A limited liability company, or LLC, is easiest described as being a composition of a corporation and a partnership. Simply explained, limited liability company give a business the good parts of a corporation but not all of the protocols usually associated with a corporation.

The owners of an LLC, who are called member, get treated like a partnership when it comes to taxes. It is a pass-thru tax structure, so income taxes are paid by its owners, so the LLC never pays income taxes itself, unlike a corporation.

An LLC does not suffer from the double-taxation problem that a corporate structure faces. In other words, because the tax burden is put on only the owners, income tax is paid just one time. However, a limited liability company must still pay state (if applicable) and federal payroll taxes.

At the time of form a LLC, you choose how to handle income taxes. You can be taxed like a sole proprietor, a C corporation, or an S corporation. The great thing about a limited liability company is that you get to decide how to handle paying taxes.

If the LLC is properly set up, and you completely separate business and personal activities, the members are afforded personal liability protection. This potential protection is one of the biggest reasons to form an LLC versus running a business as a sole proprietor. You should also consider that a business generally earns more reverence when it has a formal business structure, such as a limited liability company.

Forming an LLC is done by a person who does not necessarily have to be a member. You can actually use an online company to create your LLC for a very reasonable cost, saving you from having to ensure the structure is set up correctly.

A member’s monetary liability is limited to the financial contribution made by that member. When you are operating as an LLC, you can bring in multiple partners, who can either be actively involved in the company, or serve as silent investors.

While an LLC is similar in structure to a corporation, it offers more flexibility to its members. Creating an LLC with an incorporating online company is most suitable for smaller companies in which there doesn’t have to be too many owners.

The LLC is a fairly new form of business structure, at least in the US. As early as 1986, LLCs were only permitted in two states. Now, the LLC is recognized in every state.

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There are certain possible liability implications that you need to consider if you are considering starting, or already have started, a business. As a small business owner, you are possibly subjecting yourself to much greater legal liability than you had to deal with before you owned a small business.

One other issue that you have to consider when you are an entrepreneur is taxes. Business taxes are handled differently than personal taxes, so you have to be aware of what is going on with your business taxes. This is a great time to talk with an accountant.

While you probably can operate your small business as a sole proprietor, this is not the best option in most circumstances. There are many liability and tax reasons why you might not want to be a sole proprietor. Seeking professional advice about these matters is recommended.

So what can the average entrepreneur do? Smart small business owners form some sort of business structure to protect themselves personally from liability and to take advantage of corporate tax laws.

A very common business entity, and probably the best choice for most entrepreneurs, is to consider starting a LLC. A limited liability company (LLC) gives you personal liability protection, assuming it is set up correctly and you totally separate your business and personal affairs. Also with an LLC, you have the ability to choose how taxes are handled.

Forming an LLC is incredibly easy. The more expensive option is paying a lawyer to form your LLC. Another option is to use one of the less expensive Internet business formation services for form an LLC. With prices starting at $115, there is really no reason to not form a limited liability company for your business.

Talk to a professional to see if forming a LLC is the right business structure for your particular situation. It is vital to make sure that you have your business structure set up correctly to reduce personal liability and make the most of the tax benefits afforded to companies.

Learn more about starting a corporation here.

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