LLC or Sole Proprietorship? Incorporating Your Small Business

In planning to start your company, one of the most important choices you’ll face is what business structure to use.  In many countries, it is only possible to use structures such as corporations, partnerships, and sole-proprietorships.  However, in the United States, people have the opportunity to form a limited liability company.

Advantages of LLCs

Limited liability companies, or LLCs, combine several aspects of corporations and partnerships, but have certain advantages that neither possess.  An LLC can have an unlimited number of owners, called members.  These members can be individuals, corporations, or other LLCs.  LLCs, like corporations, have liability protection, meaning that members cannot be held responsible for debts, unless they have signed personal guarantees.  Because of these similarities, LLCs are sometimes called limited liability corporations, but the correct term is ‘company’.?  With a limited liability company, profits can be distributed in various ways.  This is much more flexible than in common partnerships, which require that profits be distributed evenly.  In an LLC, all profits, losses, and expenses flow through the company, directly to its members.  This will allow you to avoid being taxed twice by paying corporate, then individual income tax.  For tax purposes, LLCs can be classified federally as corporations, partnerships, or sole-proprietorships.  Defaults may apply, or classifications can be selected.

Another benefit of the LLC business structure is that, unlike corporations, LLCs are not required to keep formal minutes, hold meetings, or record resolutions, making them much simpler to own and operate.

Drawbacks of LLCs

An LLC is easier to form than a corporation, but it still involves much more involvement and paperwork than a sole-proprietorship or a partnership.  While a corporation might last forever, LLCs cease to exist if any of their members die or go bankrupt.  Entrepreneurs with plans to issue employee shares in the future, or take their company public, would be better served with a corporate business structure.

How to Set Up an LLC

It is now possible to set up an LLC in any of the 50 states.  It’s not as simple as forming a sole proprietorship, but it is much easier to do than creating a corporation.  To form an LLC, you must file articles of organization with the office of the Secretary of State and pay the necessary fees.  You can have the articles created by a lawyer, or you can prepare and file them yourself.  ?  Most states don’t require it, but it is best to draft an operating agreement.  Operating agreements can help establish company profit sharing, responsibilities, ownership, and changes in ownership.

All companies’ situations are not the same, and the rules for forming LLCs differ from state to state.  In North Dakota, for example, foreign LLCs are not allowed to participate in banking or agriculture.  Some states require that a notice of company formation be published in the local newspaper.  Check with your state government to see what their policies are.?  This article should provide you with the basics of LLCs, but it is best to seek legal and tax council to see what option will best fulfill your needs.

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Pete Williams
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Posted on Jul 25, 2008
Pete Williams
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Posted on Jul 25, 2008