My absolute favorite thing to do at work helps a client form a new limited liability company, or LLC.
It was an honor to serve at the District Attorney’s Office. But all we ever did there was fight or get ready to fight.
Now that I’m in private practice, I get to help clients build things, and the form of building that I find most satisfying is helping clients start new businesses.
Before 1977, if a person wanted to start a new business, he had three choices. He could enter business as a sole proprietorship, he could form a partnership with others, or he could form a corporation. None of these choices was entirely satisfactory.
A sole proprietorship means a single person goes into business. This form of business has the advantage of single taxation, meaning its earnings only get taxed once, as income of the owner. However, a sole proprietor is subject to personal liability for the company’s debts. If a sole proprietor hires an employee, and that person negligently hurts someone in the line of employment, the employer can be successfully sued as an individual for the business-related injury and his personal assets can be liable for collection.
A partnership has the same single taxation advantage and personal liability disadvantage as a sole proprietorship. However, a partnership is a coalition of multiple persons for the purpose of doing business.
A corporation is a creation of state laws under which persons go through a filing process and pay a fee to state government. If they do these things correctly, they get to form a legal entity that is treated as if it were a person. In a corporation, the persons who own the company are not personally liable for the debts of the company. However, a corporation is subject to double taxation, meaning the company’s revenues will be taxed twice: Once as earnings of the company and then again as earnings of the owners when the company distributes dividends to its shareholders.
In 1977, Wyoming passed a law creating a new type of legal entity, the limited liability company, or LLC. Wyoming structured its law so that the members of the LLC would be exempt from personal liability for the company’s debts and also get the benefit of single taxation. People thought the IRS would reject the idea, but instead, it has embraced single taxation for LLCs.
Every state now has a limited liability company law. It’s an excellent option for a person to start a new small business.
Alabama law requires an online filing with the secretary of state and the payment of a very affordable filing fee. The members of the new LLC also should agree to a written agreement on how the company will operate and get a federal Employer Identification Number.
An advantage of forming an LLC that isn’t really in the law is that it creates an appearance of legitimacy for your business, making it easier to get financing and attract customers.