Limited Liability – the way to go. You’ve probably heard a lot about limited liability companies, and probably see that a lot of businesses are using this legal structure, with good reason.
Limited Liability companies have the advantages of a corporation and of a sole proprietorship/partnership rolled into one. Many small business owners and entrepreneurs prefer LLCs because they combine the limited liability protection of a corporation and the pass through taxation of a sole proprietorship or partnership. Indeed, with a limited liability company, the LLC is responsible for the debts and liabilities of the business, meaning you won’t be personally liable and taxes pass through like a partnership, i.e. on your personal tax returns. You heard correctly – no personal liability, and no separate business tax returns.
So, why then, isn’t everyone using the LLC structure?
One of the major reasons is that the LLC is a relatively recent phenomenon. Until a few years ago, the LLC wasn’t recognized in all states. Another downside to an LLC is that it does not offer the free transferability of ownership, perpetual existence, and the ability to be totally owned by a single individual that one gets with a corporation (though, in most nearly every state now, sole proprietors can form LLCs).
Another reason is that forming an LLC is more expensive than a partnership or a sole proprietorship. You have to draft articles of organization and file it with your state to get LLC status, and – in addition to the paperwork – this can be somewhat expensive, in the range of a few hundred dollars, depending on the state. (Of course, if you are looking for the requisite paperwork, you can get one of our LLC forms here Limited Liability – LLC Forms. These forms are basically templates you fill out and mail to your secretary of state. Pretty simple – and the same package has boilerplate language for your Operating Agreement, which is not filed with the state, but details the obligations of your business).