The Two Giant Problems a Limited Liability Company Fixes
If you own an unincorporated business--a business that operates as either a sole proprietorship or a partnership--you have two big problems.
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.
A Final Clarification: Limited Liability Company vs. Limited Liability Corporation
By the way, let me also just clear up a possible confusion. Limited liability companies can correctly be called LLCs. But people just starting to investigate this subject sometimes use other incorrect labels to refer to limited liability companies. For example, the phrases "limited liability corporation" and "llc corporation" are wrong because corporations are different from limited liability companies. The "c" in the acronym "llc," in other words, stands for "company" and not "corporation."
Ready to take the next step to reduce risk and taxes?
If you want to reduce your business risks and start saving taxes, click the do-it-yourself kit link for your state (see list of links along left edge of this web page). Note that almost always you want to set up a limited liablity entity in the state where your business operates or if you're an investor in the state where your investment is located.
Tip: Still need to do a bit more research before you pull the trigger? Be sure to check out my giant FAQ.