Taking care of legal issues isn't exactly the best part about running a business. Thoughts of getting sued, losing all your money or customers slipping on a wet floor and holding you responsible are enough to give any small-business owner an ulcer. Is there any way to protect yourself from such nightmares? Actually, there is something you could do to give you peace of mind: Make your business a limited liability company (LLC).
What exactly does this mean for you and your business? Should you form an LLC? What are the tax advantages? What exactly is an LLC? All these questions and more are answered in business attorney Anthony Mancuso's Nolo's Quick LLC: All You Need To Know About Limited Liability Companies (Nolo, $24.95). Mancuso delves into the basics of LLCs beginning with whether you should seriously consider forming one. He then takes you through a brief overview of LLCs as well as other business stuctures, and provides detailed information about taxes, managing an LLC and the paperwork you'll need. Here, Mancuso offers a few things to think about as he explains the ins and outs of LLCs and how becoming one can benefit your business.
Entrepreneur.com: What exactly is an LLC and what are the benefits of forming one?
Anthony Mancuso: A limited liability company is a special entity recognized under each state's LLC statutes. You form them separately and differently in each state. At this point, all states allow for the formation of LLCs. Essentially its primary advantage is that it protects you personally from the debts and liabilities of your business when you file an article of organization with your state.
And it's no longer a disadvantage to do this. Before, the tax consequences of becoming an LLC were somewhat questionable. This is no longer true. The IRS has relented and says your tax status doesn't change when you form your LLC. Let's say you have a sole proprietorship or one-person business and you form an LLC. All states, except for Washington, DC and Massachusetts-which are expected to fall in line soon-allow you to from a one-person LLC.
Once a sole proprietor files articles of organization, they're immediately released from personal liability for their business debts and claims against them as well as slip-and-fall liabilities and unpaid bills. They continue to file their Schedule C with their 1040 and be taxed as a sole proprietor. They don't have to file a corporate tax return. There was some question about that in the past since they looked like a corporation because they had limited liability. The IRS no longer questions this.
If you have a partnership, all the partners are personally liable for the debts of the partnership, and in a limited partnership there's always at least one general partner who's liable. So if you have a general or limited partnership and you convert it to an LLC by filing articles of organization, the same thing happens-you immediately step back from personal liability in your business and you don't change your tax status. You continue to file a partnership return at the end of the year and divide up profits and losses among the partners as you always did-it doesn't change your tax status.
Entrepreneur.com: What types of businesses benefit from becoming an LLC?
|"Once you've filed your articles, you've changed your business's legal character to a limited liability business that protects you. I don't want to make it sound too simple, but it really is for most small businesses."|
Mancuso: Everyone benefits. It's gotten to the point where everyone's jumping on the LLC bandwagon. The minute they start thinking their business exposes them to uninsured losses or personal liability of any kind, people file articles of organization. It's usually not expensive to do, and again it doesn't change your tax situation. It's just a formal legal filing. You also don't have to be too formal about everything like a corporation. You don't have all these different director and officer and shareholder hats to put on. It's very flexible.
Entrepreneur.com: Does registration differ in each state?
Mancuso: The articles are basically very similar in every state. Each state wants to know the name of the LLC, its agent for service or process, which just means someone who will receive legal documents in case no one can be found, and information on the person who's forming it-name and address-very basic stuff.
Entrepreneur.com: Where can you find information about how to register your business?
Mancuso: The secretary of state is the state office that usually handles all types of entity filings including corporations, limited partnerships and LLCs. Typically, most of the LLC filings are made with the corporations division of the secretary of state. They all have Web sites with downloadable forms as well as filing instructions.
Entrepreneur.com: Should you have an attorney help you with the filing?
Mancuso: In most cases, you probably don't. I think there's more complicated tax scenarios and questions that can come up particularly when you're a large business, one that's not controlled by one or two people, or if you have investors, and we have other books that treat all ofthose issues. To me, it makes sense to always consult with someone unless you're doing something so straightforward and you're absolutely clear about what you're doing. It always makes sense to have a consultation, particularly with a tax person.
Entrepreneur.com: What's the most important thing to keep in mind when filing as an LLC?
Mancuso: There aren't a lot of ongoing filing requirements of any kind. Once you've filed your articles, you've changed your business's legal character to a limited liability business that protects you. I don't want to make it sound too simple but it really is for most small businesses.
Small-business owners should take a serious look at forming an LLC. A lot of people try to keep their business as simple as possible, particularly one-owner businesses that just don't want to make any filings, but the minute they decide they're a little uncomfortable with their exposure to personal liability and their business, I think they should at least consider forming an LLC.