The limited liability company (LLC) is one of the most popular types of business entities for those starting their own commercial enterprises. In choosing what business structure works for you, there are three major considerations: liability, organizational needs, and taxation. While the law recognizes a variety of business entities, the LLC is oftentimes the best choice.

The main reason for creating a business entity is protection from personal liability. People can, and do, operate businesses in their own names without a business organization. This is called a sole proprietorship. With a sole proprietorship there is no legal distinction between the individual owner and the business. Any debts or obligations arising from the business are the owner’s personal responsibility.  Organizing a business as an LLC insulates the owners from most business related obligations, meaning the business is legally separated from the owner’s personal affairs, so creditors of the business cannot lay claim to the owner’s personal assets. This protects the owners if the business falters or fails completely.

An LLC is often the preferred type of organization for small businesses as there are no limitations on the number of company owners. Also, the regular accounting and reporting costs associated with an LLC are lower than other business structures. There are also fewer formalities in operating an LLC. For example, corporations are required to hold annual shareholder meetings, but this is not required for LLCs. An LLC can certainly be a good choice, but one should consult an experienced business formation attorney in advance.

Corporations also pay income tax on the revenue the company earns, and the owners pay additional income taxes on any salaries and benefits drawn from the company. This is known as “double-taxation.” By contrast, an LLC itself does not pay income tax. The income “passes through” the company and only the owners are taxed.

Another significant advantage of an LLC is that the organization uses the “cash” method of accounting, so the owners only recognize and pay taxes on income when it is received. Other business entities use the “accrual” method of accounting, which triggers taxes when the income is placed on the books rather than actually distributed.

The attorneys at Anker Law Group in Rapid City are highly skilled and experienced in all aspects of business organization and taxation. If you wish to create or expand a business in South Dakota, feel free to contact us online or call 605-519-5967 for an initial consultation.

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