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ABCs of LLCs

Consider changing your small business from sole proprietor or partnership to a limited liability company.

Chances are that if you started your small business more than a few years ago, you formed it as a sole proprietor, a partnership, or a corporation. Each of these types offers its own benefits. Sole proprietorships, for example, are the least costly and easiest form of business to start, though they can leave you open personally to business liability. A corporation can limit your personal liability, but it can be more costly to start and maintain, and your tax rate might be higher.

A newer structure that has recently emgerged for small businesses, the LLC, bears a look. No, LLC doesn’t stand for “lucky little company,” although forming an LLC may improve your success rate. LLC refers to “Limited Liability Company,” and is a business entity that limits your personal liability while offering flow-through taxation. The latter term refers to the fact that business taxes in an LLC are paid on individual income tax returns.

The LLC business structure combines the best elements of the corporate and partnership forms of doing business. It protects your personal assets, offers you tax advantages, and can also offer some flexibility in terms of estate planning.

In most states, sole proprietors and partnerships can convert to LLCs. Look at the Small Business Administration Web site for more information about LLCs and check with your accountant and attorney to determine if forming or changing to an LLC is right for you.

Contributing Editor Maggie Biggs has more than 15 years of business and IT experience in the financial sector.

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