Definition
A business structure created under state law that separates the owner's personal assets from the business's debts and lawsuits. For taxes it is a chameleon: a one-owner LLC is taxed like a sole proprietorship by default, a multi-owner LLC like a partnership, and either can elect to be taxed as an S corporation or a C corporation.
Why it matters
Forming an LLC changes legal exposure, not taxes; by default a freelancer's LLC files the same Schedule C and pays the same self-employment tax as before. The liability shield also only holds if the business is run as a separate entity, with its own bank account and no mixing of personal and business money.
Example
A wedding photographer forms an LLC for a $150 state filing fee and moves all business income and expenses to a dedicated account. When a venue dispute produces a $30,000 claim, the LLC's $12,000 of equipment and cash are exposed, but the photographer's personal $60,000 of savings and her car are not. Her $80,000 of profit is still reported on Schedule C exactly as it was before the LLC existed.
Put it into practice
Related terms
This definition is educational, not financial, legal, or tax advice. U.S. rules and limits change; verify time-sensitive details with official sources. See our disclaimer.