What Is an LLC? A Complete Guide to Limited Liability Companies

Last updated on January 5th, 2026 at 03:12 pm

An LLC, or Limited Liability Company, is a flexible legal business structure that combines limited liability protection with the pass-through taxation benefits of a partnership or sole proprietorship. It protects the personal assets of its owners (called members), so their homes, savings, and other personal property are typically not at risk if the business faces debt or legal claims.

In this article, we will explain:

• What an LLC is and how it works
• Key advantages and disadvantages of forming an LLC
• What LLC taxes look like
• Costs associated with forming and maintaining an LLC
• How to register an LLC — with a focus on California LLC registration
• How LLCs differ from corporations, partnerships, and other business entities
• Helpful government resources for those looking to start an LLC

What is an LLC?

An LLC is a hybrid legal structure with characteristics of both corporations and partnerships (or sole proprietorships). It is formally created when you file formation documents (usually called Articles of Organization) with the state’s business filing office.

Unlike corporations, LLCs do not require boards of directors, annual meetings, or extensive formalities. Instead, members can agree (often in an Operating Agreement) how profits are distributed and how the business is managed.

Key Characteristics of an LLC

An LLC is defined by these core characteristics:

• Separate Legal Entity: Once formed under state law, an LLC becomes its own legal entity, separate from its owners, offering liability protection similar to a corporation.
• Flexible Ownership and Management: LLCs can have one or multiple members (individuals, other companies, or even foreign owners), and they can be member-managed or manager-managed.
• Pass-Through Taxation (Default): By default, profits and losses “pass through” to members’ personal tax returns, avoiding double taxation common with corporations. An LLC can also elect to be taxed as a corporation if beneficial.
• Limited Liability Protection: Members generally are not personally liable for business debts or judgments, protecting personal assets.

What are the advantages of an LLC?

LLCs offer multiple business advantages:

• Limited Liability Protection: Personal assets (home, bank accounts) are generally shielded from business debts or lawsuits
• Pass-Through Taxation: Profits and losses pass through to members’ personal taxes, avoiding the double taxation of C corporations
• Flexible Management and Ownership: LLCs allow varied ownership structures and flexible internal governance
• Tax Flexibility: LLCs can elect different tax treatments, including being taxed as an S corporation
• Increased Credibility: Forming an LLC can convey professionalism and trust to clients, vendors, and partners
• No Limit on Members: Most states allow unlimited members, including individuals, corporations, and foreign investors

What are the disadvantages of an LLC?

Even with many benefits, LLCs have limitations:

• Self-Employment Taxes: Unless you elect S-Corp taxation, members may owe self-employment taxes (Social Security and Medicare) on their share of income
• Annual Fees and Taxes: Some states, notably California, require franchise taxes or annual fees regardless of profitability
• Investor Limitations: LLCs generally cannot issue stock, which can limit certain types of investment compared to corporations
• Lifecycle Considerations: Some states tie LLC existence to member status — withdrawal or death can affect continuity unless operating agreements address this

LLC Taxes

LLC tax treatment depends on elections and federal tax classification:

• Default Pass-Through Taxation: Income is reported on members’ personal returns
• Optional Corporate Taxation: LLCs may elect to be taxed as a C or S corporation for potential tax benefits
• California Franchise Tax: In California, a minimum annual franchise tax (typically $800) applies

Cost of an LLC

The costs of starting and maintaining an LLC vary between states. However, in California, they typically include:

• Articles of Organization filing fee — approximately $70
• Initial Statement of Information — around $20
• Annual Franchise Tax — minimum $800/year
• Optional Registered Agent Service — $100–$300+/year

View the full breakdown of the fees in California.

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California LLC Registration

In California, the LLC registration process involves the following:

1. Choosing a Business Name — Must meet state naming requirements (unique, LLC designation).
2. Appointing a Registered Agent — Required in every state.
3. Filing Articles of Organization — With the state’s Secretary of State or equivalent.
4. Creating an Operating Agreement — Not always legally required but highly recommended.
5. Obtaining an EIN — Employer Identification Number from the IRS for tax reporting.
6. Complying with Annual Filings — Pay annual taxes and file required reports.

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What is the Difference Between a Corporation and an LLC?

While both corporations and LLCs provide liability protection by separating personal assets from business obligations, they differ significantly in how they are structured, taxed, managed, and regulated.

Key Differences Between a Corporation and an LLC:

• Structure: LLCs have flexible management; corporations have formal governance (board, officers).
• Taxation: LLCs use pass-through taxation; corporations can be double-taxed at corporate and shareholder levels.
• Ownership: Corporations issue stock; LLCs have membership interests.
• Formalities: Corporations require more formal compliance and record-keeping.

View the full breakdown of the differences between corporations and LLCs.

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What Is the Difference Between an LLP and an LLC?

Limited Liability Partnerships (LLPs) and Limited Liability Companies (LLCs) both offer limited liability protections, yet they are designed for different use cases and operate under distinct legal and regulatory frameworks. LLPs are most commonly used by licensed professionals, whereas LLCs are widely available to businesses across industries.

Key Differences Between an LLP and an LLC:

• Eligibility and Use: LLPs are often restricted to certain professional services (such as attorneys, accountants, or architects), while LLCs are available to most types of businesses.
• Liability Protection: LLCs generally provide broader liability protection for members, whereas LLP partners may remain personally liable for their own misconduct or professional negligence.
• Management Structure: LLCs can be member-managed or manager-managed, while LLPs are typically managed directly by partners.
• Tax Treatment: Both LLPs and LLCs are usually taxed as pass-through entities, though specific tax treatment can vary based on elections and jurisdiction.
• State Law Limitations: LLP formation and requirements vary significantly by state, while LLCs are universally recognized across all U.S. jurisdictions.

View the full breakdown of the differences between LLPs and LLCs.

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Summary of the Differences Between LLCs, Partnerships, and Corporations

	LLC	Partnership	Corporation
Liability Protection	Yes	Generally no (except LLP)	Yes
Taxation	Pass-through or corporate	Pass-through	Corporate (potential double tax)
Formalities	Flexible	Minimal	Structured governance
Ownership	Members	Partners	Shareholders

Helpful Government Resources

For official forms, tax guidance, and filing requirements, the following government resources may be helpful when forming an LLC.

U.S. Small Business Administration (SBA)

• Choose a Business Structure: General guidance on choosing a business structure

California Secretary of State – LLC Formation & Filing

• California Secretary of State – Primary authority for California LLC registration

Internal Revenue Service (IRS) – LLC Tax & EIN Information

• Limited Liability Company (LLC): Covers federal tax treatment and classification rules
• Apply for an Employer Identification Number (EIN): EIN registration for LLCs

California Franchise Tax Board – LLC Taxes

• California LLC Tax Information: Information on the $800 annual franchise tax, LLC fee thresholds, and filing obligations

California Department of Tax and Fee Administration (CDTFA)

• Register for Seller’s Permit and Business Taxes: Resources for businesses selling goods or taxable services

While these agencies provide required forms and guidance, an experienced business attorney can help ensure your LLC is properly structured, compliant, and aligned with your long-term goals.

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Frequently Asked Questions (FAQ)

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Conclusion

Forming an LLC is a strategic choice for many entrepreneurs seeking personal liability protection, tax flexibility, and simplified management. Whether you are considering California LLC registration, evaluating costs, or understanding how LLCs compare with corporations and partnerships, the right legal structure can significantly influence your business’s success.

At Law Advocate Group, LLP, we guide business owners through every step of forming and maintaining an LLC from entity selection and registration to compliance and growth planning. Contact us today to schedule a consultation and ensure your business is properly structured and protected.