You’ve decided to start a business by yourself, and you want to know whether it’s worth the time and money to form a limited liability company (“LLC”) or other business entity. While forming an LLC is not required, the benefits of an LLC can provide an immense benefit to a business owner.
Operating as a Sole Proprietor: Ease and Exposure
When you conduct business without forming an “entity” (LLC, corporation, etc.) you have a “sole proprietorship.” All of the business’ bank accounts, expenses, and income will be reported along with your personal income and expenses on your individual tax return. While operating your business this way requires the least amount of administrative time and cost up front, it does nothing to shield you from any of the liabilities of the business. Just as every dollar the business earns is a dollar that goes directly into your bank account, you are also personally liable for every liability of the business.
Key Advantages of Forming an LLC
The most commonly recognized benefit of an LLC or other business entity is the liability protection that it provides to the owner. If you use an LLC to operate your business, the LLC is a separate, distinct legal entity that earns business income and pays business expenses. If you satisfy the required formalities of forming and maintaining the LLC status, such as filing the articles of organization with the state, maintaining a formal operating agreement, and opening and funding a separate LLC bank account for LLC income and expenses, you may be shielded from the LLC’s creditors.
You can draw funds from the LLC’s profits to earn a living so long as the business is not left undercapitalized and unable to satisfy its debts. While you have multiple options in forming a business, a single-member LLC provides significant advantages in its flexibility and the simplicity of its tax reporting obligations.
Even though you are not operating as a sole proprietorship, the IRS disregards the entity for purposes of tax reporting, and you will report your income and expense the same as if you were a sole proprietorship. This means that even though the LLC provides the benefits of entity liability protection, the administrative burden for tax purposes is the same as if the entity did not exist.
Liability Limits, and Their Exceptions, for LLC Owners
Although LLCs and other business entities provide substantial liability protection benefits to business owners, creation of an LLC in itself does not provide absolute protection to its owners. For example, if you engage in personal services on behalf of the entity, you may not avoid your own personal liability for negligence or other wrongful acts.
Contact Paule, Camazine & Blumenthal for LLC Guidance
It is important to consult a business attorney to discuss the requirements you will need to satisfy to maintain these protections.
Contact a Paule, Camazine & Blumenthal attorney to answer your questions about LLC formation and maintenance of the appropriate business formalities to ensure liability protection is preserved.
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