The usual steps to start an LLC are to pick a name, appoint a registered agent, file articles of organization with your state, sign an operating agreement, get a free EIN from the IRS, and open a business bank account. An LLC shields your personal assets and, by default, passes profits through to its owners. It often suits freelancers and bootstrapped businesses; startups raising venture capital usually find investors expect a C corporation.
Definition: A limited liability company (LLC) is a state-registered business entity that shields its owners (members) from personal liability for company debts and lets them choose how the business is taxed.
Forming an LLC takes an afternoon. Choosing whether you should form one at all is the decision that matters, and it mostly comes down to one question: will you ever take venture money?
What is an LLC and why start one?
An LLC is a separate legal entity. If the business is sued or can't pay its debts, your home, savings and personal property are generally protected, as long as you keep business and personal affairs separate and don't personally guarantee the debt.
Key benefits of an LLC:
- Personal liability protection
- Pass-through taxation by default, which avoids a separate entity-level income tax
- Fewer formalities than a corporation
- Flexible profit splits and management set by the operating agreement
Often a good fit for: freelancers, consultants, student businesses, agencies, real estate holdings and other companies that plan to grow on revenue rather than venture capital.
How LLC taxes work
The IRS has no separate LLC tax classification. Instead, it applies defaults:
- A single-member LLC is treated as a disregarded entity, so income is reported on the owner's personal return (it is still a separate entity for employment taxes and certain excise taxes).
- A multi-member LLC is treated as a partnership and files a partnership return, with each member reporting their share.
An LLC can elect a different classification. Form 8832 lets it be taxed as a corporation, and an eligible LLC can also elect S corporation status, which some owners use to manage payroll taxes. Under the default treatment, owners who work in the business generally owe self-employment tax (Social Security and Medicare) on their share of profits, so model both options with an accountant.
Whatever the state requires, we'd have a written operating agreement covering ownership, roles, voting, profit sharing and what happens when a member leaves. It's cheap now and priceless the day two co-owners stop agreeing.
Types of LLCs explained
Single-member LLC. One owner, simple taxes, full control. Example: a college student running a graphic design business forms a single-member LLC to separate business risk from personal assets.
Multi-member LLC. Two or more owners who share profits, losses and management. A detailed operating agreement matters most here. Example: two friends starting a software development agency.
Series LLC. A parent LLC that creates separate "series," each able to hold its own assets and members with liability kept separate. Only some states authorize them; Delaware does, and it charges a separate annual tax for each registered series. Rules and tax treatment differ by state, so check with counsel. Example: a real estate investor holding each rental property in a separate series.
Member-managed vs. manager-managed. In a member-managed LLC, the owners run the business. In a manager-managed LLC, members appoint one or more managers, which suits companies with passive investors.
How much it costs to start an LLC, by state
Costs vary a lot by state, so check your secretary of state's fee schedule before you file. A few examples, based on state sources at the time of writing:
| State | Formation fee | Ongoing |
|---|---|---|
| Delaware | $110 certificate of formation | Flat annual tax, due June 1 ($400 from the 2026 tax year) |
| California | Articles of organization fee | $800 annual tax, plus an extra LLC fee once total income reaches $250,000 |
| Massachusetts | $500 certificate of organization | $500 annual report |
Delaware's annual LLC tax. Delaware LLCs file no annual report but pay a flat annual tax for the prior year by June 1, with a $200 penalty plus 1.5 percent monthly interest if they pay late. House Bill 400, signed May 21, 2026, raised the tax from $300 to $400 (and the tax on each registered series from $75 to $100), with those changes taking effect January 1, 2026. Because each June 1 payment covers the prior calendar year, the $400 amount generally first applies to the payment due June 1, 2027. As of September 22, 2026, both the Division of Corporations' LLC tax instructions and its general annual report and tax page list $400.
California. The Franchise Tax Board says every LLC doing business or organized in California owes the $800 annual tax each year until the LLC is canceled, even if it does no business. The first-year exemption applied only to tax years beginning in 2021 through 2023. That's $800 a year for an LLC you forgot you had.
Beneficial ownership reporting no longer applies to US LLCs. FinCEN exempted all entities created in the US from Corporate Transparency Act beneficial ownership reporting in March 2025 and made that exemption permanent with a final rule in August 2026. Only foreign companies registered to do business in the US still report.
Step by step: how to start an LLC
- Choose a business name. Check availability with your state; state rules require the name to include "LLC" or an allowed variation. A trademark search is a good idea too. Picking the name itself is a separate exercise, and the guide to naming your startup keeps it to a week.
- Appoint a registered agent. A person or service with a physical address in the state who receives legal notices.
- File articles of organization (called a certificate of formation in some states, including Delaware) with the secretary of state, usually online, and pay the fee.
- Sign an operating agreement covering ownership, roles, voting, profit sharing, transfers and exits.
- Get an EIN. Apply online with the IRS after the LLC is formed. The IRS says it does not charge a fee for an EIN.
- Open a business bank account and keep business and personal money separate, which helps protect your liability shield.
After formation, calendar your state's annual report or tax deadline, register for state and local taxes and licenses, and keep a written record of major decisions.
Employee equity options in an LLC
LLCs don't issue stock, but they can still share ownership and upside:
- Profits interests: a share of future profits and appreciation above the company's value at grant. If structured correctly, they can receive favorable tax treatment at grant.
- Membership units: actual ownership units, similar to shares.
- Phantom equity: cash bonuses tied to company value, with no actual ownership.
