Tax
Limited Liability Company (LLC)
A flexible legal entity that combines personal liability protection with passthrough taxation by default. The default legal form for most U.S. small businesses because it separates owner liability from business liability without triggering C-corp double taxation.
An LLC is a state-law entity that separates owner liability from business liability. Single-member LLCs are taxed as disregarded entities (Schedule C); multi-member LLCs as partnerships. Either can elect S-corp or C-corp tax treatment.
Most small businesses choose LLC for the legal protection and tax flexibility. The tax election is a separate decision from forming the LLC.
The four tax paths an LLC can take: (1) single-member disregarded (default for solo owners — reports on Schedule C or E, no separate return), (2) multi-member partnership (default for 2+ owners — files 1065, K-1s), (3) S-corp election (files Form 2553, then 1120-S annually — enables the wage/distribution split), (4) C-corp election (files Form 8832 then 1120 — rarely useful except for QSBS eligibility). The election is separate from the legal form and can be changed with IRS consent.
Piercing the LLC veil is the risk owners underestimate. An LLC only protects owner assets when it's treated as a real entity: separate bank account, no commingled personal spending, board resolutions where required, adequate capitalization, and consistent formalities. A courts-of-appeal case that pierces the veil (usually for fraud, undercapitalization, or extreme informality) leaves the owner personally liable for the business's debts. Basic hygiene: never use the business account for personal transactions, ever.
State-tax overlay varies enormously. California's $800 minimum franchise tax + LLC gross-receipts fee kicks in the day the entity is formed regardless of revenue. Texas has no franchise tax below the no-tax-due threshold. Delaware charges an annual franchise tax and a registered agent fee but no state income tax on non-Delaware business. New York has publication requirements that cost $500-$2,000+ depending on county. Choose formation state based on the state you actually operate in, not on Delaware's name — a Delaware LLC operating in California still owes California's $800 as a foreign LLC.
Common pitfalls
- Confusing the LLC legal form with its tax form; they're separate decisions
- Failing to register foreign LLCs in states where you actually do business
- California's $800 minimum franchise tax applies to every LLC operating in CA
- Commingling personal spending in the business account, which is the fastest way to lose the liability shield in court
- Forming a Delaware LLC by default despite operating entirely in another state; you now owe TWO state filings and pay Delaware's registered-agent fee for no benefit
Related service
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Federal, state, and local returns prepared and reviewed by a licensed CPA, with the planning done before year-end rather than after it.