Should You Form an LLC for Your Small Business?

If you are in business as a sole proprietorship, and looking to change the face of your company to limit your personal liability without the tax ramifications of a corporation, you should consider forming a limited liability company, or LLc. Why an LLc instead of a limited partnership, an S corporation, or a traditional corporation? LLcs have become popular with consultants in a variety of businesses, from real estate brokerages and investment companies to the single person operating a computer repair shop, because this form of business entity offers the owner the best of both worlds, combining features of both a corporation and of a limited partnership.

The Limited Liability Company is a relatively new form of business ownership, created to provide greater flexibility than found under S corporation provisions, giving business owners who have put there personal assets into a company protection from personal liability similar to a corporation; and granting the owner management flexibility not found in any form of corporation but common in limited partnerships.

The ability to form a limited liability company has been created by state law in every state. These state statutes vary somewhat from state to state, but are fairly uniform. LLcs are treated as partnerships by federal tax code, meaning a direct pass-through of profits or losses for from the business for tax purposes. This removes your business venture from receiving a one-two tax punch, first on corporate profits, then on your personal income derived from the company. When you form a limited liability company under the laws of your state, you need to file a Form 1065 with the Internal Revenue Service, "U.S. Partnership Return of Income."