How to Understand the Advantages of a Limited Liability Company

The main advantages of a limited liability company-as opposed to a sole proprietorship or partnership-are those implied in the title itself: In case of litigation and ensuing debt, the pursuer can only go after company assets, not the owner's personal assets. Each member of a limited liability company, or LLC, is not personally liable. To understand all of the advantages of an LLC, though, consider the tax advantages along with the reduced liability.

Things You'll Need

• Consultation with a lawyer experienced in small business formation
• Your company's projected risk of liability, profit hopes and tax needs

Instructions

1. Ask your lawyer to help you decide the level of liability you stand to have as a company. If your line of work or level of exposure to the public is such that you are at risk of litigation, the advantages of limited liability probably make sense.

2. Consider your company's profit potential in the first 5 years of business. If your pre-formation profits are booming, chances are you will be keep profits within the company rather than include them all on your own tax return. If this is the case, you might consider becoming an LLC so that you can enjoy corporate tax policy.

3. Put aside an hour or two to review the nuances of a limited liability company.

4. Use the Small Business Administration Web site to study limited liability companies (see Resources below). Take advantage of their free legal help, and attend SBA seminars on the subject if they are offered in the office near you.

Tips & Warnings

• Understand that setting up a limited liability company can be significantly more expensive and complex than setting up a sole proprietorship or partnership. This depends partly on the state in which you start it. Each state has its own laws regarding the formation of LLCs.