Benefits of Forming an LLC
I often get questions from readers and sometimes I'll answer them here. If you have questions you'd like to ask, please email me by clicking on the "Contact Ray Martin" link to the left.
Question: What is the best way to start a new business: as a corporation, LLC or a trust? We have a son wanting to start his own construction business, so we need to know what we should advise him on getting started. How can he choose a name for his business?
Thanks!
Janice
Ray Answers:
I'd suggest he form a single-member limited liability company or an LLC.
Every state allows single-member LLCs. To create an LLC, you'll need to file the proper documents with the appropriate state agency and pay filing fees. In New York you'll need to file Articles of Organization and obtain Department of State Filing Receipt. You'll also need to advertise the existence of the LLC in a few local business journals and obtain an Affidavit of Publication.
But before you make a decision on any corporate structure, you should first understand the legal and tax implications.
LLC's shield the personal assets of their owners from the liabilities of the business. This means that if your company has liabilities or bad debts, banks and other lenders cannot seize your personal property. The only exception is if you signed a personal guarantee on a loan to your business. So an LLC provides legal protection of your assets in much the same way as a corporate structure, however an LLC has more flexibility when it comes to management and taxes.
The tax implications of an LLC are simpler than that of corporations. LLCs are "conduit entities" which means that they pass through the taxable income to the members. This means that the LLC does not pay taxes. Income from the business is instead passed down to the company's members (members are the individuals who own the LLC.) The members report the profits or losses from the LLC on their personal income tax returns.
For purposes of tax reporting, a single-member LLC is considered a sole proprietorship. The tax reporting for a single-member LLC is straightforward. Single members report the income, expenses and net profit from the LLC on Schedule C of the Form1040 that they file with the Internal Revenue Service.
When there is more than one member of an LLC, it's referred to as a partnership LLC. Partnership LLC's must file partnership tax returns using Form 1065, U.S. Return of Partnership Income. Since an LLC does not pay income taxes on its own, then it avoids the double taxation that is a problem with corporations. Corporations pay taxes on their income and shareholders also pay taxes when the corporation's profits are distributed to them in the form of dividends. Check out this for more on taxation of LLCs.
Most states have a registry where you can perform a search to see if the business name you are considering is available and not in use by another registered company. In New York folks can perform a corporate search on the New York State Department of State, Division of Corporations web site, where you can log on and perform a search to find out if the business name he wants to use is available (e.g. not already in use by another business).
Here is another bit of advice: he should strongly consider NOT using his family or surname as a part of the name for his business. Later if something goes wrong or he wants to discontinue the business, he (and you) will be glad he did not do this.
