Why form an LLC?

We've helped countless small business owners incorporate their business and protect their personal property, cash and other assets from being drawn into a legal matter because they failed to establish a corporate entity. Many solo entrepreneurs are so busy making their dream a reality that the last thing they think about is how to protect themselves from costly (but all too common) lawsuits like a breach of contract or defamation. Unfortunately, small business lawsuits can put your business and family at risk without the proper legal protections that a corporate structure provides.

If you haven't felt the need to form a company legally, you're not alone. Maybe you started a business out of your garage (i.e., bookkeeping or car detailing) or your living room (i.e., beauty services) a while back and nothing bad has happened — yet. After all, it's just you writing an affiliate marketing blog. Maybe a friend helps you out by shooting your YouTube videos, but it's mostly your creativity and hard work that has resulted in a side hustle that could become your full-time job one day. Who's going to sue you? (No one, we hope.)

There are two main reasons for anyone, including solo entrepreneurs and small business owners, to form a limited liability corporation (LLC): Asset protection and tax options. If you or another member of the LLC are sued, your home or retirement savings are protected. A business license or a state or locally registered company name are not actual protections against debts or tort (wrongful act or infringement of a right like wrongful termination) issues. An LLC does offer this protection.

Another positive of an LLC corporate structure is the ability to select your tax basis — personal income or company distribution. For example, a sole proprietor with an LLC is taxed based on personal income. Essentially, you cannot be paid wages by an LLC company (and must pay your payroll taxes separately). Instead, you record business profit and loss on your personal income tax return. If the LLC has more than one member, each member can be taxed based on the distributions they receive (just like a C-Corporation). A C-corporation pays taxes based on the federal corporate tax rate and that of their state. These options matter because of the potential for reducing your tax liability and for attracting and retaining members and outside investment in your business.

Don't let a lawsuit hinder your business growth and success. Make sure you have the right corporate structure in place for your business and personal situation.

Categorised in: Starting a Business in Arizona

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