One of the main advantages to a limited liability company is that it’s one of the more flexible business entities that you can create… the company can be run in a manner similar to a partnership, yet has many of the same protections for its members as a corporation would have. The LLC has become increasingly popular in recent years, to the point that many major companies that you deal with on a regular basis may be limited liability companies. Is it in your business’ best interest to be incorporated as an LLC? Here’s some information for you to consider so as to help you decide.

Partnership-Like Features

Much like a standard partnership, money that is made through a limited liability company can be channeled directly to its members (with “members” being the legal term for an LLC’s owners.) This is important, because it deals with a major drawback of incorporation… something that is known as “double taxation.” With a standard corporation, any money that the corporation makes is taxed at a special corporate rate. When the owner of a corporation wants to be paid, they have to take their income as a dividend of the money that the corporation has made… and then they have to pay standard income taxes on that money. This means that taxes have been taken out of their income twice by the time that they receive it; this is why it’s advantageous to have profits flow through directly to members. Income tax still has to be paid on money that is earned through an LLC, but the separate corporate tax rate doesn’t apply to any money that you’ve made (as it isn’t held by the company itself.)

Corporation-Like Features

The great thing about limited liability companies is that they feature some of the better aspects of corporations in addition to those of partnerships. One of the big features that they share in common with corporations is that they are able to assume liability for their own debts… meaning that if the company goes bankrupt or gets sued, then you aren’t going to have to worry about the judgment affecting your personal finances. The company will absorb the debt, and while it may have to be liquidated in order to satisfy what is owed none of that debt will carry over to you provided that the corporate veil is still intact.

If you aren’t sure what that last piece about the “corporate veil” means, it’s simply a way of saying that your finances are safe so long as the court doesn’t order that you’re personally liable because there wasn’t a distinct line between your personal finances and the company’s finances. So long as you run your business properly like a business should be run (meaning that you pay yourself with the payroll instead of taking money directly from the business, don’t use the business to cover personal expenses, and essentially don’t treat the business’ books like they were your own private credit account), then the chances of the corporate veil being pierced are exceptionally slim.

Popularity of LLC’s

Even though many people think of limited liability companies as simply being restricted to small business owners, there are actually a number of very popular businesses which are actually LLC’s. These companies include booksellers, private lenders, and just about any other business type that you can think of… all taking advantage of the unique features offered by limited liability companies in order to operate their business the way that they want to without having to run it as a full corporation.

Another place where LLC’s are quickly becoming popular is the internet… a number of major websites have a limited liability company behind them, which is used to shield the company’s members from any financial liabilities which could result if their website should happen to fail. As more and more web designers are learning about the advantages of using LLC’s to protect their personal assets and to organize their business interests, the number of limited liability companies which are operating on the internet continues to increase.

Creating a Limited Liability Company

If you want to create a limited liability company as your business, then the process is actually quite simple. While there are a number of companies out there who will process all of your paperwork and organize your company for a fee, the basic steps required to create your own LLC can be done from the comfort of your own home and all that you’ll have to pay are the filing fees in order to get the appropriate paperwork filed with the state that you live in. In some states, you’re even able to file your LLC paperwork online in order to speed the process up even more.

The first thing that you’ll need to do is to find out what the specific rules are in your state for creating a limited liability company. Many aspects of LLC’s are standardized nationwide due to the fact that they are treated as a business entity by the IRS and other federal agencies; different states may have specific requirements regarding business licenses and residency. In most if not all states, the name of the business will be required to contain the letters LLC or the words “limited liability company” at the end in order to signify that the business is, in fact, and LLC.

Once you’ve learned any and all requirements for creating an LLC in your state, then you’ll have to file the appropriate paperwork with the Secretary of State (or the state agency specified in your state’s rules for creating a limited liability company.) This generally involves filling out a form and mailing it in along with a registration fee. After the paperwork has been filed by the Secretary of State (or the state agency), then your business will legally be viewed by the state as a separate entity.

All that remains from that point is to contact the IRS and file for an Employer Identification Number, or EIN. This works much like a Social Security number for businesses, and is used by the IRS to track your company’s income for tax purposes. In order to get an EIN, contact the IRS or visit their website to learn the process of applying for one and then submit the necessary paperwork.

Julie-Ann Amos is a professional writer and business consultant. She has over 14 books published in many countries. She runs Exquisite Writing, a large freelance writing agency that produces a wide variety of business writing, articles, web pages, website contents, books and ebooks for an international client base. Topic experts available for a wide range of subject areas.

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However, most business owners and investors should consider the three powerful forms of asset protection that the limited liability company provides. In some cases the liability protection provided by a limited liability corporation prevents financial or legal disaster.

Protecting Against Internal Business and Investment Risks

Putting a business or an investment into a limited liability company is the most popular LLC asset protection technique.

By putting your business or an investment into an LLC, for example, you won’t be personally liable for things that happen to or inside the business or investment simply because you own the business or investment.

In comparison, if you directly own or you together with other partners own a business or investment–in a worst case scenario–you can find yourself liable for bad stuff that happens merely because of ownership or co-ownership.

For example, suppose a business you directly own breaches a contract. If somebody sues the business and you’re operating as a sole proprietorship or a general partnership, you might personally be forced to pay monetary damages because you’re an owner.

In comparison, if you own an interest in an LLC that, in turn, owns the business, you probably won’t be liable for the business’s debts (unless you personally promised to guarantee the LLC’s debts or to guarantee the contract). Segregating Internal Business and Investment Risks

A slightly more sophisticated asset protection technique uses multiple limited liability companies to segregate business or investment risks into different containers.

