What is Limited Liability Company (LLC)?

How it works

The LLC is a creature of state law. Each US state has its own LLC statute (Wyoming Limited Liability Company Act, Delaware LLC Act, etc.) — formation, governance, dissolution, member liability are all governed by the state where the LLC is formed. The federal layer is purely tax: the IRS does not have an "LLC" classification at all. Every LLC is mapped onto an existing federal tax regime via the check-the-box rules:

The two layers are independent. State law gives you the entity (limited liability, charging-order protection, anonymity in some states); federal tax classification gives you the rate structure and reporting form.

What every LLC has in common, regardless of state and election:

• Limited liability for members. A creditor of the LLC reaches the LLC's assets, not the members' personal assets, except in narrow cases (personal guarantee, fraud, piercing the veil).
• A registered agent in the state of formation, with a physical address there. Required by every state.
• An EIN if the LLC will hire, file taxes, open a bank account, or be foreign-owned.
• Operating agreement (recommended; not legally required for single-member LLCs in most states, but expected by banks and counterparties).
• Annual report and franchise tax in most states. New Mexico is one of the few with no annual report.

Why non-residents pick US LLCs

A non-resident running a single-member US LLC with no US trade or business and no US-source income generally has zero US federal income tax — the entity is disregarded, the foreign owner has no US tax connection. The LLC still gives access to:

• US business banking (Mercury, Brex, Wise, Relay).
• US payment processors (Stripe, PayPal Business).
• A US business identity that European and Latin American clients trust.
• A clean wrapper limiting personal liability on contracts.

Examples

• French SaaS founder forms a Wyoming LLC. Single-member, owned personally. Sells to European clients, banks at Mercury, processes payments via Stripe. No US presence, no US clients. Federal tax: $0. Annual paperwork: Form 5472 + pro-forma 1120, plus the Wyoming annual report.
• Two US co-founders form a Delaware LLC. Multi-member by default = partnership. The LLC files Form 1065, issues Schedule K-1 to each co-founder, who reports their share on Form 1040.

Common mistakes

• Confusing LLC and corporation. They are different state-law entities with different governance rules. An LLC has members; a corporation has shareholders. Mixing the terminology in agreements creates real legal problems.
• Picking Delaware reflexively. Delaware is the gold standard for VC-backed companies because of the chancery court and case law. For a solo non-resident with no funding plan, Wyoming or New Mexico usually beats Delaware on cost and privacy.
• Treating "no US tax" as "no tax". US LLC profits are taxed in the owner's country of residence, almost always. The LLC is not a tax-avoidance vehicle — it is an operational and liability vehicle.
• Mixing personal and LLC funds. "Piercing the veil" claims gain traction when LLC accounts and personal accounts blur. Maintain a separate bank account, book transfers as capital contributions or distributions, and document them.