The Two Giant Problems a Limited Liability Company Fixes
If you're here just looking for information about how you can purchase and download an LLC formation kit for your state, go ahead and skip the next few paragraphs. You simply want to click on one of those state hyperlinks shown along the left edge of the web page. You'll then jump to a page that provides a bit of background information concerning the state and buttons you can click to download an appropriate LLC formation kit for the state.
If you're still during your research, however, let me give you a bit of background about the two big problems of operating an unincorporated business like a sole proprietorship or general partnership.
Dangers of sole proprietorships and partnerships
The first problem: You are legally liable for the all the debts of the business. In other words, no matter what happens, in some cases no matter who is at fault, no matter what the amount, you are liable.
In a worst-case scenario, you could lose almost everything you have.
But that's not the only problem with operating a business as a sole proprietorship or partnership. In addition to the income taxes you pay on your business income, you also pay a second heavy tax on all your business profits, the self-employment tax.
Many small business owners, in fact, pay more in self-employment taxes than they pay in federal income taxes.
That's the bad news, so to speak.
Advantages of forming a limited liability company
Fortunately, you also have some good news. You can often fix both problems easily, quickly, and inexpensively.
How? First, you can setup a limited liability company and use it to run your business. This largely solves the unlimited liability problem. A limited liability company means you aren't liable for the debts and obligations of the business merely because you own some or all of the business.
Second, you can use a quirk of tax law to select how your LLC is taxed. But let me explain.
A limited liability company lets its owners select the tax treatment they want for their business. For example, an llc with a single owner can be a sole proprietorship or a C corporation or an S corporation. And one with multiple owners can be a partnership, a C corporation or S corporation.
This tax flexibility means you can pick the tax treatment that saves you the most taxes. An S corporation, for example, can save a small business thousands of dollars a year in self-employment taxes. And a C corporation, as another example, can allow small business owners to pay generous tax-free fringe benefits to themselves which saves potentially thousands of dollars annually in income taxes.
So here's the bottom line: If you're starting a new business or if you operate an existing business, you must investigate the limited liability company option. You owe it to yourself. You owe it to your family.
One final tip: Still need to do a bit more research before you pull the trigger? Be sure to check out my giant FAQ. It provides a ton of general LLC related information you can use to boost your knowledge and to make a smarter decision.