Are LLCs Today’s Business Structure of Choice?

On Tuesday, I talked about business structures, and some preliminary steps I take when first talking with a client about the best choice for them.

When Diane and I do a tax strategy with a new client, we always look at it from two angles:

1. From a tax perspective; and
2. From a legal perspective

The two are often quite different. For example, from a tax perspective, a Sole Proprietorship, or Schedule C business, is a great choice. It’s fast, easy to set up, very low cost to maintain, and lets a client grow a business idea without a huge investment of money. But from a legal perspective, this structure is scary. It offers zero asset protection for you personally. If the business fails, you, and all of your personal assets could go down with it.

I think that’s why Diane and I both really like the LLC. Unlike all the other business choices out there, an LLC can pick whatever tax classification suits it best. It can even make that tax choice months after it was formed. Plus, it has plenty of strong, built-in legal protection that can often keep your personal assets safe from business creditors. It’s almost like the stem-cell of business entities, if that makes any sense.

LLCs = Asset Protection + Tax Flexibility

If you aren’t sure how a new business will pan out, but don’t want to risk your other assets unnecessarily, my suggestion is to begin with an LLC. You’ve got unparalleled flexibility in tax options, plus you’ve got room to maneuver before that tax choice has to be made.

And make no mistake: the tax choice is crucial. Get it right, and you’ll save taxes. Get it wrong and not only will you see no savings, you’ll probably wind up paying more taxes than you need to.

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