LLC Formation Guide

Last updated: July 2026 · Reviewed quarterly. State fees and federal rules change, so confirm the current details with your state and the IRS before you file.

An LLC is the most popular way for a freelancer or small business owner to go from side hustle to real company. It gives you legal protection, a more professional look, and flexible taxes, without the heavy paperwork of a corporation. Best of all, you can set one up yourself in a single sitting.

This guide walks through the whole process in plain language. You will learn what an LLC actually does, whether you need one yet, and the exact steps to form it. We also cover the real costs, how an LLC is taxed, and the one federal rule that changed in 2025 and confuses almost everyone. By the end you will know how to start an LLC with confidence, and how to avoid paying for things you can get for free.

What is an LLC, and why form one?

LLC stands for limited liability company. It is a legal business structure that sits between a sole proprietorship and a corporation. When you form one, your business becomes its own legal entity, separate from you as a person. That separation is the whole point, and it delivers three real benefits.

The first benefit is liability protection. If your business is sued or cannot pay a debt, your personal assets, like your home and savings, are generally shielded. Only the business assets are at risk. The second benefit is credibility. Adding “LLC” to your name signals to clients, banks, and partners that you run a real operation, which can help you win work and open a business bank account. The third benefit is tax flexibility. By default an LLC is taxed like a sole proprietorship, with profits passing straight to your personal return, but you can later elect to be taxed as an S corporation to save on self-employment tax as you grow.

An LLC is not always necessary, though. If you are testing an idea with almost no income and no liability risk, you may not need one yet. The protection matters most once you have assets to lose, clients who could sue, or income worth shielding. For most serious freelancers, that point comes quickly.

LLC vs sole proprietorship: which do you need?

Right now, if you work for yourself and have not formed anything, you are already a sole proprietor by default. It costs nothing and requires no paperwork, but it offers no separation between you and the business. Every debt and lawsuit is personally yours. That is the core difference the table below makes clear.

The choice comes down to risk and income. Choose the sole proprietorship if you are just starting, earn little, and face no real liability. Choose the LLC once you have income to protect, work that could expose you to a claim, or a plan to grow. Because forming an LLC is cheap and fast, most people who are serious about their business do it sooner rather than later.

How to form an LLC in six steps

The process is the same in every state, with only small differences in fees and forms. You can complete all six steps yourself on your state’s Secretary of State website, or pay a service to handle the filing. Here is exactly what each step involves.

How much does it cost to form an LLC?

The one cost you cannot avoid is the state filing fee, because it goes straight to the government and is the same whether you file yourself or use a service. It varies widely by state, from $35 in Montana to $500 in Massachusetts, with a national average near $132. The table below shows a sample of common states so you can gauge yours.

Beyond the state fee, your only real decision is whether to file yourself or pay for help. Doing it yourself costs nothing extra. A formation service typically charges from $0 to a few hundred dollars, and the value depends heavily on the registered agent renewal and the add-ons, which is where the pricing games hide. Our guide to the best LLC formation services compared breaks down the real total cost of each option and exposes the upsell traps to watch for.

One planning note saves people real money. Do not form in Delaware or Wyoming just because you read they are cheaper, unless you actually operate there. If you form out of state while living elsewhere, you usually have to register as a foreign LLC in your home state too, paying two sets of fees and two registered agents. For nearly every freelancer, the right formation state is the one you live and work in.

Should you file yourself or use a service?

Once you understand the six steps, the real question is who clicks the buttons. Both paths end with the same legal LLC, so this is about time, privacy, and how much hand-holding you want. Neither choice is wrong, and the right one depends on your situation.

Filing yourself is the cheapest route, since you pay only the state fee and keep the rest. It suits anyone forming in their home state who is comfortable filling in a government form and does not mind being their own registered agent. The trade-off is that you handle the annual report reminders and put your own address on the public record. For a confident do-it-yourselfer, that is a fair deal for the savings.

A formation service earns its fee in three situations. The first is privacy, where you want a company address on the public record instead of your home. The second is convenience, where you would rather never track a compliance deadline yourself. The third is forming out of state, where a local registered agent is required and you have none. If one of those fits, a service is worth it, but the price you pay varies enormously between providers. Before you commit, read our comparison of the best LLC formation services, which ranks them by real total cost and flags the checkout tricks that inflate the bill.

How is an LLC taxed?

By default, an LLC is a pass-through entity, which means the business itself pays no federal income tax. Instead, the profits pass through to you and you report them on your personal return. A single-member LLC is taxed like a sole proprietorship on Schedule C, and a multi-member LLC is taxed like a partnership. This keeps things simple and avoids the double taxation that hits corporations.

The catch is self-employment tax. As a pass-through owner, you pay both income tax and the 15.3% self-employment tax on your profits, and no one withholds it for you. That means making estimated quarterly tax payments to the IRS. Once your profit grows, usually somewhere past a few tens of thousands of dollars in net income, you can elect to have your LLC taxed as an S corporation. That election lets you split income between salary and distributions, which can lower the self-employment tax you owe. It adds paperwork, so it is worth doing only once the savings clearly outweigh the cost.

Do LLCs need to file a BOI report in 2026?

This is the rule that changed and still confuses people. The Corporate Transparency Act created a beneficial ownership information report, known as BOI, that most small companies were once expected to file with FinCEN. Then in March 2025, FinCEN issued an interim final rule that stopped enforcing the requirement against domestic US companies.

As of 2026, domestic LLCs are not required to file a BOI report. The enforcement now falls only on certain foreign companies registered to do business in the United States. The requirement technically remains on the books but is not being enforced for domestic entities, and Congress is still weighing whether to reform or repeal it entirely. Because the situation could change, it is wise to keep your ownership details organized in case the rule is revived with a new deadline. Always confirm the current status on the FinCEN website before assuming you have nothing to file.

Common mistakes to avoid

Most LLC problems are self-inflicted and easy to sidestep once you know them. The biggest is mixing personal and business money. If you pay for groceries from your business account or run business expenses through your personal card, a court can decide your LLC is not truly separate, which erases the liability protection you paid for. Open a business bank account and use it exclusively.

The second common mistake is overpaying at signup. New owners routinely pay for an EIN that the IRS gives away free, or accept a $199 registered agent fee when fair services charge closer to $120. The third is ignoring the annual report, which quietly puts your LLC out of good standing and can lead to dissolution. The fourth is forming in the wrong state and creating a foreign-registration headache. Avoid these four, and the rest of running an LLC is straightforward.

Conclusion

Starting an LLC is far simpler than the marketing makes it look. You choose a name, appoint a registered agent, file one short form with your state, and add an operating agreement and a free EIN. Keep up with your annual report and keep your money separate, and your liability protection stays intact. The whole thing can be done in an afternoon for the price of your state fee.

The smartest move is to go in informed. Know your state fee, get your EIN free from the IRS, and never overpay for a registered agent or an add-on you do not need. If you decide to use a service to save time, compare the real total cost first rather than the headline price. Do that, and you will form your LLC the right way, for what it should actually cost.

Frequently asked questions

State fees, federal rules, and processing times change often. This page is reviewed quarterly and was last verified in July 2026. Confirm current details with your state and the IRS before filing. Freelance Treasury is not a law firm and does not provide legal or tax advice.