What is an LLC?

What is an LLC?

Let’s say you’re a timber-cutter operating independently in the Oregon woods.  You get your contracts from large timber companies or the U.S. Government, then turn around and hire the machinery and manpower to get the job done.  For work you have a few trucks and some light gear.  Back home, you’ve got a mortgage, two car payments and a few acres on which you run a hobby farm.  It’s a good life.

Now ask yourself this: If something goes wrong, would you rather you lost your business assets … or all your assets?  Sadly, this is a question too few business owners actually ask themselves, and in so forgetting, they set themselves up for potentially devastating consequences later on.

So what is an LLC?  The acronym stands for Limited Liability Company, and the main benefit of this type of entity is right there in the name: limited liability.  When you form an LLC, the company itself becomes generally liable for whatever happens on the company’s time in the ordinary course of its business.  That means if a piece of equipment malfunctions and someone gets injured, or you fail to follow a regulation stipulated in your contract, the consequences are applied only to the LLC rather than to you as well.  This is generally true, however exceptions apply.

Those consequences might include damages from a lawsuit, forfeited or repossessed equipment, liens and so forth. While this may put the company out of business, though, you’ll still be fine.

What happens if you don’t form an LLC (or another separate legal entity) and something goes wrong?  Then the damaged parties can come after you and everything you own.  Say goodbye to the house, cars and hobby farm, not to mention any bank accounts or other assets you might have … because so long as you have money to pay, they are all potentially forfeit.

Plus, an LLC comes with a potential significant tax advantage (if an S election is timely made), which is the fact that it is not taxed as a C corporation (i.e. taxed at the entity and shareholder levels).  Rather, each member of the LLC is taxed at the individual level on their federal tax return as a pass through entity.

In the end, the choice is clear: many small business owners that can form an LLC should and do.  If you’d like to learn more about your options, speak to a business lawyer today.

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