by Joni Per-Lee, Georgia SBDC Small business owners wrestle with whether their sole proprietorship status provides adequate protection in a litigious society and whether this ownership structure allows for company growth. Another popular ownership option, the Limited Liability Company (LLC), may put their soles to rest! An LLC exists somewhere between a sole proprietorship or partnership and a corporation. It offers the tax advantages of a partnership with the legal protection provided a corporation's owners. In a sole proprietorship, the owner and the business share the same legal identity. Therefore, individuals operating their companies as sole proprietorships face the possibility of a lawsuit, putting both their business and personal assets at risk. When a business is incorporated, the owners are liable for business debts and claims only to the extent of their ownership interests. While they want the protection, many sole proprietors have not incorporated to avoid the expense and hassle of creating a separate legal entity. LLCs give the legal benefit in a few simple, inexpensive steps. In order to establish an LLC in Georgia, one must reserve the company name, complete a one-page application, file Articles of Organization, and pay a $75 fee to the Secretary of State's office. (All of these steps can be taken online at www.sos.state.ga.us.) As a side note, LLC owners are called "members," and Georgia allows for one or more members. [Note: A full listing of state department of revenue offices can be found here for business located outside of Georgia.] Spana HotelArticles of Organization can be very simple or fairly complex. They must state the name of the business and its members, be signed by an LLC member, and should probably include the management structure. An LLC can be managed by all of its members or by designated individuals. In the latter case, only the designated managers vote on management decisions and act as LLC agents. Unlike corporations, LLCs can operate informally with no required ownership or management meetings. When forming an LLC with more than one member, however, one should consider preparing an LLC operating agreement. This agreement should specifically identify the rights and responsibilities of the LLC members and managers. Areas to address include who will work in the business, how and how much each member will be paid, and what steps will be taken if a member wants to leave or transfer ownership in the LLC. An attorney would be helpful in drawing up a formal operating agreement. Again, this document is optional but will prove a valuable tool as the business matures. Finally, an LLC with one member continues to be treated as a sole proprietorship by the Internal Revenue Service. Profits are reported on a Schedule C as part of the individual 1040 tax return. LLCs with more than one member automatically receive partnership tax treatment. The LLC files a Form 1065, reporting the allocation of the company's profits or losses to the members according to the terms of the operating agreement. The members then report the earnings on their 1040 return, resulting in self-employment taxes. It should be noted that both single and multi-member LLCs may elect corporate tax treatment from the IRS. Like the other forms of business ownership, LLCs have down sides. Since there is no stock, ownership by outside investors can be cumbersome. Unlike corporations, the IRS restricts the deduction of certain benefits paid on behalf of LLC owners, like health insurance. Finally, the self-employment tax burden can be higher for LLC members when compared to ownership of an S Corporation. A tax advisor will help evaluate the financial consequences of this decision. So, should a sole proprietor, intending to stay small, convert to an LLC? If for no other reason than legal protection, the answer is probably "yes." On the other hand, a sole proprietor with growth in mind, or a group of individuals starting a business together, will want to carefully consider future plans in choosing a form of ownership. The legal website www.nolo.com and IRS tax site provide excellent information on LLCs. Additional assistance with this and other business decisions is also available from the Small Business Development Center in your area. > See also: Legal, Regulatory & Taxes | 
