What is an LLC? When Should I Form One?
You have probably seen the term LLC tacked on to the back of business names all over the country. LLC stands for Limited Liability Company. LLCs are the greatest legal mechanism to conduct business under. Two common alternatives to an LLC are partnerships and corporations. However, each of these business forms have serious downfalls. Under a partnership, you are legally liable for any of the actions committed by another partner. For example, you go into business with Jesse as partners. Jesse makes a huge mistake and now you are being sued. Under a partnership, you could be personally liable for the acitons of your partners. This means that Jesse could cost you your house! That is where the “limited liability” portion of the LLC comes into play. LLCs act as their own legal entity that shield you from liability. As long as it is explicitly clear that you are conducting your business as an LLC (more on that in a later blog post), potential plaintiffs can only sue the LLC and not you individually. This is huge! That means if you were found liable in a lawsuit as an LLC you could lose the office, your desk, and your LLC bank account funds: BUT you would still be able to go home to your personal house and rest easy knowing your personal bank account is untouched.
The primary downfall of a corporation is what is known as “Double Taxation”. Doesnt sound fun does it? Its not. Organizing as a corporation means that the income to the corporate entity will be taxed AND you will be taxed on your individual return for the same money! The same money gets taxed twice! For example, say you form Lemonade Stand, Inc. The corporation makes $10 in profits. You have to pay taxes on the $10 that the corporation made. Then, it comes time to pay your salary from the corporation. You get paid $4 from the corproate profits as a salary. You have to report that $4 as income and pay taxes on it individually too! In an LLC, taxes are reported as income on individual member’s tax forms. This means that the income is only taxed once.
In conclusion, an LLC is the ideal entity for most businesses. It provides the best of both worlds from partnerships and corproations but with none of the downfalls. Forming an LLC with the Kentucky Secretary of State is actually very quick and easy. If you are operating a business without being registered, you need to organize under an LLC as soon as possible! If you need any assistance setting your LLC up, don’t hesitate to give us a call.