| Want to limit your business liability? While many | | | | and the shares in your small business corporation. |
| business owners choose to form a regular | | | | With a limited liability company, however, many |
| corporation, a limited liability company often | | | | states say a personal creditor can only grab your |
| makes more sense for three important reasons. | | | | share of the distributions the limited liability |
| Reason #1: Really Easy Setup | | | | company makes to owners. (This is the actual |
| Most states let you form a limited liability | | | | charging order.) |
| company simply by downloading and then filling | | | | In other words, in many states, even in a |
| out a simple one or two page form. | | | | worst-case scenario, you might not lose control or |
| In other words, with an LLC, you often don't | | | | ownership of a limited liability company. The |
| need an attorney or accountant to help with | | | | worst-case scenario might be that should you |
| preparation of the formation documents. And with | | | | decide to make a distribution to owners, you |
| an LLC you typically don't need to complete | | | | would have to give the money to the personal |
| incorporation tasks such as having an | | | | creditor with the charging order. |
| organizational meeting, electing a board of | | | | Obviously, a charging order leaves an LLC owner |
| directors, having a board meeting to elect | | | | tremendous leverage in negotiating with personal |
| corporate officers, and so forth. | | | | creditors even in a worst-case scenario. |
| Reason #2: Better Liability Protection | | | | Reason #3: Total Tax Flexibility |
| Some people wonder if limited liability companies | | | | A third big reason to consider using a limited |
| offer protection as good as a regular corporation. | | | | liability company concerns income taxation of the |
| But quite possibly, a limited liability company offers | | | | business. In a nutshell, a limited liability company |
| you better protection than a regular | | | | gets to choose how it wants to be treated for |
| corporation-and for two big reasons. | | | | income purposes. |
| The first factor that explains the better liability | | | | A one owner LLC (called a single member limited |
| protection of a limited liability company concerns | | | | liability company) by default gets treated as a sole |
| the LLC's simpler operation. A limited liability | | | | proprietorship. But the single member LLC can |
| company should be easier to operate which | | | | often make an election to be taxed as an S |
| means you're less likely to inadvertently weaken | | | | corporation or as a regular C corporation. |
| the liability protection by making some mistake or | | | | A multiple owner LLC (called a multiple member |
| forgetting to take care of some corporate task. | | | | limited liability company) by default gets treated |
| For example, with a corporation, you might get | | | | as a partnership. |
| sloppy and not have regular shareholder meetings | | | | But, again, the multiple member LLC can often |
| or board of directors meetings. These sorts of | | | | make an election to be taxed as an S corporation |
| omissions could weaken the liability protection of | | | | or regular Corporation. |
| the corporation. | | | | Note: The entity is still a limited liability company |
| With a limited liability company, you often don't | | | | for state law purposes. However, for federal and |
| need to have shareholder meetings or a board of | | | | usually state tax purposes, the entity can be |
| directors-which you can't screw up these items. | | | | considered an S or C corporation after making |
| A second factor, the use of charging orders, can | | | | the tax elections. |
| also mean that a limited liability company offers | | | | The tax flexibility afforded by a limited liability |
| better asset protection. But let me explain. If you | | | | company often means a business owner can |
| own shares in a regular corporation, your personal | | | | keep his or her accounting really simple in the |
| creditors may in a worst-case scenario be able to | | | | early years of operation. And of course, that |
| gain ownership of your shares of stock for | | | | saves money and time. |
| something that happens outside the corporation. | | | | In later years, after the firm establishes itself, the |
| For example, if you get sued because some | | | | LLC for tax purposes can morph into an S or C |
| young child gets hurt in your home's backyard, | | | | corporation if a corporation saves the business or |
| you might lose assets you own like your home | | | | the owner taxes. |