Most business owners are lost when it comes to managing and understanding business entities. If you’re not, then you’ve probably done some extensive research at some point in time (or you have a great business lawyer on-call!).

Let’s set the record straight on the top three LLC questions that clients frequently ask:

1.  What exactly is an LLC?

LLC stands for limited liability company. A limited liability company is a product of state law, so how they are formed and how they are treated (by the state) after creation varies state-to-state. There are three legal ways to look at LLCs – from the state, from the IRS, and from the courts.

State.  When you create an LLC, what you’re really doing is asking the State to recognize this new entity as a legal “being” – it’s akin to filing for a birth certificate, but in a business sense. Once you’re certificate of formation is filed and accepted by the TX Secretary of State, congratulations! You are now the proud parent of a brand new LLC “baby.”

IRS.  Once the State has recognized this new entity, the IRS needs to know what to do with it. Because LLCs are creations of the states and vary between states, the IRS does not actually recognize LLCs as a new kind of creation. LLCs get to tell the IRS how to treat them for taxation (corporation, partnership, or sole proprietor). This is a decision that is best made with a tax professional, but does not affect the actual structure or daily operations of the company.

Courts.  Every business owner hopes that he or she doesn’t have to end up in court over a business dispute, but about 70 percent of all businesses in […]