4 things small business owners should know about forming an LLC

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By Brooke Chaplan

When you’re getting a small business off the ground, one of the first decisions you’ll have to make is what legal structure to give it. One of the most popular entities for small and mid-sized businesses is the limited liability corporation, or LLC. Here’s what small business owners should know about forming an LLC.

LLCs are considered pass-through tax entities

Unlike larger corporate structures, an LLC is treated as a pass-through entity for tax purposes. This means the profit produced by the business is ultimately “passed through” to the owner or owners as income. In this sense, an LLC is very similar to a sole proprietorship, since it does not differentiate between the business and the business owner when taxes are due.

An LLC provides you with some protection against legal liability

As the name suggests, an LLC is a structure that can limit your legal liabilities as a business owner. Essentially, an LLC separates your personal assets from those of the business, meaning that your personal home, bank accounts and investments can’t be brought into a lawsuit filed against the business entity. It’s important to remember that you can still be sued personally, but a suit filed against your business won’t affect your personal holdings.

Different states have different rules for LLCs

If you want to get the most out of your LLC, you may want to consider forming it in a state with advantageous treatment of LLC business entities. Two popular states are Wyoming and Delaware, neither of which requires business owners to disclose their names or other personal information as matters of public record. Best of all, you don’t actually have to live in a state to form an LLC in it. Several LLC formation services exist that will act as registered agents, allowing you to form a business in a state you don’t reside in.

Forming an LLC isn’t a guarantee of protection

Needless to say, there are some limits to what an LLC can protect you from. If you’re engaging in unethical or illegal activities or otherwise doing something for which you could personally be held liable, there’s every possibility than an LLC won’t keep your assets safe. With that said, the overwhelming majority of business owners do everything they can to comply with proper legal and ethical practices, and an LLC can help to act as a shield against frivolous lawsuits or suits arising from unusual circumstances.

Now that you have a basic understanding of what LLCs are and what they can do, you can decide if this legal entity is the right one for your business. Forming an LLC can be a great way to get your business off the ground while protecting you from any liabilities it may incur. Small business owners should take the time to properly investigate the benefits of an LLC for their businesses.


Brooke Chaplan is a freelance writer and blogger. She lives and works out of her home in Los Lunas, New Mexico. She loves the outdoors and spends most of her time hiking, biking, and gardening. For more information, contact Brooke via Facebook at facebook.com/brooke.chaplan or Twitter @BrookeChaplan.

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