What you always wanted to know but were afraid to ask

What does LLC mean

LLC means Lim­ited Lia­bil­ity Com­pany. But I guess you did not come here to sim­ply get this clean and quick answer, you want to know more. How many peo­ple do you need to form an LLC, how much does it cost, where do I have to go, should I get an attor­ney, what is the dif­fer­ence to a sole pro­pri­etor­ship, gen­eral part­ner­ships, lim­ited part­ner­ships, a C-corporation or an S-corporation, what is the dif­fer­ence between mem­ber and man­ager man­aged LLC, what does an LLC oper­at­ing agree­ment look like, do I need arti­cles of orga­ni­za­tion, and so on.
What does LLC mean

Main Advantage 1:  NO double taxation

LLCs are com­par­a­tively new, that is cor­po­ra­tions have existed for cen­turies, LLCs were first intro­duced in 1977 (in Wyoming). LLC’s offer two main advan­tages: The owner(s) will be taxed like a part­ner­ship, that is, no dou­ble tax­a­tion. When you set up a C-corporation, your prof­its are taxed twice. Take Nike for exam­ple. After Nike made 20 $ for sell­ing you a shoe, Nike, Inc. is going to pay taxes to the fed­eral (and maybe state) gov­ern­ment. When they dis­trib­ute their prof­its to their share­hold­ers, you, the share­holder have to pay taxes on the div­i­dends you received. Unfair, but cur­rent tax law. A part­ner­ship or an LLC do not pay taxes, rather they inform the gov­ern­ment how much they made and who the indi­vid­u­als behind the part­ner­ship or LLC are, who are going to include the income on their tax returns. This way, the mem­bers of an LLC only pay taxes on the LLC or part­ner­ship prof­its once. Pay­ing taxes is already bad enough, but only pay­ing once instead of twice, is cer­tainly an advan­tage.

Main Advantage 2:  Protection from Personal liability


The sec­ond advan­tage is, that owner’s are pro­tected from per­sonal lia­bil­ity. A sole pror­pri­etor is when you run your shop as your­self, maybe you give your­self a trade name (“doc’s candy store, Mary Ann’s foot mas­sage, the clean­ing won­der”) but all your bank accounts are in your name and you sign all con­tracts in your name. If you are a sole pro­pri­etor, you are per­son­ally liable. Some­one slips and falls in your candy store and a mean attor­ney sues you and gets a mil­lion dol­lar ver­dict against you, you are going to pay with your car, your house, your stamp col­lec­tion and your first-born (OK, maybe not your first-born). When you set up an LLC, only the LLC assets are sub­ject to lia­bil­ity, which means, the lawyer get­ting the mil­lion dol­lar judg­ment against your busi­ness can only sell off the assets of the LLC. IN this case you might keep your house, your car (and your first born).

Why do not more people set up LLCs ?

There is some paper­work to set up, a lit­tle more paper­work at tax time and to main­tain the sta­tus as a com­pany. Paper­work is always unpleas­ant since it dis­tracts you from your main busi­ness: mak­ing money. How­ever, a lit­tle paper­work goes a long way to pro­tect you against dis­as­ters.

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