal rules state, LLC owners need to make sure they understand the state rules as well. 

State Tax Requirements and Franchise Taxes

While the IRS governs federal tax treatment, states impose their own LLC tax regulations. In many states, LLCs must pay an annual franchise tax or fee, even if the business earns no income during the year. For example:

  • California charges an $800 annual minimum franchise tax.
  • Delaware and Texas levy franchise taxes based on business revenue.

In addition to franchise taxes, some states require LLCs to file annual or biennial reports and pay renewal fees. These requirements are critical to maintaining good standing and avoiding administrative dissolution.

Liability Protection and Business Profit Regulations

The main reason for choosing to form an LLC is to limit the liability for each member. The liability for each member is limited to what they contribute to the business, and their personal assets are not at risk. In the event of debts or litigation, the LLC members' homes, cars, savings accounts, etc. may not be seized. 

Profits may be distributed among LLC members any way they choose, and they can decide what percentage each will receive no matter what percentage each member owns. By contrast, corporations are required to issue dividends, which are profit distributions, to shareholders according to the amount they have invested in the business. 

However, unlike corporations, LLC members may not be paid wages. Their profits are subject to self-employment tax and are reported on individual members' tax returns.

Special Considerations for Foreign and Professional LLCs

Some LLCs are subject to specialized regulations depending on their scope or profession:

  • Foreign LLCs: An LLC formed in one state but doing business in another must register as a “foreign LLC” in that additional state. This process involves filing for a Certificate of Authority and paying applicable fees.
  • Professional LLCs (PLLCs): Certain professions (e.g., doctors, lawyers, accountants) must form a PLLC rather than a standard LLC. These entities are subject to licensing board approvals and may have restrictions on ownership or service types.

Each state has different rules for foreign and professional LLCs, so business owners should review their state’s LLC regulations carefully.

Ongoing Compliance and Recordkeeping Obligations

To maintain liability protection and stay in good standing, LLCs must meet various ongoing compliance responsibilities:

  • Annual Reports: Most states require an annual or biennial report detailing business activities, ownership, and registered agent info.
  • Licensing and Permits: LLCs must renew applicable state and local business licenses.
  • Operating Agreement Updates: Changes in management or membership should be reflected in the operating agreement.
  • Recordkeeping: Maintain accurate financial records, meeting minutes (if applicable), and copies of key documents like the Articles of Organization.
  • Registered Agent Requirements: LLCs must continuously maintain a registered agent and updated contact information with the state.

Noncompliance can result in loss of liability protection, fines, or administrative dissolution by the state.

Frequently Asked Questions

1. What are LLC regulations? LLC regulations are state and federal rules governing how a limited liability company is formed, operated, and taxed.

2. What is the Corporate Transparency Act and how does it affect LLCs? The CTA requires most LLCs to report beneficial ownership details to FinCEN to increase corporate transparency and prevent financial crimes.

3. Are LLCs taxed at the state and federal level? Yes. Federally, LLCs are usually pass-through entities, but states may charge franchise taxes or require separate filings.

4. Do LLCs need to file annual reports? Most states require LLCs to submit annual or biennial reports to remain in good standing and legally operate.

5. Can an LLC be managed by non-members? Yes, in a manager-managed LLC, non-members can be appointed as managers, depending on the terms set in the operating agreement.

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