Are Your Assets at Risk?

Business Rule #10

Decide on an Entity

Limited Liability Company

A Limited Liability Company (LLC) is a business structure allowed by state statute.  (IRS 2009)

If you believe that sole proprietorship comes with too many risks then maybe consider being a limited liability company (LLC). Just like the name states, a limited liability company limits your personal liability unlike a sole proprietor whose liabilities are unlimited. 

 Many small businesses decide to become a limited liability company to protect their personal assets against the debt of their business. As a sole proprietor all your personal assets can be seized to cover your business debts but as a LLC your personal responsibility is now limited. Do a little research and look up cases of sole proprietors and what assets were taken to cover their business debts and do the same with limited liability companies. This will give you an idea of your risk under each entity.

Heads Up: LLC is a new type of entity that varies state to state, so it may not be easy to locate cases regarding limited liability companies.

Not all business can become a limited liability company. Among the list of companies that does not qualify to be a LLC are banks, trust and insurance companies but the complete list varies by state. Check with your state government to see if your business qualifies to be a LLC.

When deciding if LLC is for you, use the below list of advantages and disadvantages as a resource to make your decision.

 Advantages:

*    Limited Liability 

The biggest benefit of LLC is the liability protection that it gives you. You & your personal assets are now safe from your business debts and actions. If your LLC is sued, you are protected from being held personally responsible. 

*   Pass-through tax treatment:
Pass-through tax treatment allow for business owners to report their gains/losses on their personal income tax which eliminates the possibility of double taxation. 

*   Your business can be classified as a separate entity from you.

 Disadvantages:

*    Not all businesses qualify to be a LLC
Check with your state government to see if your business can operate as a LLC. Banks and insurance companies are example of businesses that can’t be a LLC.

*  New Entity
LLC is a fairly new entity and a lot of the legal and tax operating issues has yet to be resolved. Example: Many states does not recognize single member LLC's.

*   Different Law Interpretation
LLC laws are on the state level and its rules and judgment has yet to be agreed upon universal.

*    There is filing cost
Cost can run between $50-600+ visit your state website for the cost for your state.

*    Tax Deduction Lost
LLC's loss deductions can be limited because of your limited liability for LLC debts.

Check out website: http://www.laughlinusa.com/LLC_casestudies.asp for great examples on LLC’s.

 How to become a LLC?

*    Business name check
You have to make sure that the business name that you have isn't already being used by another LLC company operating in the same state as you. Also, there are some names that you cannot use such as, corporation, incorporated, City, etc. Most secretary of state websites offer a business name search tool.

FYI- Once your business becomes a LLC; you will be required to add LLC to end of your business name. That will now become your business legal name.

 Example: Kelly’s Daycare, LLC

*    Paperwork
You will need to complete the necessary paperwork and pay the requested filing fee. To get the necessary paperwork go to your states secretary state website.

*    Public Announcement
Some states actually require you to make a public notice about your intentions to become a LLC. Check with your state to see if they require a public notice.

Knowing which entity to use can be a daunting task. Sitting down with a lawyer to discuss your personal and business needs will help you make the best decision. The $100.00 hr visit to talk with an attorney may be worth it if in return it prevents you from making an uninformed decision that can cost you valuable time and money. A lawyer can give you an in depth analysis on you and your business tax and legal implications.

Thoroughly researching the entities sole proprietorship and LLC helps you compare your needs with the advantages and disadvantages of both entities. Look over yesterday and todays discussion on Sole proprietorship and limited liability companies (LLC) to make an informed decision on your business classification.

Make sure to visit your secretary of state website for state specific requirements for starting a small business in your state.

www.sos.(enter your state abbr.).gov

What is your business classification?