How to Set Up an LLC

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Starting a business involves many important decisions, one of which is choosing the right legal structure. For many entrepreneurs, freelancers and small-business owners, a limited liability company (LLC) strikes the right balance between flexibility, cost and protection.

This guide walks you through everything you need to know about setting up an LLC in the United States. We’ll cover what an LLC is, why you might choose to set one up, the step-by-step process for forming one, state-specific considerations, ongoing compliance requirements and even the best business credit cards to help your LLC thrive and maximize its earnings.

Whether you’ve just started your first side hustle or are already scaling with contractors and employees, this is your comprehensive resource on how to set up an LLC.

What Is an LLC?

An LLC is a business structure that combines the liability protection of a corporation with the operational flexibility of a partnership or sole proprietorship.

Owners of an LLC are called members, and their personal assets are generally protected from business debts and lawsuits. Unlike with a sole proprietorship, your business is a legally separate entity.

Here’s a breakdown of some of the key aspects of an LLC.

Liability Protection

As its name suggests, an LLC limits the liability of its members.

In short, each members’ legal obligation to repay the business’ debts is limited to the amount they’ve invested in the business. This liability protection is known as the “corporate veil.”

Keep in mind that limited liability protection applies to the LLC’s members only—the business itself is fully liable to repay all debts because it’s a separate legal entity.

That means personal assets such as your car, house and savings are protected in the event of a lawsuit. However, all of the business’ assets are up for grabs when it comes to debt repayment and lawsuits.

Similarly, it’s important to understand that limited liability is not absolute—rather, it’s a benefit that members enjoy subject to meeting ongoing requirements. Specifically, members need to respect the boundary between themselves and the LLC and ensure that the LLC is set up and managed correctly.

For example, failing to follow corporate formalities (such as filing annual reports and keeping business records), undercapitalization, and commingling business and personal assets are just a few of the ways that members can lose their limited liability protection.

In these instances, the corporate veil is “pierced” and your personal assets are put at risk.

Flexible Management and Structuring Options

When you set up an LLC, you have many options to choose from when it comes to the type of LLC and its management structure.

Common types of LLCs include:

• Single-member LLC. A single-member LLC (SLLC) is formed with one member and affords a sole proprietor greater liability protection. In states that follow community property laws, such as Texas and Arizona, married couples can also form single-member LLCs because they’re treated as a single legal owner.
• Multi-member LLC. A multi-member LLC has two or more owners and is generally treated by the IRS as a partnership for tax purposes. However, in some cases the LLC may opt to be taxed as a corporation.
• Series LLC. In certain states, you can form a series LLC in which the “parent” LLC has multiple “series” within it, each with its own assets, liabilities and members. Each series’ liability is limited to its own individual assets, shielding itself from the other series’ debts and assets.This structure offers centralized management and asset protection benefits similar to a holding company but with the flexibility and tax benefits of an LLC.
• Professional limited liability company. Licensed professionals, such as doctors, lawyers and accountants, can form a professional limited liability company (PLLC) to limit their liability and protect themselves against the malpractice of other members. However, keep in mind that a PLLC doesn’t shield owners against the consequences of their own malpractice or negligence.
• Low-profit LLC. A low-profit LLC (L3C) is a for-profit business structure that combines the tax and limited liability benefits of an LLC with a social mission. This allows the company to earn profits and attract certain types of investments while not having to adhere to the strict requirements of a not-for-profit or nonprofit LLC.

Within these LLCs, management can be organized in one of the following ways:

• Member-management. Member-managed LLCs put their members in charge of the day-to-day decision-making and management of the company.
• Manager-management. Manager-managed LLCs appoint one or more individuals (who may or may not also be members) to manage the company.

Depending on the degree of control you want over your business, one type of management structure will suit you better than the other.

Pass-Through Taxation

One of the key advantages of an LLC is its default tax treatment.

By default, the IRS classifies single-member LLCs as “disregarded entities,” meaning the profits and losses are reported on the owner’s personal tax return.

Multi-member LLCs are treated as partnerships, and income flows through to members according to the terms of their operating agreement.

In both cases, this approach avoids the double taxation faced by traditional corporations where income is taxed both at the corporate level and again when distributed as dividends.

However, LLCs aren’t locked into this default. Owners can elect to have their LLC taxed as an S corporation or C corporation if it makes financial sense.

An LLC can elect to be taxed as an S corporation, which can lower self-employment tax obligations because only the salary portion of an owner’s compensation is subject to payroll taxes while distributions may not be. The downside to S corporations is that there are strict limitations regarding ownership and stock.

LLCs can also choose to be taxed as a C corporation. This means that the LLC pays corporate income tax on its profits and its owners are taxed again on the dividends they receive. Although this double taxation is usually unattractive to small businesses, some LLCs opt for it if they plan to reinvest profits in the company or eventually seek outside investors.

The flexibility to choose how your company will be taxed is one of the defining advantages of an LLC. It allows you to start simple with default pass-through taxation and adjust as your profits grow or your ownership structure becomes more complex.

How to Set Up an LLC

Forming an LLC involves a series of steps that, while generally consistent across the country, vary in detail from state to state.

