Small Business LLC

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The owners of an LLC are not personally liable for the debts or faults of the company. So if the company goes bankrupt, the creditors should only be able to go after the LLC assets and not the personal property of the owners (house, cars, your cat).

1. They both have the major benefit of limited liability because they are considered a separate legal entity from the owner or owners of the company.

   However, for the limited liability benefit to work, you'll need to:

   • Operate the LLC properly. This means you have to operate even a small business LLC as a separate entity and do all the administration required. For example, you must always keep your personal finances separate from the business finances (i.e. not "comingle assets"). So be sure to have separate bank accounts for the business and your personal transactions.

   • File licenses, pay taxes, and have the proper insurance. Otherwise, a court could rule that you did not operate like an LLC and are therefore not entitled to the LLC's limited liability.

   • Establish a credit history that is separate from your personal credit. What is an LLC but a separate legal entity. The LLC must establish a credit history that is separate from the personal credit of the owners. In this way, the small business LLC can potentially borrow money, get credit cards, obtain a credit line, buy equipment on credit, etc.

     However, you will not likely find a banker willing to extend credit to a brand new LLC. The reason is that the bank requires the LLC to have some history of operation before they hand out money to an "entity" that may not pay it back. This is especially true because, remember, the LLC is a separate legal entity and if it defaults on a loan or a credit card bill, the bank can theoretically only go after the assets of the LLC which may be zero.

     Eventually banks offer the LLC credit cards and loans but it usually requires three years of financial history proved via tax returns.

2. LLCs and "S" Corporations are taxed similarly. They are taxed once (avoiding "C" corporation double taxation) at the personal level after profits are allocated to the members of the LLC. (They are called "members" in an LLC rather than "shareholders" as in a corporation.)

   In regards to fees and state taxes, you can expect to pay the same types of minimum taxes for the LLC as you do for an "S" Corporation. This includes the filing fee required to set up the LLC and the annual minimum franchise tax fee ($800 in California.) Be sure to check the details in your state for the exact numbers.

Small Business LLC versus S Corporations

So LLCs and "S" Corporations are similar in their limited liability and tax situations. What is an LLC vs. an "S" Corporation? How are they different? How do you decide which one to become?

The biggest advantage of an LLC over an "S" Corporation is that an LLC encounters fewer administrative hassles. This depends on the state where you will operate but in general you don’t have to have board minutes, board resolutions, meeting minutes, etc. (You do however have very similar formation administration including a document you'll need when forming the company called "Articles of Organization" in an LLC and "Articles of Incorporation" for an "S" Corporation.)

On the other hand, with an LLC you might face more problems obtaining investment, merging with other companies, or getting acquired.

Part of the problem is that LLCs are relatively new and as a result there have not been as many legal cases that have occurred with them. This means that attorneys might be unsure of how a legal issue might turn out, whereas with a corporation there is much more case law to review in determining how your case might turn out. Because of these things, investors, big customers, and others may be wary of working with you.

Still, a small business LLC could be an easier, more efficient, ownership structure.

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