By: Ben Freeman, Attorney at Law—
When starting a business, the entrepreneur has several options for organizing a company. Choosing the right type of organization is important. Many small businesses operate as a sole proprietorship or a partnership. These types of organizations are easy to establish and at little or no cost to the entrepreneur. Corporations, on the other hand, can be very complex and require the dedication of time and money to manage properly. The limited liability company (LLC) offers a unique middle ground approach to organizing a business that includes the ease and flexibility of the sole proprietorship/partnership and the limited liability benefit of the corporation.
A LLC is formed by causing articles of organization to be executed and filed in the records of the Office of the Indiana Secretary of State. The filing of the records creates a legally recognized entity that is separate from the members (owners) of the LLC. This distinction can shield the members from responsibility for the debts and liabilities of the LLC. It can also protect the members from liability in any lawsuits that may arise from the operation of the business. The liability shield that a LLC offers can be there difference between a successful startup and an early failure for the entrepreneur.
LLCs also offer incredible flexibility on the payment of taxes. Sole proprietors and partnerships must be taxed as self-employed persons. This means that all income of the business is taxed as personal income at personal income tax rates. However, a LLC may make an election to be taxed as a corporation or as a sole proprietorship/partnership. This choice as to the manner of taxation provides advantages unavailable to most other business organizations.
Once a LLC has been organized, it is important for the member or members to execute an operating agreement. An operating agreement is a contract between the members that establishes how the business will be internally organized and managed. This includes who the members are, how new members can join, where the business will be located, what type of business will the LLC transact, ownership shares of the members, how the LLC may be dissolved and much more. The operating agreement sets the standard for the operation of the business making operating procedure clear for the members.
When operating an LLC, it is vitally important to keep the member’s records and finances separate from those of the LLC. The LLC is an independent legal entity and must be treated as such; whereas, a sole proprietor’s records and finances are indistinguishable from that of the business. Keeping the member’s records and finances separate from those of the LLC reinforces the liability shield that the LLC offers to the member. However, violating this rule by intermingling records and finances can result in a loss of limited liability protection.
The choice of how to organize your business is an important one. The structure of your business organization will impact every facet of your business from beginning to end. For many small business, the LLC may offer the best opportunity for success. However, it is important to discuss your business goals with legal counsel prior to making the decision to insure that your company’s organization is optimized to meet those goals. Once properly organized, your company is free to open for business.
About the author: Benjamin J. Freeman is a graduate of Jay County High School, Ohio Northern University, and the University of Dayton School of Law.
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