An LLC isn't an invisibility cloak
But it can offer some important protections. Plus, the "big, beautiful bill" and a reminder to collect testimonials.
In this issue
Quick question: What do LLCs do? A lot, but they aren’t magic.
In the news: What the latest federal budget will change for small businesses.
Tip of the month: Ask customers to review you right away.
Quick question: What’s so great about LLCs?
LLCs are the most popular type of business in the U.S. by a wide margin, according to a 2023 survey by the National Small Business Association.
But misconceptions about them also seem pretty popular. I see a ton of these when I talk to people, read Reddit and watch videos on social media.
Forming an LLC does protect your personal assets, like your home, if your business fails or gets sued. But it doesn’t let you get no-credit-check financing or dramatically reduce your tax bill.
To get clarity on what entrepreneurs should know about LLCs, I talked to a couple of experts:
Lisa Greene-Lewis, a CPA and tax expert at TurboTax.
Evan Sarzin, an attorney and volunteer with national business mentoring organization SCORE.
What’s real, and what did they debunk? Test your knowledge to find out.
1. An LLC is like a personal invisibility cloak
The subject line probably gave this one away. It’s mostly false.
If someone looks up your LLC in your state’s business registry, it’s true that they’ll find the name of the registered agent. That might be you, or it might be a lawyer representing your business.
The federal government used to require domestic LLC owners to register with the Department of the Treasury body that investigates financial crimes. That law was repealed in March, but some states still have similar rules.
Your bank and lenders will definitely need to know who you are, though.
Banks have pretty strict know-your-customer laws to help prevent money laundering. You typically have to provide your Social Security number or ITIN when you apply for a bank account, even if you have an LLC,
And if you apply for any kind of loan — a credit card, line of credit or business loan — your lender will still scrutinize your personal finances. That includes your credit score.
Learn more: How to open a bank account for your LLC
2. Forming an LLC is the first step in starting a business
Not quite. It’s an early one, but not a prerequisite to getting started.
“I think people confuse the idea of creating a business with creating an entity or a vessel to hold that business,” Sarzin told me.
The product or service you sell is your business. You can start that — writing your business plan, nailing down your product or service and maybe even making a few sales — before you have a vessel for it.
So, when should you form a business entity? Sarzin says to think in terms of “legal obligations.” For instance, if you’re getting ready to sign a lease or a contract, that’d be a good time to incorporate.
Remember that forming an LLC costs money. Registering one starts at $50 in Colorado and $150 in Illinois, for instance. California LLCs have to pay a tax of $800 per year, which you’ll owe within four and a half months of filing your Articles of Incorporation.
3. LLCs have major tax benefits
This is more fiction than fact. Be wary of TikTok videos suggesting that having an LLC will have a huge impact on your tax bill.
Single-member LLCs are usually pass-through entities. That means your LLC itself doesn’t pay taxes. Instead, the IRS treats all the LLC’s income (minus your business expenses) like your personal income.
That’s the same way the IRS would treat your business revenue if you were a sole proprietor. And you’ll still have to pay self-employment taxes on your LLC’s income, just like you would without the LLC.
“Basically, you’re getting the same deductions,” Greene-Lewis says.
LLC owners do have the option to treat their LLC like a corporation. That means putting yourself on payroll and taking a salary. This setup may have tax benefits in certain cases — like when your business has an exceptionally high-revenue year. Talk to an accountant or tax professional for more direction there.
Learn more: How to file business taxes as an LLC
4. LLCs totally insulate your personal finances
Partially, yes. Totally, no.
LLC stands for limited liability company. Liability is legal responsibility. That means:
If someone sues your LLC and a court rules in the other person’s favor, they can collect the judgement from your LLC’s bank accounts — but not your personal ones.
If your business fails, creditors can file claims to the LLC’s assets — but not your personal home, car or investments.
But these protections don’t apply to every financial obligation. For instance, if you apply for a credit card, you’ll most likely have to provide a personal guarantee — a promise that you’ll pay back the debt if your business can’t. That doesn’t go away, even if your business fails.
LLC protections can also be voided if you don’t manage your business properly. If you mix your business and personal funds together, a creditor might be able to argue that your LLC isn’t truly a separate entity. That’s called “piercing the veil.”
To keep your personal and business finances separate, open a business checking account in your LLC’s name. Use that account for all your business income and expenses. Then, you can transfer your profits to your personal account before you spend them on yourself.
Learn more: NerdWallet’s best business bank accounts for LLCs
In the news: Federal law changes affecting small businesses
The so-called “big, beautiful bill” was signed into law earlier this month. My colleague Randa Kriss covered the changes that may impact small-business owners. Here are the highlights:
Payment app updates. Last year, apps like Venmo and PayPal had to issue tax forms to anyone who received more than $600 in payments. The bill raises that threshold to $20,000 and more than 200 individual payments. (You still have to report all your business income on your taxes, though, even if Venmo and PayPal no longer send you a 1099-K.)
The Qualified Business Income (QBI) tax deduction is sticking around. This was previously scheduled to expire in 2026. If you operate a pass-through entity — like a single-member LLC — you can deduct a portion of your business income from your total gross income.
“Bonus depreciation.” Business owners can write off 100% of the cost of eligible property, including certain types of equipment, vehicles and software, acquired after Jan. 19, 2025.
Affordable Care Act subsidies can expire at the end of this year. That may make it more expensive to buy health insurance on your own instead of staying in a job that provides health benefits.
Tip of the month: Start collecting testimonials right away
“Social proof” is the idea that, when we see people we relate to saying something, we tend to believe it’s true. It’s why most people choose a restaurant with 4.7 stars on Yelp over one with 4.2 stars.
You can start building social proof right away. If you serve clients, ask your first few to write short testimonials about your work that you can use on your website. If you sell physical products, make sure your e-commerce store supports reviews. And as soon as you have a physical location, set up a Google Maps listing so people can start rating it.
Getting your first few customers is tough. Do whatever you can to get others to speak on your behalf.
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