On Friday, I took an important legal step for my business: Picture Your World Photography has changed its designation from a sole proprietorship to a limited liability company, or an LLC.
Often mistakenly called a limited liability "corporation" instead of the correct term "company," the LLC is a hybrid business entity sharing characteristics of both a corporation and a partnership. LLCs are popular because owners, also called members, have limited personal liability for the debts and actions of the LLC. That means, if the LLC goes bankrupt, I will not be required to make up the difference with my own money. If the assets of the LLC can't cover the debts and liabilities, the creditors cannot look to me, other members, managers or officers for recovery. Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation.
An LLC is a separate and distinct legal entity. Because of that, I was able to get a federal tax identification number (also known as an Employer Identification Number) open a bank account and do business all under my company's, name "Picture Your World Photography LLC." I filed documents with Secretary of State's Business Center , and paid a $50 fee.
Under Colorado law, my company is also known as a "Single Member Liability Company," which is taxed as a sole proprietor for income taxes. Being an SMLLC becomes important when determining employment tax requirements. I can use my companies name and EIN, but I, as a single member owner, is ultimately responsible for collecting, reporting and paying employment taxes. I'm still very confused about this designation, so I will have to do more research to make sure I understand because different federal tax reporting rules apply depending on whether or not I have employees, which I don't yet.
I will have to take all of this up with my accountant. He will be pleased to know that I now have separate bank accounts for personal and business use, will make it easier to figure out my profit and losses come tax time next year.
Need help starting your own LLC? Use this checklist from findlaw.com to help get you started. I am about half way done with the list, working on 4-7, including creating an LLC operating agreement and filing articles of organization. Make sure your business complies with your state's legal requirements by checking with the Secretary of State's office and the Internal Revenue Service. Consulting with a business attorney is a great idea as well.
Sunday, September 28, 2008
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2 comments:
Hi Sheeba,
Congrats on making the move to a separate business entity.
As someone who has gone through this, let me give you a little piece of advice. In addition to talking to your accountant, find and go over all this with a business lawyer. Have him/her look over your articles of organization and your operating agreement to make any necessary changes. If you don't, you could have some holes that will allow someone to later "pierce the LLC shield" and get to you personally. Do it right or you'll lose all the protections a LLC provides. It's well worth a couple hundred bucks.
Good luck!
Hi Tim, thanks for leaving such a great comment. I too agree it's a great idea to have a business lawyer check things out. There is no way my personal finances could take a hit for my company, so it's better to have all the protections in place that I can.
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