The US LLC as a legal form: what an LLC is and how it works

The LLC is a fairly young legal form that has only existed since the 1970s. Today it is available in every US state. For tax purposes, an LLC is usually treated as a partnership, but for liability purposes it is a company with limited liability.

You can find the key advantages of the LLC here. All the facts about the American C Corporation at a glance are here.

1Forming the company

LLCs can be formed in every US state. Which state suits your plans best should mainly come down to practical considerations (proximity to potential employees, customers and so on).

Other points to consider when forming an LLC:

1.1Applicable corporate law

As is usual in the English-speaking world, the USA follows common law. Corporate law is a matter for the states and varies from state to state, but the fundamentals are the same.

1.2Time to form

Formation times differ from state to state. Two days to two weeks is entirely normal.

1.3Formation fees

Formation fees also vary widely from state to state. Fees between $50 and $500 are typical.

2Officers and directors

An LLC is not required to have any corporate bodies, but it can appoint one or more managers to run the company's business.

Otherwise, management lies with the members: every member takes part in running the business, unless the Operating Agreement provides otherwise.

3Share capital & shareholders

An LLC has no statutory minimum capital. How the members hold their stakes in the LLC and how profits are split between them is purely a matter of private agreement.

3.1Operating Agreement

The members can draw up an agreement among themselves. This Operating Agreement is required by law in California, New York, Missouri, Maine and Delaware, and optional for LLCs in other states. The Operating Agreement is never made public.

3.2Membership certificates

Membership certificates can be issued if you wish. They are not stock certificates, though; they simply confirm the member's contribution.

4Liability

The liability rules are comparable to those of European limited companies. The LLC is, in short, a company with limited liability. The company is liable with all of its assets. Members are liable only up to the contribution they paid in, not with their personal assets.

The company is liable as a whole, even when the claim arises from a member's misconduct.

Managers or members are personally liable only if negligence or intent can be proven.

In extreme cases, though, the liability shield may only partly hold: if it can be shown that a single-member, single-manager LLC is run like a personal piggy bank, ignoring the company's status as a separate legal entity, liability protection can be limited.

5Public record with the state

Every state keeps its own business register, and these can be searched online. Exactly what gets published differs from state to state.

As a rule, the details of one member or manager and the company's registered address are made public. Because we provide a US manager for every LLC we form, that person's details appear in the state business register.

5.1Ongoing state filings (annual report)

Most states, though not all, require an annual report. The annual report should not be confused with a tax return. The annual report is simply a filing with the state business register confirming the company details on record (such as registered address, management and business purpose).

Some states require a report every two years instead of every year. Preparing and filing the annual report is included in our annual fee; state fees are charged separately.

5.2Annual state fees

Annual fees also differ from state to state. Some states only charge a fee when you file the annual report. Others levy an additional flat tax (franchise tax).

6Taxation

Learn more about how the LLC is taxed on this page

An LLC can choose whether to be classified for tax purposes as a partnership or as a corporation. 99% of all LLCs choose partnership classification. Every LLC we form is taxed as a partnership.

The LLC itself then pays no tax; instead, tax is paid at the level of the members. The LLC still has to file its own return (partnership tax return).

If you are a foreign member of an LLC, you must file a US income tax return (covering only your US income). You are then taxed like a US taxpayer. Expect a tax burden of typically 15% to 30%, plus state tax.

The LLC must withhold tax of up to 37% on distributions (the rate for individual members under § 1446; 21% for corporate members, 30% on non-business US income). Members get back any overpaid tax once they file their income tax return.

Whether the LLC's profits are then taxed again in your country of residence depends on your specific situation and on where you live.

In short

• The LLC has existed since the 1970s and is available in every state; for tax purposes it is usually a partnership, for liability purposes a company with limited liability.
• It needs no corporate bodies and no minimum capital; ownership and profit sharing are set out in the Operating Agreement, which is never made public.
• Members are liable only up to their contribution, as long as the company is not run like a personal piggy bank.

How we help you

• Form an LLCThe US LLC with a permanent establishment, turnkey in six states.
• Form a Limited PartnershipThe US LP for structures with a general partner and limited partners.
• Form a CorporationThe US corporation (Inc) for growth, investors and your visa.
• Apply for an EINYour company's US tax ID, applied for by us.
• LLC and LP Tax ReturnForm 1065 and K-1 for your LLC or LP.
• Company formation consultationEntity type, state and tax consequences, before you commit.