Because they can be treated as a disregarded entity for tax purposes, owners are protected much more than a sole proprietor and they seemed very easy to set up.

One thing I noticed about the limited liability is that if you attempt to establish any type of financial relationship – from bank accounts and credit cards, to credit accounts at office supply stores – they require the owner to cosign for the LLC!

I guess what pushed me over the edge – since I didn’t have any guidance – was knowing that some huge companies are set up as LLC’s (such as Amazon.com).

I may also have been cranky in my pre-coffee hours.

In my work, I encounter LLCs fairly regularly, and rarely are they actually properly set up. Generally this is because an owner did it themselves and missed something (though this is also sometimes the case with an attorney-assisted LLC). Since I think it is more difficult to miss something essential with a corporation, hence my preference (if one needs to form an entity at all).

On the point about liability limitation, I don’t know what to say, aside from anecdotally: I have yet to encounter an LLC where I couldn’t reach the owner’s personal assets. Your state’s LLC statute may be more forgiving.

As far as points three and four go, I will have to follow up with sourcing, though I will endeavor to shortly (my father is coming to town for a visit).

Thanks for taking my commentary in the spirit in which it was intended. And thanks for your blog.

Best regards,

Anthony

Thanks for your reply. Your points are helpful and informative.

Your first point is an excellent broadening of the conversation — I have to look into your point further.

Your second point is something I struggle with. I just have no idea how much protection any legal form has but I know that the protection aspect is one huge reason people consider these options. That’s why I made the point.

Third and forth points….When I started my company, I did so as an S-corp. My experience is that it was indeed a pain in the rear and continues to require work on an ongoing basis. Not sure the LLC requires so much effort. My research says it doesn’t but if you have more info, I’d love to have you share it.

I really appreciate your points. Very helpful Anthony.

First, the analysis of available business forms should be separate from the classification for tax purposes. For the solo business owner, generally there are three choices of form: sole proprietorship, LLC, and corporation. Then, depending upon the form chosen, there’s tax classification: sole proprietor, C-Corp, and S-Corp. The business form chosen dictates which of the tax classifications is available: A sole proprietor is taxed as such; a corporation may choose between the two corporate classifications; an LLC may pick any of the three.

Second, the notion that forming an entity protects assets is overblown. Regardless of the form chosen, insurance is an owner’s best protection. Why? If an LLC or a corporation is inadequately capitalized, a plaintiff may seek to “pierce the corporate veil” (also available against LLCs), going after the owner’s personal assets.

Third, the notion that LLCs are easier to set up and are less expensive to maintain than corporations is, in my opinion, misguided. Both LLCs and corporations are relatively easy to set up; however, setting up an LLC *correctly* is far more complicated. Why? Corporate law has existed for hundreds of years; this has given the law enough time to come up with a set of default rules that cover situations not explicitly set out in a corporation’s operational documents. LLCs only started in the 1970s, and as a result, default rules are lacking. I would not be bothered by a corporation with less than ten pages of operational documents; I’m still leery of an LLC with twice as many.

Fourth, the notion that a corporation has to be more formal than an LLC overlooks most state’s statutory close corporation statutes, which allow owners to abolish corporate formalities (e.g., a board of directors).

Really, the only advantage of an LLC to another form is its ability to elect any of the three available tax classifications. As this election may only be changed every five years, and as setting up an LLC correctly is significantly trickier than either of the other two options, I believe that LLCs are actually the worst of the three forms for the DIY business owner.