Starting Your Own Business?

With U.S. employers still reluctant to hire, more folks are considering starting a small business. But what's better, forming a corporation or a trust? Neither actually. For individuals looking to start small and grow big, I typically suggest forming a limited liability company, or LLC.

Every state allows single-member LLCs. To create one, you will need to file the proper documents with the appropriate state agency and pay filing fees. For example, in New York you will need to file so-called articles of organization and obtain a "department of state filing receipt." You'll also need to advertise the existence of the LLC in a few local business journals and obtain an affidavit of publication.

But before you make a decision on a corporate structure, you first need to understand the legal and tax implications. LLCs shield your personal assets from the liabilities of the business. This means that if your company sinks into debt, banks and other lenders cannot seize your personal property. The only exception is if you signed a personal guarantee on a loan to your business. So a LLC provides legal protection of your assets in much the same way as a corporation. But a LLC has more flexibility when it comes to management and taxes.

When it comes to taxes and tax reporting, LLCs are simpler than corporations. LLCs are "conduit entities," which means that they pass through the taxable income to the owner or members (the individuals who own the LLC). This means that the LLC itself does not pay taxes. Income from the business is instead passed down to the company's members. The members report the profits or losses from the LLC on their personal income tax returns.

For purposes of tax reporting, a single-member LLC is considered a sole proprietorship. The tax reporting for individuals who own a single-member LLC is straightforward. They report the income, expenses and net profit from the LLC on Schedule C of the Form1040 that they file with the Internal Revenue Service.

When there is more than one member of a LLC, it is referred to as a partnership LLC. These businesses must file partnership tax returns using Form 1065, U.S. Return of Partnership Income. Since a LLC does not pay income taxes on its own, it avoids the double taxation that is a problem with corporations. Corporations pay taxes on their income, and shareholders also pay taxes when the company's profits are distributed to them in the form of dividends.

Most states have a registry where you can search to see if the business name you are considering is available and not in use by another registered company. One piece of advice: Do not use your surname as a part of the company's name. If something goes wrong down the road or you want to discontinue the business, you'll be glad your name isn't on the front door.