Inside Small Business | Small Business & Home Business Marketing
LLC May be the Wrong Choice Part 1
If you are going to open a business these days, you really need to protect yourself by forming a business entity. Lawsuits are a fact of life and the proper business entity will build a shield between the debts of the business and your personal assets.
Corporations and limited liability companies are the two most popular choices for small businesses. There are numerous differences between the entities, but the lack of record keeping and formalities has made the “LLC” a very popular choice for many small business owners. This choice can, however, lead to problems if only one person owns the entire entity.
To understand the potential problem, we first have to step back and look at the bigger picture. The touted advantages of an LLC are threefold. First, it provides you with asset protection similar to a corporation. Second, it does not require you to go through the formalities of record keeping, meeting and so on as required with a corporation, to wit, it is more informal. Finally, the LLC has the inherent advantage in that it can be taxed as a partnership, which avoids the double taxation problem that exists with a corporation. This last advantage is where we start running into problems.
As you know, the IRS controls the rules and regulations applicable to federal tax law. For tax purposes, the IRS defines a partnership as two or more individuals [or businesses] pursuing a profitable venture. This is also the legal definition. The key thing to focus on is the numeration – two or more. For there to be a partnership for tax purposes, two or more groups have to be involved.
Now, let’s return to our LLC owned by a single person. The advantage of being taxed like a partnership is a big advantage to being an LLC. So, what happens when you file your partnership tax return after your first year of being in business as an LLC?
Part 2 will be published tomorrow.
Richard A Chapo, Esq., is the lead attorney and owner of SanDiegoBusinessLawFirm.com. He provides legal services in the fields of business entity formation and internet law to large and small
Posted on Wednesday, March 12th, 2008 at 2:02 pm and is filed under Business, Entrepreneurship, Legal, Money/Finance. You can follow any responses to this entry through the RSS 2.0 feed.
