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Q.Why should I consider forming a corporation or limited liability company (LLC)?
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 all 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 personal tax return(s).
Businesses generally should not be operated as sole proprietorships or partnerships. Why? Because both the corporation and LLC are better alternatives. 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. The corporation, albeit being subject to a few more formalities can save the business owner from having to declare personal bankruptcy in the event the business unexpectedly fails.
Properly forming and maintaining either an LLC, or corporation, can limit the business owner's personal exposure to the debts, obligations, and 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 huge penalties at a later date.
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