If you own a small business or are planning to start one, the simplest way to organize it is as a sole proprietorship. Registering a sole proprietorship is inexpensive, often requires no legal expertise, and filing taxes for it are relatively easy. However, sole proprietorships and partnerships, which are essentially proprietorships shared between two or more people, offer little personal protection from loss. If the business faces a lawsuit, the owner of a sole proprietorship is personally responsible for any judgement made against him. Plaintiffs might draw damages from the proprietor’s or partners’ personal savings or property. For than reason, many small businesses organize as a Limited Liability Company (LLC).
Limited liability law defines the company itself as a business entity and creates a “shield” between the company and its owners. If the company loses a lawsuit, only its assets can be used to settle the debt and the personal assets of the owners are protected. All 50 states and the District of Columbia now permit companies to form as LLCs, even if the company has only one owner with no employees. Owners of LLCs need not be US citizens or residents. Forming an LLC is also a good way for a company with a single owner to bring in additional partners and investors, allowing it to grow. The more formal business organization looks more legitimate to other businesses, to investors, and to clients.
For a business to become an LLC, documents must be submitted to the secretary of state, who also requires an annual filing. Each filing includes a fee. To ensure that filings are correct and that the company is properly organized, it is recommended that LLCs hire an experienced business attorney. Filing taxes can become more complex, as the company may file its own tax return in addition to the owners’ personal tax returns. Owners of an LLC must decide whether to file its tax return as a partnership, an S corporation or a C corporation. A possible exception to this is an LLC with a single owner, who can file as a proprietor and report the company’s earnings on his personal tax return.
It is not necessary in most states. There are many companies and websites online that can help you do it. However, the advice of an attorney is highly recommended and can save you and your company costly mistakes that may cause headaches and down the road.
There are advantages, and the solution depends on your business goals. If you wish to remain a small business, forming as an LLC may be right for you. The primary advantages to forming an LLC over a corporation are lower cost and more flexibility, in both tax reporting options and management structure. If you wish to continue to grow the company and eventually offer shares to the public, you should consider forming your company as a corporation. It is recommended to consult with an expert who knows your industry before making a decision.