Key Takeaways

  • LLC rules vary by state but share foundational guidelines such as member flexibility, naming requirements, and liability protections.
  • LLCs can choose how they are taxed: as sole proprietorships, partnerships, or corporations, offering strategic flexibility.
  • New federal rules now require LLCs to report beneficial ownership to FinCEN to prevent illicit financial activity.
  • Annual state compliance may include fees, reports, and franchise taxes.
  • Understanding operational rules, such as required documents and ongoing compliance, is critical to maintaining good standing.

There are several LLC rules that must be followed, no matter what state you form your business in. Also, individual states may have regulations and guidelines that must be met. LLCs are created by state statute as a hybrid that combines the limited liability provided by corporations with the taxation process of partnerships and sole proprietorships.

LLCs are relatively simple for small business owners to create. They have many advantages over other forms of business entity, including the separation of personal and business assets and the way the business is taxed. Before forming your LLC, you'll want to make sure you understand the guidelines that apply in your state.

Standard LLC Guidelines

There are many standard guidelines and rules that apply to LLCs in every state. For one thing, ownership is not restricted to a certain number of members, with no maximum. Entities such as other corporations or non-U.S. citizens may be LLC members. 

One of the most important differences between an LLC and a corporation is the difficulty of transferring ownership interests in an LLC. If a member chooses to leave, the LLC must be dissolved. This is also true if a member dies. The LLC must then be re-formed with the remaining members if they want to continue the business. 

Articles of organization may be created at the time that the business is formed, and if the method for dealing with a member's departure is included, the LLC may be able to continue without being dissolved and re-formed. 

Beneficial Ownership Reporting Requirements

As of January 1, 2024, new federal regulations from the Financial Crimes Enforcement Network (FinCEN) require most LLCs to report information about their “beneficial owners” — individuals who own or control at least 25% of the company or exercise substantial control over it. This rule, part of the Corporate Transparency Act, is designed to combat illicit financial activities by increasing transparency of business ownership.

Reporting LLCs must submit the following to FinCEN:

  • Full legal name
  • Date of birth
  • Residential address
  • An identifying number from an acceptable identification document (e.g., passport or driver’s license)

Failure to comply can result in significant civil and criminal penalties. This filing is separate from state registration or tax requirements, and most existing LLCs have until January 1, 2025, to file their initial reports, while new LLCs formed in 2024 generally have 90 days from formation​.

Creating an LLC

No matter which state you're in, LLC formation involves the same steps:

  • You must choose a business name that is unique from any other business in your state.
  • The name of the company must end with “LLC,” “Limited Liability Company,” or similar.
  • The name of the company may not include prohibited words such as bank, corporation, city, and insurance, just to name a few.
  • You can research to see if your name is available at your state's LLC office.
  • Most states allow you to reserve your chosen name for a certain amount of time by paying a fee.
  • The LLC is formed officially when you file the articles of organization.
  • The articles of organization must include basic information such as how many owners it will have.
  • An LLC is required to have a registered agent to receive official communication on behalf of the business.
  • Your LLC will need to obtain an Employer Identification Number (EIN) from the IRS.

Specific states may have their own rules that LLCs may follow. In your state, the articles of organization may involve a form you can fill out and may request different information. Your state may also call it a certificate of formation or certificate of organization.

Some states require you to create an operating agreement for your LLC. In most states, you do not need to file this with the state LLC office. However, it is important that you create one for your own use since it prevents future problems from occurring.

Publication requirements are another rule that some states have for LLCs. In addition to filing articles of organization, you may need to publish a notice in a newspaper that states your intention to form an LLC. This notice is required to run for a certain period of time, after which you need to submit an affidavit of publication to the office that deals with LLCs in your state. If your state has this rule, most local newspapers will be familiar with the process and can help you through it.

Ongoing State Compliance Requirements for LLCs

After an LLC is formed, states generally require several ongoing compliance measures to maintain active status and good standing:

  • Annual Reports: Most states require LLCs to file annual or biennial reports to update contact information, members, and registered agents.
  • Franchise or Annual Fees: States often impose annual fees or franchise taxes on LLCs, which vary depending on revenue, profit, or a flat rate.
  • Registered Agent Updates: If your registered agent changes, you must promptly update the information with your state’s filing office.
  • Business Licenses: Depending on the LLC's industry or locality, additional professional or municipal business licenses may be required.
  • Operating Agreement Updates: Significant changes to the LLC’s structure or member responsibilities may necessitate updates to the operating agreement.

Failing to meet these obligations can result in penalties, suspension, or administrative dissolution of the LLC.

LLC Tax Regulations

The LLC is an entity registered with the state, but the IRS does not recognize it as a classification for taxation. It can choose to be taxed as a sole proprietorship if it has only one member. If it has more than one member, it is taxed like a partnership. It can also elect to be taxed as a corporation. 

If the LLC is taxed as a sole proprietorship or a partnership, it does not pay taxes, but rather the owners report all profits on their personal tax returns. Corporations pay taxes at the corporate level and have the advantage of potentially reducing owners' self-employment tax.

Consult with a qualified attorney or CPA to determine which is right for your business, and to make sure all rules are followed.

Choosing a Tax Classification for Your LLC

LLCs are not taxed by the IRS as a default entity type. Instead, they may elect to be treated as one of the following for federal tax purposes:

  • Disregarded Entity (Sole Proprietorship): For single-member LLCs, income is reported on the owner’s personal tax return (Form 1040, Schedule C).
  • Partnership: Multi-member LLCs default to partnership status and file Form 1065 with accompanying K-1s issued to members.
  • S Corporation: LLCs can elect S corp status by filing IRS Form 2553, allowing for pass-through taxation while potentially reducing self-employment taxes.
  • C Corporation: LLCs may also opt to be taxed as C corporations by filing IRS Form 8832. This subjects profits to corporate tax rates and shareholders may pay taxes again on dividends.

The decision on how to be taxed should take into account business goals, administrative burdens, and potential tax implications. Consulting a CPA or tax professional is strongly recommended to ensure the most advantageous classification​​.

Frequently Asked Questions

  1. What are the basic LLC rules every owner should know?
    LLC owners must comply with naming rules, register with the state, maintain a registered agent, and file formation documents like Articles of Organization.
  2. Do LLCs need to file taxes separately from their owners?
    It depends on the tax classification. By default, LLCs are pass-through entities, but they may elect to be taxed as corporations.
  3. What is the FinCEN beneficial ownership reporting rule?
    Starting in 2024, most LLCs must report ownership details to FinCEN, including personal information for anyone with significant control or ownership.
  4. How often do LLCs need to file state compliance documents?
    Most states require annual or biennial reports, along with payment of franchise taxes or fees.
  5. Can an LLC be owned by another company or a non-U.S. citizen?
    Yes, LLCs can have members that are other entities or non-U.S. citizens, depending on state law and the LLC’s desired tax classification.

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