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Q.Why should I consider forming a L.L.C.?
A.The sole proprietorship is merely the alter ego of its owner, and as such it does not exist for either state law, or federal income tax, purposes. When operating as a sole proprietor or as a partnership, the business owner(s) will be personally liable for the debts and obligations of the business. In addition, all income earned or losses incurred are taxable directly to the business owner(s) and reported on the individual tax return.
Businesses generally should not be operated as sole proprietorships or partnerships. Why? Because the LLC is generally a better alternative. The LLC offers all the benefits of the sole proprietorship and partnership (simplicity and flexibility) without the huge disadvantage of unlimited personal liability for the business debts and obligations. In short, forming a LLC can limit the business owner's personal exposure to the potential liabilities of the business.
Before rushing out to form a LLC, however, the business owner should consult with an attorney to determine: (1) if the limited liability benefit will outweigh the attorney's fees, filing costs, and annual franchise taxes imposed by your state; and (2) whether LLC or corporation would better fit your particular circumstances. Please beware that failure to properly organize a LLC, or corporation, can lead to lofty penalties at a later date.
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