| Business owners often struggle with whether or not | | | | People often assume (incorrectly) that one option you |
| they should form a limited liability company for a new | | | | need to consider as an alternative to a limited liability |
| entrepreneurial venture. And that maybe makes sense. | | | | company is the S corporation. After all, sure, LLCs |
| Deciding to form a limited liability corporation requires | | | | may be great. But S corporations (so the rumors say) |
| thoughtful analysis. | | | | offer small businesses the opportunity to minimize |
| Unfortunately, people often complicate the analysis of | | | | payroll taxes that the owners pay. |
| LLC incorporation because they believe several "urban | | | | But here's where this myth loses touch with solid |
| myths" about the limited liability company. The good | | | | ground reality. An S corporation is not a real |
| news in all this--at least from your perspective--is that | | | | corporation. An S corporation is a tax accounting |
| you'll make your own entrepreneurial decision-making | | | | classification that the Internal Revenue Service and |
| easier and more profitable by recognizing and then | | | | almost all state revenue agencies allow corporations |
| ignoring these myths. But let me explain... | | | | and LLCs to make. |
| Limited Liability Company Protection Weaker than a | | | | In other words, a business owner never has to choose |
| Regular Corporation | | | | between an LLC and an S corporation. A business |
| Commonly, you hear knowledge-able business | | | | owner can choose to have his or her LLC treated for |
| people--sometimes even attorneys and | | | | tax accounting purposes as an S corporation. |
| accountants--suggest that a limited liability company | | | | Note: If an LLC doesn't make an election to be treated |
| provides its owners with weaker protection than a | | | | as an S corporation, the IRS uses default rules to |
| corporation. Often the person unhelpfully offering this | | | | determine how the LLC is taxed. Typically, the |
| bit of mythology pairs the advice with the statement, | | | | one-owner business operating as an LLC gets taxed |
| "Well, you know, the thing is, LLCs just haven't been as | | | | as a sole proprietorship. And a business with more |
| tested in litigation." | | | | than one owner that is operating as a limited liability |
| This myth is dead wrong--and for two big reasons. | | | | company gets taxed as a partnership. |
| First, if you talk with attorneys knowledgeable in LLC | | | | Limited Liability Company the 'Fly-by-night' Option |
| law, you'll learn that a limited liability company offers | | | | One last, almost laughable, LLC myth needs busting: |
| better protection than a regular corporation because | | | | the notion that the LLC option is the one that |
| by design an LLC requires less legal maintenance in | | | | 'fly-by-night' operators use. |
| the form of meetings, minutes, boards and officers. | | | | One can guess where this notion comes from: All the |
| Less required maintenance means in layman's terms | | | | big, old business entities like General Electric, 3M, and |
| that the LLC owner is less likely to "break" the legal | | | | IBM operate as regular corporations. And so it sort of |
| protection. | | | | seems like new small businesses should, too. |
| The weaker legal protection myth misleads business | | | | But here's the problem: The corporation is not |
| people in a second way, too. In many states, an LLC | | | | state-of-the-art legal technology. The corporation is, |
| provides protection that regular corporations do not. | | | | really, an old technology. You should think about a |
| How? In many states, your personal creditors may in a | | | | corporation as being like a steamship a skyscaper. |
| worst-case scenario be able to gain ownership of | | | | The limited liability company option, in comparison, is like |
| your stock in a corporation but not of your interest in | | | | a personal computer or the Internet. In a sense, the |
| an LLC. | | | | LLC amounts to a new legal technology with big |
| In other words, many times, the LLC doesn't just | | | | benefits as compared to the old technology of the |
| provide you, the owner, from bad stuff that happens | | | | traditional corporation. Which is probably why newer |
| inside the LLC. The limited liability company also | | | | big companies like Microsoft, and many of the cellular |
| self-protects business assets from bad stuff that | | | | phone companies make extensive use of the LLC. |
| happens to the LLC owners. | | | | Note: Big benefit number one is the fact that the LLC |
| Limited Liability Company an Alternative to S | | | | requires less legal maintenance. Benefit number two |
| Corporation | | | | comes from the fact that limited liability companies |
| Another limited liability company myth concerns the | | | | select the tax accounting treatment they want. |
| "LLC versus S corporation" question. | | | | |