Here’s a step-by-step overview of how to set up an LLC.

Step 1: Choose Your State of Formation

The first decision to make is where to form your LLC. For most businesses, the simplest and most cost-effective option is to form the LLC in the state where you will operate.

For example, if you live and work in Illinois, it rarely makes sense to form a business in Delaware or Nevada because you’d still have to register as a foreign LLC in Illinois and pay fees in both states. The only businesses that typically benefit from forming outside their home state are those with large national or international operations or those with privacy concerns that certain states accommodate.

Each state has its own costs and compliance burdens.

For instance, California requires an $800 annual franchise tax, making it one of the most expensive states to operate in. Wyoming, by contrast, is one of the cheapest, with formation fees of around $100 and annual reports costing as little as $60.

Delaware is famous for its Court of Chancery and predictable business laws, which appeal to corporations and investors, but small local businesses usually don’t need that level of sophistication.

Step 2: Choose a Name

Once you know the state, you need a name.

States require LLC names to be distinguishable from existing businesses, and they typically mandate that the name include “LLC” or “limited liability company.” Certain words, like “bank,” “insurance” or “university,” may require additional approvals.

Beyond legal requirements, a good business name should be clear, memorable and available as a web domain. Many entrepreneurs check the Secretary of State’s database and domain registries simultaneously to avoid conflicts later.

Step 3: Designate a Registered Agent

Every LLC must designate a registered agent.

This is a person or company with a physical address in the state who can receive legal papers, tax notices and service of process on behalf of your LLC.

You can act as your own registered agent if you live in the state, but this means your personal address will be public record and you must be available during business hours. Professional registered agent services are often a worthwhile investment for privacy and convenience.

Step 4: File Articles of Organization

The Articles of Organization, sometimes called a Certificate of Formation, is the legal document that creates your LLC.

It is filed with the Secretary of State or similar agency and requires basic information, such as the name of the LLC, the registered agent, the business address and whether the LLC is member-managed or manager-managed.

Filing fees range widely from one state to the next.

Step 5: Draft an Operating Agreement

Even if your state doesn’t legally require one, an operating agreement is essential.

This document governs how your LLC is run, how profits and losses are distributed, and what happens if a member leaves.

For single-member LLCs, it formalizes the separation between owner and business, which can help defend your corporate veil in court. For multi-member LLCs, it sets expectations and reduces disputes.

While you can draft your own agreement using templates, complex situations are best handled with legal advice.

Step 6: Obtain an EIN

An Employer Identification Number (EIN) is issued by the IRS and functions as the tax identification number for your LLC.

It’s required if you have more than one member, hire employees or want to open a business bank account. Even single-member LLCs often obtain one to avoid using their Social Security number on business documents. Applying online with the IRS is free and, if approved, your EIN is issued immediately; the online tool is available Mon–Fri, 7 a.m. to 10 p.m. ET.

Step 7: Open a Business Bank Account

To preserve your liability protection, you must keep personal and business finances separate. A dedicated business bank account is the cornerstone of this separation.

Banks usually require your Articles of Organization, EIN and sometimes your operating agreement. Some states also require LLCs to publish a notice of formation in a local newspaper, such as in New York, Nebraska and Arizona, and banks may ask for proof of compliance before opening accounts.

Step 8: Register for Taxes and Permits

Depending on your state and business type, you may need to register for state taxes, such as sales tax or employer withholding tax. Some industries also require professional or local licenses.

For example, contractors often need state licenses while restaurants must comply with health department permits. Ignoring these requirements can lead to fines or even closure.

Step 9: Maintain Ongoing Compliance

An LLC is not a set-it-and-forget-it structure.

States typically require annual or biennial reports that update information like your address and registered agent.

Some states, including California, also impose franchise taxes regardless of whether the LLC is profitable. Missing deadlines can result in late fees or administrative dissolution, so it’s important to calendar these obligations or hire a compliance service to monitor them.

Failing to comply can put both your business and personal assets at risk.

Who Should Set Up an LLC?

Not every entrepreneur needs an LLC, but for many, it’s the structure that makes the most sense.

If you’re a freelancer providing low-risk services and are comfortable accepting personal liability for your work, you may find that operating as a sole proprietor is sufficient.

However, even in professional services, lawsuits can arise unexpectedly. A client dispute or claim of negligence can expose your personal assets if you operate without a legal entity. Forming an LLC provides a layer of security that many freelancers find worthwhile once they begin earning steady income.

Real estate investors often use LLCs as a protective shell around their holdings. Placing rental properties in LLCs ensures that liabilities connected to the property, such as tenant lawsuits or slip-and-fall claims, don’t threaten your other assets. In states that allow series LLCs, investors can structure their portfolios in a way that separates each property into its own series while retaining centralized oversight.

Partnerships are another area where LLCs prove valuable. Without a formal structure, partners are personally liable for each other’s actions and debts. An LLC solves this by creating a separate legal entity while still allowing owners to share profits flexibly. The operating agreement serves as the partnership contract, ensuring that expectations are clear and disputes are minimized.

