Consider Organizing Your Business As A Limited Liability Corporation

One of the most important first decisions an entrepreneur makes is what form the business takes when created. Choices are many and include:

Sole proprietorship
Limited Liability Company (LLC)
Partnership
Corporation

There are advantages and disadvantages to each type of business organization. Folks starting their own business should discuss the form they choose with both their tax advisors and their attorneys. This article is for informational purpose only and is not a substitute for professional tax and legal advice.

Companies that are incorporated (corporations) enjoy protection from financial exposure that limits each shareholders liability to no more than their investment. So, a company that gets into financial difficulty can not make stockholders invest more money in order to pay debts, and stockholders are insulated from being named as a party to bankruptcy which could hurt their credit rating. Additionally, if there is a problem with the corporations product that leads to a lawsuit and that suit is settled in excess of available insurance, the stockholders have no personal liability.

However, tax implications for a corporation require that stockholders involved in the company as employees must receive reasonable compensation, thus money earned above this limit will be taxed as capital gains if distributed as dividends. However, corporate profits are subject to corporate income tax, so the dividends are actually subject to double taxation - once as corporate profits and once as dividend income.

Sole proprietorships and partnerships do not enjoy the protection from liability for owners that corporations provide. The sole proprietor or partners are responsible for financial difficulties the company may run into personally.

On the other hand, profits for sole proprietorships and partnerships are only taxed once and all profits are treated as wages.

However, entrepreneurs can have the best of both worlds! They can form their business as a LLC or limited liability company. With this form of ownership, investors enjoy the protection of a corporation from personal liability, but, for tax purposes are treated as a sole proprietorship.

Each state has different rules for organizing as a LLC, you should consult an attorney. In broad terms, to become a Limited Liability Company you must apply to the state where the corporation is to be located. Many states limit the amount of members to 100.

First, a name must be selected for the new company and submitted to the Secretary of State to make sure that it is not in use. Most states have an on line database that makes this task easy and quick. If the name selected is available than you may be required to run an ad in the classified section of the newspaper under the heading "Fictitious Names". This is just to let the public know that your dba (doing business as name is not a real person). You then file the appropriate paperwork the Secretary of State and receive your Limited Liability Corporation certificate. This certificate will allow you to open a business bank account. States usually require that a LLC file an annual report and pay an annual fee.

Operating as an LLC offers a hybrid to solution to business organization. Those who choose this option receive the liability protections that corporations enjoy and the tax benefits that sole proprietorships and closely held partnerships have.