For example, suppose that you’re a real estate investor that owns six rental properties, and you’ve placed all six rental properties into one limited liability company. In this situation, you won’t find yourself liable for bad things that happen inside the LLC merely because you own the LLC.

For example, if someone slips and falls at one of your rental properties, you probably won’t individually be held liable for any damages that the LLC has to pay because of the accident. However, if you have valuable assets inside the limited liability company–say the equity in the six rentals–something terrible occurring at property four might destroy all the wealth you’ve accumulated inside the limited liability company.

In other words, if legally the LLC has done something “wrong,” all of the assets owned by the LLC may be used to satisfy a creditor or to resolve an actual or threatened lawsuit.

If you place each property into a separate limited liability company, or if you setup a parent limited liability company and then place a single property into a separate child LLC, in comparison, a worst-case scenario means you lose only the single property inside an individual LLC.

Obviously, losing a single property might still be a disaster. But invariably losing just one property would be (using my example) better than losing six properties.

And, just to make this point, note that this segregation of assets into different LLCs isn’t applicable only to real estate investors. A business owner might also segregate assets into different LLCs. A restaurant owner with three locations might put each location into its own limited liability company. A business might group product lines, business units or even customer groups into different LLCs.

Protecting Against External Business and Investment Risks

One remaining asset protection technique provided by a limited liability company should be mentioned.

In a worst-case scenario, a personal lawsuit might mean you lose ownership of property. Such property could easily include small business assets or real estate investments. And such property might even include a small business you own or the stock you own in a small business you operate as a corporation.

Note: State and federal laws often protect some of your personal assets. Retirement accounts, life insurance, a modest amount of home equity, and your work tools are probably protected, for example.

In many states, however, an ownership interest in a limited liability company often can’t be seized or transferred. Often, the best a creditor can do, for example, may be to get a “charging order” from a court. A charging order simply (and only) says any payments which should go from the LLC to the LLC owner should instead go to, say, the creditor. The “charging order” protection isn’t perfect. But “charging order” protection does mean that you improve your negotiating position in any worst case scenario situation.

Neither the court nor the creditor with a charging can interfere with the operation of the LLC, for example. The court can’t, for example, force the LLC to make payments to the LLC owner.

What this all means is that by owning assets or a small business through a limited liability company, you reduce the possibility that some external, personal event will foul up the stuff going on inside the limited liability company.

Author and accountant Stephen L. Nelson CPA publishes the do-it-yourself limited liability corporation and incorporating a business web sites.

Article Source: http://EzineArticles.com/?expert=Stephen_Nelson

Reason #1: Really Easy Setup

Most states let you form a limited liability company simply by downloading and then filling out a simple one or two page form.

In other words, with an LLC, you often don’t need an attorney or accountant to help with preparation of the formation documents. And with an LLC you typically don’t need to complete incorporation tasks such as having an

organizational meeting, electing a board of directors, having a board meeting to elect corporate officers, and so forth.

Reason #2: Better Liability Protection

Some people wonder if limited liability companies offer protection as good as a regular corporation. But quite possibly, a limited liability company offers you better protection than a regular corporation-and for two big reasons.

The first factor that explains the better liability protection concerns the LLC’s simpler operation. A limited liability company should be easier to operate which means you’re less likely to inadvertently weaken the liability protection by making some mistake or forgetting to take care of some corporate task.

For example, with a corporation, you might get sloppy and not have regular shareholder meetings or board of directors meetings. These sorts of omissions could weaken the liability protection of the corporation.

With a limited liability company, you often don’t need to have shareholder meetings or a board of directors-which you can’t screw up these items.

A second factor, the use of charging orders, can also mean that a limited liability company offers better asset protection. But let me explain. If you own shares in a regular corporation, your personal creditors may in a worst-case scenario be able to gain ownership of your shares of stock for something that happens outside the corporation.

For example, if you get sued because some young child gets hurt in your home’s backyard, you might lose assets you own like your home and the shares in your small business corporation.

With an LLC, however, many states say a personal creditor can only grab your share of the distributions the company makes to owners. (This is the actual charging order.)

In other words, in many states, even in a worst-case scenario, you might not lose control or ownership of your business or investment. The worst-case scenario might be that should you decide to make a distribution to owners, you would have to give the money to the personal creditor with the charging order.

Obviously, a charging order leaves an LLC owner tremendous leverage in negotiating with personal creditors even in a worst-case scenario.

Reason #3: Total Tax Flexibility

A third big reason to consider using an LLC concerns income taxation of the business. In a nutshell, a limited liability company gets to choose how it wants to be treated for income purposes.

A one owner, or single member, LLC by default gets treated as a sole proprietorship. But the single member LLC can often make an election to be taxed as an S corporation or as a regular C corporation.

A multiple owner, or multiple member, LLC by default gets treated as a partnership.

But, again, the multiple member LLC can often make an election to be taxed as an S corporation or regular Corporation.

Note: The entity is still a limited liability company for state law purposes. However, for federal and usually state tax purposes, the entity can be considered an S or C corporation after making the tax elections.

The tax flexibility afforded by a limited liability company often means a business owner can keep his or her accounting really simple in the early years of operation. And of course, that saves money and time.

In later years, after the firm establishes itself, the LLC for tax purposes can morph into an S or C corporation if a corporation saves the business or the owner taxes.

CPA Stephen L. Nelson is the author of downloadable do-it-yourself kits for Forming a California Limited Liability Company, Forming a Texas Limited Liability Company and Forming a Florida Limited Liability Company.

Article Source: http://EzineArticles.com/?expert=Stephen_Nelson

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