Your business structure should be in accordance with the business’s activities and potential risks. If you are operating a home based business which does not involve much personal risk or considerable financial transactions, a sole proprietorship will suffice. Forming a sole proprietorship does not entail any legal or statutory formalities. All you need is the required permits and licenses from your state or the IRS. A major issue with operating a sole proprietorship is the unlimited personal liability of the business owner. You will have to settle any debts or claims arising out of the business personally and your personal property is liable to get liquidated for settling the claims or debts.
For operating a small business that has potential for business claims or debts, Limited Liability Company is an ideal structure. The LLC has a separate existence from that of its member(s). Its business obligations or debts do not crossover to the members in normal circumstances. LLC member’s personal liability is limited to their capital contribution to the business. To form an LLC, you have to comply with certain procedures and formalities. Formation of LLC is governed by state statutes. You should refer to your state’s rules and regulations governing the formation of LLC.
LLC is relatively a recent addition to legal business forms. LLC’s can be formed with single or multiple members. All states have enacted laws for formation of single member LLC though the rules governing it vary in each state. The IRS does not have an individual tax entity classification for LLC and treats it as any of the existing tax entity classification such as sole proprietorship, partnership or corporation. LLC taxation benefit is that the members can choose any of the other tax classification that is most beneficial for them for reporting and payment of tax.
For more information also see llc taxation benefits.
