There are many ways to set up a business from the sole proprietorship or partnership to the investor owned corporation. However, most small businesses today are using a method that provides the near simplicity of the partnership and some of the protection of the large corporation.
For several years, the idea of forming Limited Liability Corporations or LLCs as they are commonly known, has been gaining increased attention and are becoming the choice of many business people.
It is interesting to note that the use of the LLC is not limited to the person who is basically working for himself. Some large corporations have spun off sections of their companies as LLCs.
Some look upon the LLC as a combining or merging of the partnership and the corporation. The difference is that the LLC has the best of both—all the of the good things of each and none of the bad.
An LLC offers full limited-liability protection to all the owners, much like a corporation, but has a pass-through tax status, muck like a partnership. In addition, the LLC has a second layer of liability protection that will shield the business from any personal lawsuits that may result.
Another advantage of the LLC, if you are the individual owner, you can report your income and expenses on your 1040 tax form. Thus, you do not have to file a separate tax form, in most cases. As with most tax issues, there are always some exceptions.
LLCs have been in use for several years, but understanding some of the newer concepts that come with an LLC can prove to be difficult for those familiar with partnerships or even corporations.
There are a couple of things to keep in mind. If you are going to form an LLC and hire any employees, you are going to have to withhold federal income taxes, Social Security and state taxes. Therefore, you will have to apply for a federal tax ID number. This can be done on-line and is not expensive. Different states may require additional licenses, such as an occupational permit, and assess certain fees.
Without question, the best way to understand an LLC is to look upon it as a regular partnership. However, all the partners have full limited liability protection. Therefore, the partners, or the LLC members, are not personally responsible for the actions or debts of the company.
This is a major issue because by being part of an LLC, your personal assets are not at risk. The liability is limited to the assets of the LLC as an individual entity. The LLC is more official than a partnership because first you have to form them with the state. Simply stated, the LLC becomes an individual entity. By being organized under state law you can raise financing by selling portions of the company, knowing that the liability is limited to the amount invested and earned by the LLC.
Also, in many states you have to register the name of the LLC you want to create. You may want to use your last name to identify the LLC, but that may already be in use. Thus you will need to spend some time researching what name you want to use and making sure it is available in your state.
LLCs are subject to state oversight. This is important to remember because not all the states are using the same rules. Corporations, have hundreds of years of case law backing them up. However, with the LLCs, the courts still have a lot to learn. Thus it is important for you, as the owner of an LLC, to know that some things are based upon assumptions instead of actual legal precedents, which can create gray areas or potential problems.
The best way to avoid situations like this is to hire a knowledgeable registered agent or accountant who stays abreast of the LLC laws for you. With this approach, if there are any shifts in the LLC laws, your adviser can bring you up to speed and keep you on the right track.
The LC can be an excellent option for a person who wants to start a part-time business and have a better way of deducting his expenses for that business. The self-employed may also find the LLC to be the best vehicle for running a privately owned business. You may have to spend a little money up front, but such expenditures could turn out to be a great investment.
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About The Author: Fred Meek has over 20 years of video production experience and owns MindBOX Productions a Legal Video Servicesl in Austin, TX.