Finally, if you anticipate hiring employees or independent contractors, an LLC is advisable. Employment introduces liability risk, from workplace injuries to wage disputes. An LLC not only shields your personal assets but also enhances your credibility when recruiting and contracting with others. Many clients, vendors and partners prefer to do business with entities rather than individuals, and an LLC signals that you take your enterprise seriously.

Alternatives to an LLC

Although LLCs are a popular choice, they’re not the only option.

The alternatives to forming an LLC fall into two broad categories: simpler structures with fewer formalities and more complex ones that may offer advantages in specific circumstances.

The simplest option is the sole proprietorship. In this model, the business is legally indistinguishable from its owner. This makes setup effortless—there is no state filing, no separate tax return and often little more than a local business license is required.

The tradeoff is that you assume full personal liability for debts, lawsuits and obligations. This may be acceptable for small side hustles with minimal risk, but it is rarely the best choice once meaningful money or liability is involved.

Partnerships extend the sole proprietorship concept to two or more owners. They are easy to form, but they come with even more risk because each partner can bind the business to obligations and debts.

For example, if your partner signs a contract that the business cannot fulfill, you could be personally responsible even if you disagreed with the decision. General partnerships thus carry significant dangers, but limited partnerships and limited liability partnerships attempt to mitigate some of them.

On the other end of the spectrum are corporations.

A corporation is a separate legal entity with shareholders, directors and officers. It provides strong liability protection and can raise capital by issuing stock. However, it comes with heavier administrative requirements, such as annual meetings and more complex tax filings.

A C corporation is subject to double taxation, which is often a disadvantage for small firms. An S corporation avoids double taxation but has strict eligibility rules—it can’t have more than 100 shareholders; all must be U.S. citizens or residents; and it can’t issue multiple classes of stock.

When comparing these alternatives, the LLC often emerges as the middle ground. It is more protective and flexible than a sole proprietorship or partnership but less burdensome than a corporation. That balance explains why the LLC has become the most popular entity choice for small businesses in the United States.

Best Business Credit Cards for an LLC

Once your LLC is up and running with its own bank account and EIN, you can apply for a business credit card. These cards serve multiple purposes—they help separate business and personal expenses, build a credit history for your company and provide rewards points or cash back that can help offset operating costs.

When selecting a card, consider your company’s spending habits. If much of your budget goes toward advertising or travel, a card that offers enhanced rewards in those categories will deliver more value. If your expenses are broad and varied, a flat-rate cashback card or a card with a high baseline rewards rate will be the better choice.

Similarly, cards that offer the ability to issue employee cards help simplify expense tracking as your business grows.

You’ll also want to evaluate whether you will realistically meet the minimum spending requirements to earn the card’s welcome bonus. If you’d struggle to do so, consider applying for the card at a time when big expenses, such as tax payments, renovation costs or capital investments, are on the horizon. This way, it’ll be easier to reach the card’s minimum spend through leveraging your natural expenditure.

Some of the best business credit cards for an LLC include:

• Chase Ink Business Cash® Credit Card ($0 annual fee): Earn 5% cash back on the first $25,000 spent in combined purchases at office supply stores and on internet, cable and phone services each account anniversary year; earn 2% cash back on the first $25,000 spent in combined purchases at gas stations and restaurants. Issue free employee cards with spending limits.
• Chase Ink Business Preferred® Credit Card ($95 annual fee): Earn 3X points per dollar spent on the first $150,000 in combined purchases in the following categories: shipping purchases; advertising purchases made with social media sites and search engines; internet, cable and phone services; travel. Free employee cards with spending limits.
• Capital One Spark Miles for Business ($0 annual fee in first year, then $95 thereafter): Earn 2X miles on all purchases and issue free employee cards with spending limits.
• Capital One Venture X Business ($395 annual fee): Earn 2X miles on all purchases, issue free employee cards with spending limits and enjoy access to a range of luxury travel perks, such as complimentary lounge access.
• Capital One Spark Cash ($0 annual fee in first year, then $95 thereafter): Earn 2% cash back on all purchases and issue free employee cards with spending limits.
• The Blue Business® Plus Credit Card from American Express ($0 annual fee, see rates and fees): Earn 2X points per dollar everyday on everyday business purchases on up to $50,000 per calendar year (1X points thereafter). Issue free employee cards with spending limits.

While this list isn’t exhaustive, it covers some of the most cost-effective business credit cards for LLCs that give you the greatest bang for your buck in terms of annual fees vs. earning rates and perks.

Final Thoughts

Forming an LLC is one of the most consequential early steps in building a business. It provides legal protection, offers tax flexibility and enhances your professional credibility, all without the rigid structures of a corporation.

The process requires careful attention to state-specific rules, but the general path—choosing a state, selecting a name, appointing a registered agent, filing Articles of Organization, drafting an operating agreement, obtaining an EIN and opening a bank account—is consistent nationwide.

An LLC is not a one-size-fits-all solution, but for many entrepreneurs it strikes the right balance between simplicity and protection. With proper setup and ongoing compliance, your LLC can provide the foundation on which to grow your venture, whether it remains a solo consultancy or expands into a company with employees, assets and multiple revenue streams.