Limited Liability Company (LLC)
A separate legal entity that shields your personal assets from business liability. Costs $50-$500 to form depending on state.
What Protection You Actually Get
If a lawsuit results in a judgment against your LLC, creditors can only go after LLC assets (business bank account, equipment, receivables). They cannot touch your personal savings, home, or retirement accounts.
This protection holds as long as you "maintain the corporate veil": separate bank accounts, don't commingle funds, pay annual fees, and file required reports.
The LLC does not protect against personal wrongdoing. If you personally commit fraud or personally injure someone, the LLC doesn't shield you from that liability.
What You Need to Do After Forming
- ✓Open a separate business bank account - never use personal accounts for business
- ✓Get an EIN (free from IRS, takes 5 minutes online)
- ✓File an operating agreement (even a simple one-page document)
- ✓Pay annual fees and file annual reports on time
- ✓Keep business and personal expenses 100% separate
- ✓Don't personally guarantee business debts unless absolutely necessary
LLC Taxes - Same as Sole Prop by Default
A single-member LLC is a "disregarded entity" by default. You still file Schedule C. You still pay self-employment tax. The IRS ignores the LLC for tax purposes and taxes you as if you were a sole proprietor.
The tax changes if you elect S-Corp status. At net profit above roughly $40,000, paying yourself a "reasonable salary" and taking the rest as distributions can reduce self-employment tax. This requires payroll, a separate tax return (Form 1120-S), and more complexity.
The liability protection of an LLC has nothing to do with the tax election.