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When considering whether to form your small business, you may be asking yourself, “Is a LLC formation – right for me?” A Limited Liability Company can be a great way to protect your personal and family finances from business risks, as well as provide tax savings. There are some great benefits for those who choose a LLC formation. Yet an LLC is not right for everyone. You as the business owner are the only one who can truly decide what’s best for your business. So when thinking “Is this right for my own business?”, be sure to educate yourself and surround yourself with professional advice.

First, let’s start with the benefits of starting your own business via LLC formation:

1) Reduced Liability

LLCs reduce the liability you face as a business owner. Similar to a corporation, The LLC functions as a separate legal entity, protecting owners from liabilities of the business.

2) Flexibility and Control

A Limited Liability Company can be structured with multiple levels of membership, giving different control and income benefits uniquely to each person. Also, membership can be easily transferred or adjusted, making this a great option for family businesses.

3) Tax Savings

When you form your business as a Limited Liability Company, you retain more of your earning power in several ways (under the normal “partnership” classification:
Taxes happen at the member level, not the business level, avoiding “double taxation”
Expenses are deducted before income is counted, allowing the employees to avoid being taxed on all revenue
Greatest organizational tax flexibility

Note: a LLC is federally taxed as a Sole Proprietorship when their is only one member. With more than one member, a LLC can choose to be taxed as the traditional partnership, S Corporation, or a C Corporation, enjoying the same tax benefits as those types of business formations.

4) Income Sharing

You can have your children or others with lower income taxes owed working for you, providing money for your family, without paying as much taxes on that income.

5) Marketing Advantages

If you own a small business, having the “LLC” or “L.L.C.” at the end of your business name can provide great benefits to your businesses image. It raises the perceptions of your customers and clients. With a Limited Liability Company, you gain a certain amount of instant trust. It adds to those invaluable first impressions to display proof of your LLC formation.

Who are Limited Liability Corporations for? You may be asking yourself, “Is a LLC formation right for me?” Well, a LLC is great for owners of businesses who want great flexbility in the types of control each owner has. It’s a good way to structure a real estate company or as a method of owning boats or planes. It’s the simpler business formation when it comes to taxes and paperwork, so if you have an aversion to those, this may be the way to go. A LLC formation is also a great form for a family business, allowing easy transfer of ownership from one generation to the next.

When you ask yourself, “Is a LLC formation right for me?”, remember that a LLC is certainly not the right business for everyone. If you wish to attract investors and raise capital for stock, Corporations can be a better option. The legal structure of corporations is generally more trusted by venture capitalists and angel investors, and the LLC does not provide the same kind of stock options to investors, especially for those investors hoping for an eventual IPO. If you want your business to own other businesses now or in the future, the LLC formation is limited to 80% ownership of another business.
A couple other drawbacks are “phantom income” and “earned income”. Phantom income is income that the LLC earns and uses to purchase an asset. While this income is not received by the owners, they still may be taxed on it. Also, all income that is received by members of an LLC formation is considered earned income, whereas corporation income could be considered passive income, such as capital gains. (The earned income drawback can be avoided by U.S. citizens or residents via a Subchapter “S” Election).

As always, be sure to educate yourself with good research, surround yourself with professional advice, and think through the options carefully before making such an important decision, such as LLC formation, with your business.

Here’s to business success in 2009!