Taxes Made Simple

Keith (self-employed consultant) asks:

I went out on my own this spring and started my own practice consulting for small businesses. I'm trying to figure out the differences between all the different options for legal structures. It seems like forming an LLC is my best choice, what do you think?

Answer:

The first thing to say here is that it's very likely to be a good idea to talk this over (at least briefly) with an attorney who specializes in small businesses.  That said, the following are a few considerations that you don't want to overlook.

• Incorporating (forming a corporation) or organizing as a Limited Liability Company can offer the benefit of limited liability (meaning that if the business is sued, you are not held personally liable for the debt).  However, if the business is sued as a direct result of something that you personally did, it probably won't be terribly difficult for the plaintiff to get a court to agree to hold you personally liable as well as your business.  Also, if you are going to have to obtain a loan to finance a new business, you can pretty well count on the creditor requiring you to sign personally for the debt.

• Before coming to a final conclusion about the legal structure of your business, be sure to consider state law as well.  As an example, a single-owner LLC is treated as a sole proprietorship for Federal Income Tax purposes (meaning income is simply passed through to the owner), but some states actually impose an entity-level tax on the LLC (meaning that the income of the LLC would be taxed by the state, and when the remainder of the income is passed through to the owner, it will be taxed again as personal income).

For More Information, Take a Look at My Related Book

See it on Amazon now.

A Testimonial from a reader on Amazon:

"A very concise and practical guide to the formation, taxation and legal differences between Sole Proprietorships, Corporations and everything in between. Very easily read with a simplified presentation makes this a great introduction to help you decide how to form your business." - Michael J Reed

Read more reviews on Amazon.