- Unit options: the right to buy membership units at a set price.
Grants in an LLC carry partnership tax consequences (holders may receive K-1s), so involve a tax advisor. If broad equity plans are central to your hiring strategy, a corporation with an equity incentive plan is often simpler.
LLC vs. C corp: what to choose if you plan to raise venture capital
LLCs are flexible, but high-growth startups often form or convert to a Delaware C corporation. The common reasons:
- Venture capital fit. Many VC funds invest in C corp preferred stock and avoid pass-through income for their LPs. See how venture capital works.
- Standard stock options. Corporations can grant ISOs and NSOs under familiar plans.
- QSBS. The Section 1202 gain exclusion applies only to stock originally issued by a domestic C corporation. For stock issued after July 4, 2025, the One Big Beautiful Bill Act added partial exclusions after three years (50 percent) and four years (75 percent), raised the per-issuer cap from $10 million to $15 million, and raised the gross asset limit from $50 million to $75 million, according to The Tax Adviser.
- Well-developed corporate law and familiar documents for investors and acquirers.
"But I might never raise"
That's a real possibility, and increasingly a sensible plan. Plenty of good businesses grow on revenue, and with AI pushing up revenue per employee, some founders now expect to raise less or skip rounds entirely. We've written about that shift in VC in a seed-strapping era. For those founders, an LLC's simplicity and pass-through taxes are genuine advantages.
Our rule of thumb: if you're bootstrapping a service or lifestyle business, an LLC is often a sensible start. If you plan to raise venture capital in the next year or two, talk to a lawyer about forming a C corp from day one. Converting later costs time and legal fees, and QSBS holding periods only start once you hold corporate stock. If you genuinely don't know, that uncertainty is worth an hour with counsel before you file anything.
The guide to incorporating a startup covers the venture-backed setup step by step, how to start a corporation compares C corps and S corps, and choosing a startup lawyer helps you find counsel who fits.
If you're a first-time founder building toward a raise, 1752vc's Ignite startup academy, a 12-week live and remote program for founders in the early stages, is built for that stretch, especially if you're still working on an MVP.
Common LLC mistakes to avoid
- Skipping the operating agreement, especially with co-owners.
- Mixing personal and business funds, which can weaken liability protection.
- Missing annual taxes or reports, which can lead to penalties and possible loss of good standing.
- Paying for an EIN, which is free from the IRS.
- Forming an LLC when you plan to raise VC soon, then paying to convert.
The bottom line
An LLC is a good vehicle for a business that funds itself. It's an awkward one for a company that plans to sell preferred stock to a fund. Decide which of those you're building before you file, not after the first term sheet arrives.
The filing fee is the cheap part.
Picking the wrong entity is the expensive one.
Key takeaways
- An LLC protects owners' personal assets and is taxed as a disregarded entity or partnership by default.
- Starting one typically takes six steps: name, registered agent, articles of organization, operating agreement, EIN and bank account.
- Ongoing costs vary by state, from Delaware's flat annual tax (rising from $300 to $400 for the 2026 tax year) to California's $800 annual tax.
- US-created LLCs do not file beneficial ownership reports with FinCEN, a change made permanent in August 2026.
- Startups planning to raise venture capital or rely on QSBS usually find a C corporation fits better.
Frequently asked questions
It depends on the state. Delaware charges $110 to file a certificate of formation and Massachusetts charges $500, and ongoing costs range from annual report fees to California's $800 annual tax. The EIN is free from the IRS. It is worth budgeting separately for a registered agent and any legal help with your operating agreement.
By default, a single-member LLC is a disregarded entity and its income goes on the owner's return, while a multi-member LLC is taxed as a partnership. An LLC can elect to be taxed as a corporation with Form 8832, and an eligible LLC can elect S corporation status. The right choice depends on profits, payroll and plans for outside investment.
Many founders form a C corp, usually in Delaware, if they expect to raise venture capital soon. Most VC funds invest in C corp preferred stock, want standard stock option plans, and value QSBS, which LLC interests cannot qualify for. An LLC still makes sense if you plan to grow on revenue first, but converting later adds cost.
Not every state requires one, but we would recommend having one regardless. It sets ownership, decision rights, profit sharing and exit terms, and it helps show that the LLC is a separate entity. For multi-member LLCs it is the main tool for resolving disputes before they become lawsuits.
Delaware LLCs pay a flat annual tax, due June 1, for the prior year. House Bill 400 raised it from $300 to $400 starting with the 2026 tax year, so the $400 amount generally first applies to the June 1, 2027 payment. As of September 22, 2026, the Division of Corporations' pages list the $400 amount.
Sources
- IRS: Limited Liability Company (LLC)
- IRS: Get an Employer Identification Number
- Delaware Division of Corporations: LLC/LP/GP Franchise Tax Instructions
- Delaware General Assembly: House Bill 400 (fees and taxes administered by the Secretary of State)
- California Franchise Tax Board: Limited Liability Company
- Massachusetts Secretary of the Commonwealth: Corporations Division Fee Schedule
- FinCEN: FinCEN Permanently Ends Beneficial Ownership Reporting Requirements for Millions of Small Business Owners
- The Tax Adviser: QSBS Gets a Makeover, What Tax Pros Need to Know About Sec. 1202's New Look
Disclaimer: This guide is for general education only and is not legal, tax or investment advice. Laws, market data and program terms change, so it may not reflect the latest developments or fit your situation. Treat it as a starting point, not a source of truth, and talk to a qualified lawyer, accountant or financial adviser before you make decisions.
