| The limited liability company option still generates | | | | Note: A corporation legally protects business owners |
| questions and confusion among business owners, | | | | and investors in the same manner that a limited liability |
| entrepreneurs and investors, and that's too bad. One | | | | company. The people who own the shares in the |
| can rather easily provide an explanation of the LLC by | | | | corporation are not simply by virtue of owning those |
| answering three questions: what is a limited liability | | | | shares legally obligated for the debts of the |
| company, why should one contemplate the LLC option, | | | | corporation. As with an LLC, the law considers the |
| and how does someone setup an LLC or limited liability | | | | corporation to be legally separate person. |
| company: | | | | Limited liability companies also produce some unique |
| What is an LLC? | | | | tax planning benefits--specifically the ability to have an |
| An LLC is a legal fiction created when someone | | | | investment or business taxed in whatever saves the |
| (perhaps you) files some paperwork with the | | | | most tax. For example, an LLC can be disregarded as |
| appropriate state agency asking for permission to | | | | a separate taxpayer if that makes sense (which |
| create a new limited liability company. If the state | | | | means its income and deductions get reported on its |
| grants you permission-which it will if you do the | | | | owner's tax return). And an LLC can be treated as a |
| paperwork right--you or you and your partners now | | | | regular corporation or as an S corporation for tax |
| own an entity that can do a bunch of stuff that, | | | | purposes. |
| normally, only human beings can do. | | | | How Does Someone Create an LLC? |
| This sounds confusing, but consider the fact that your | | | | Procedurally, you create an LLC by filing articles of |
| dog can't sign contracts. Nor can your dog own | | | | organization, also sometimes know as articles of |
| property. Nor can your dog earn income or borrow | | | | formation, with the secretary of state in the state |
| money. | | | | where you'll operate your LLC. For instance, to create |
| In a similar fashion, a comfortable leather chair that sits | | | | an LLC in California, you file articles of organization with |
| in your living room also can't do these sorts of | | | | the California secretary of state. |
| things--sign contracts, own property, earn income, | | | | The articles typically name the LLC, identify what the |
| borrow money and so forth. Generally speaking, only | | | | LLC will do, and name the registered agent (a real |
| people can do these types of things. | | | | human being) whom the state can contact if it has |
| The LLC however is an exception to this general rule. | | | | questions. |
| An LLC, once it exists, can sign contracts. The LLC | | | | Tip: Most though not all states' secretary of state |
| can own property. The LLC can also earn income and | | | | websites provide downloadable forms you can use to |
| borrow money--and pretty much do all of the | | | | provide the articles of llc formation information. |
| business-y things that a regular human being can do. | | | | In addition to the articles, people usually create an |
| Why Setup an LLC? | | | | operating agreement. Akin to a partnership's partners |
| People setup LLCs, or limited liability companies, for | | | | agreement or a corporation's bylaws, the LLC |
| two reasons: liability protection and tax planning. | | | | operating agreement provides the rulebook for the |
| The liability protection angle is perhaps the easiest to | | | | limited liability company's activities and specifies how |
| understand: If you operate some business or hold | | | | the owners of the LLC operate the LLC. |
| some investment, you can be liable legally for bad | | | | Finally, in cases where the LLC will employ people or |
| things that happen in the business or in the investment | | | | will have multiple owners, the LLC needs a taxpayer |
| by virtue of your ownership. If the business borrows | | | | identification number from the Internal Revenue |
| money and then can't repay the money, for example, | | | | Service. |
| you by simple virtue of your ownership may be forced | | | | Experienced entrepreneurs and investors as well as |
| to pay off the borrowed money. | | | | small business people operating on a tight budget can |
| If you own a business or investment through an LLC, | | | | often setup an LLC on their own. However, commonly |
| however, you aren't liable for the debts or obligations | | | | business people and entrepreneurs also work with a |
| of the LLC merely because you're an owner or | | | | paralegal service (if all they do is document |
| co-owner. In other words--and this is the part of all this | | | | preparation) or with a local attorney or accountant (if |
| that's fiction--state laws will say, "Oh, no, it's not Joe | | | | they need legal or tax advice). |
| that owes the money. It's Joe's LLC... " | | | | |