How to set up an LLC in the US and what pass-through taxation actually means

The Limited Liability Company (LLC) is the workhorse of American small business. It gives you the liability shield of a corporation without the corporate paperwork, and — by default — it lets your business income flow straight to your personal tax return. If you're a freelancer, consultant, or non-US founder shopping for a US entity, an LLC is usually the first thing you should look at.

Here's what setting one up actually involves.

1. Pick a state

You form an LLC in one specific US state. Most people default to their home state, and for a domestic operator that's almost always the right call — you avoid registering as a "foreign LLC" (which just means "out-of-state") in the state where you actually work.

The classic picks for non-residents or fully remote operators:

• Delaware — mature case law, popular with investors, expects annual franchise tax.
• Wyoming — cheap, private (no public member list), low annual fees.
• New Mexico — cheapest, no annual report at all, but less established.
• Florida / Texas — no state income tax; good if you'll actually operate there.

2. File the Articles of Organization

This is the document that legally creates the LLC. Every state has its own version, filed with the Secretary of State. Filing fees range from ~$50 (New Mexico) to ~$500 (Massachusetts).

You'll need:

• LLC name (must include "LLC" and be unique in the state)
• Registered agent with a physical address in the state
• Names of members or a manager (in some states)

Processing is usually 1–10 business days, faster with expedited filing.

3. Get an EIN from the IRS

The EIN (Employer Identification Number) is your business's tax ID. You need it to open a bank account, hire contractors, and file taxes. US citizens with an SSN can apply online in about five minutes at irs.gov. Non-residents without an SSN or ITIN have to submit Form SS-4 by fax or mail — expect two to eight weeks.

4. Write an Operating Agreement

An internal document setting out ownership percentages, how profits are split, how decisions get made, and what happens if a member leaves. Only a few states legally require one, but you should have it anyway — a single-member LLC without one starts looking like a sole proprietorship the moment a court asks about the liability shield.

5. Open a US business bank account

You need an EIN, formation documents, and (usually) a physical presence — either as the owner or via a service like Mercury or Relay that handles remote founders. Never commingle personal and business funds in the same account; that's the single fastest way to lose your LLC's liability protection.

What "pass-through taxation" actually means

By default, an LLC is not a taxpayer. The IRS looks straight through it:

• Single-member LLC — taxed as a disregarded entity. Profits and losses go on your personal Schedule C (Form 1040). You pay self-employment tax on the net.
• Multi-member LLC — taxed as a partnership. The LLC files Form 1065 as an information return, and each member gets a Schedule K-1 showing their slice, which they put on their personal return.

"Pass-through" just means the income is only taxed once — at the owner level — instead of being taxed at the company and again on distributions the way a C-corp would be.

You can elect to be taxed differently by filing Form 8832 (to be treated as a corporation) or Form 2553 (to elect S-corp status, which can reduce self-employment tax for profitable service businesses). Both elections come with real complexity — talk to a CPA before doing this.

Forms you'll actually touch

Form	Who files it	When
Articles of Organization	You (once)	At formation
SS-4	You (once)	To get an EIN
Schedule C (on Form 1040)	Single-member owner	Every April 15
Form 1065 + K-1s	Multi-member LLC	Every March 15
Form 8832 / 2553	Optional tax election	Anytime, effective for chosen tax year
Form 1099-NEC	You, as payer	January, for each US contractor paid $600+
State annual report	Most states	Yearly, ranges from free to a few hundred dollars

The mistakes that hurt

• Forming in Delaware while operating from California — you now owe franchise tax in Delaware and must register as a foreign LLC in California, plus pay California's $800 minimum franchise tax anyway.
• Missing the annual report deadline — some states dissolve your LLC administratively.
• Skipping the Operating Agreement in a multi-member LLC — the state's default rules will fill the gap, and you probably won't like them.
• Non-residents assuming an LLC = no US tax. If your LLC has "effectively connected income" from US trade or business, you owe US tax and must file Form 1040-NR or Form 5472 (foreign-owned single-member LLC — mandatory, and the penalty for missing it is $25,000).

An LLC is simple to form and easy to run. The tax side is where people get tripped up — get the entity right first, then have a real conversation with a US CPA before your first year closes.