Legal Expert Anthony Mancuso Having trouble deciding which business structure suits your small business? Here's a look at the benefits of LLCs.
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Taking care of legal issues isn't exactly the best partabout running a business. Thoughts of getting sued, losing all yourmoney or customers slipping on a wet floor and holding youresponsible 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 ofmind: Make your business a limited liability company (LLC).
What exactly does this meanfor you and your business? Should you form an LLC? What are the taxadvantages? What exactly is an LLC? All these questions andmore are answered in business attorney Anthony Mancuso'sNolo's Quick LLC: All You Need To Know About LimitedLiability Companies (Nolo, $24.95). Mancuso delves into thebasics of LLCs beginning with whether you should seriously considerforming one. He then takes you through a brief overview of LLCs aswell as other business stuctures, and provides detailed informationabout taxes, managing an LLC and the paperwork you'll need.Here, Mancuso offers a few things to think about as he explains theins and outs of LLCs and how becoming one can benefit yourbusiness.
Entrepreneur.com: Whatexactly is an LLC and what are the benefits of forming one?
Anthony Mancuso: A limitedliability company is a special entity recognized under eachstate's LLC statutes. You form them separately and differentlyin each state. At this point, all states allow for the formation ofLLCs. Essentially its primary advantage is that it protects youpersonally from the debts and liabilities of your business when youfile an article of organization with your state.
And it's no longer a disadvantage to do this. Before, thetax consequences of becoming an LLC were somewhat questionable.This is no longer true. The IRS has relented and says your taxstatus doesn't change when you form your LLC. Let's say youhave a sole proprietorship or one-person business and you form anLLC. All states, except for Washington, DC and Massachusetts-whichare expected to fall in line soon-allow you to from a one-personLLC.
Once a sole proprietor files articles of organization,they're immediately released from personal liability for theirbusiness debts and claims against them as well as slip-and-fallliabilities and unpaid bills. They continue to file their ScheduleC with their 1040 and be taxed as a sole proprietor. They don'thave to file a corporate tax return. There was some question aboutthat in the past since they looked like a corporation because theyhad limited liability. The IRS no longer questions this.
If you have a partnership, all the partners are personallyliable for the debts of the partnership, and in a limitedpartnership there's always at least one general partnerwho's liable. So if you have a general or limited partnershipand you convert it to an LLC by filing articles of organization,the same thing happens-you immediately step back from personalliability in your business and you don't change your taxstatus. You continue to file a partnership return at the end of theyear and divide up profits and losses among the partners as youalways did-it doesn't change your tax status.
Entrepreneur.com: What typesof businesses benefit from becoming an LLC?
|"Once you've filed your articles,you've changed your business's legal character to a limitedliability business that protects you. I don't want to make itsound too simple, but it really is for most smallbusinesses."|
Mancuso: Everyone benefits.It's gotten to the point where everyone's jumping on theLLC bandwagon. The minute they start thinking their businessexposes them to uninsured losses or personal liability of any kind,people file articles of organization. It's usually notexpensive to do, and again it doesn't change your taxsituation. It's just a formal legal filing. You also don'thave to be too formal about everything like a corporation. Youdon't have all these different director and officer andshareholder hats to put on. It's very flexible.
Entrepreneur.com: Doesregistration differ in each state?
Mancuso: The articles arebasically very similar in every state. Each state wants to know thename of the LLC, its agent for service or process, which just meanssomeone who will receive legal documents in case no one can befound, and information on the person who's forming it-name andaddress-very basic stuff.
Entrepreneur.com: Where canyou find information about how to register your business?
Mancuso: The secretary ofstate is the state office that usually handles all types of entityfilings including corporations, limited partnerships and LLCs.Typically, most of the LLC filings are made with the corporationsdivision of the secretary of state. They all have Web sites withdownloadable forms as well as filing instructions.
Entrepreneur.com: Should youhave an attorney help you with the filing?
Mancuso: In most cases, youprobably don't. I think there's more complicated taxscenarios and questions that can come up particularly whenyou're a large business, one that's not controlled by oneor two people, or if you have investors, and we have other booksthat treat all ofthose issues. To me, it makes sense to alwaysconsult with someone unless you're doing something sostraightforward and you're absolutely clear about whatyou're doing. It always makes sense to have a consultation,particularly with a tax person.
Entrepreneur.com: What'sthe most important thing to keep in mind when filing as an LLC?
Mancuso: There aren't alot of ongoing filing requirements of any kind. Once you'vefiled your articles, you've changed your business's legalcharacter to a limited liability business that protects you. Idon't want to make it sound too simple but it really is formost small businesses.
Small-business owners should take a serious look at forming anLLC. A lot of people try to keep their business as simple aspossible, particularly one-owner businesses that just don'twant to make any filings, but the minute they decide they're alittle uncomfortable with their exposure to personal liability andtheir business, I think they should at least consider forming anLLC.