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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