Your LLC IS Incorporated

I was reading an article in the local paper on Sunday that said the number of self-employed business owners is down. The paper also said that the number of people who were self-employed and incorporated was down. Then the writer said that LLC owners were included with unincorporated owners. That statement may be technically right, but it’s truthfully wrong. Here’s why.

When you set up a Corporation, you file a formal document, called Articles of Incorporation, with your state’s office – usually the Secretary of State, or Division of Corporations, or Business Division, etc. But the act of incorporating isn’t truly limited just to corporations. If you are setting up an LLC you will also filed Articles with your state’s office. They’re just called Articles of Organization instead.

All incorporating means, really, is that you have taken steps to create a legal entity that will operate your business or hold your investments in place of you personally. You are taking advantage of the laws that protect business owners from the debts and liabilities of their businesses. You’re also accepting the responsibilities that go along with owning an incorporated business – meaning keeping separate books and records, a separate business bank account, filing Annual Reports with the state, and filing tax returns for the business.

By contrast, an unincorporated business is one where you don’t file Articles. You may just file a fictitious business name, and operate the business directly – things like Flowers by Amy, or John the Plumber. With an unincorporated business, you don’t file separate tax returns, nor do you have to have a separate bank account or keep separate books and records.

But you also don’t get any legal protection. Anything that goes wrong in your business will come out of your personal assets. If your unincorporated business has a $20,000 line of credit and things go wrong, a creditor can and will come after you personally. If you have an incorporated business, and you didn’t personally guarantee the line of credit, then a creditor can’t usually come after you personally. (We say usually, because sometimes they can. See Thursday’s blog for more).

I get that, “Oh, an LLC isn’t a real company” line all the time, and a lot of times it’s from people I don’t expect. Like bankers, for example!

I think it’s a terrible disservice to you, as business owners, to give you this wrong business information. In fact, I’d argue that an LLC is BETTER than a Corporation, in many ways. It’s got more flexible taxation. It’s even got a legal protection that Corporation’s don’t. It’s my business structure of choice, because I can do so many things with it. Telling people that it’s not a “real” business structure, or a properly incorporated business structure – well that’s just not right!

There are many variables when you’re structuring a business. That’s why it’s hard to go through a quick-service website. Unless you talk to someone who’s got some knowledge and experience on both the tax and the legal side, it’s hard to know what you don’t know. And that can leave you vulnerable.

Got questions? Contact us! We’re here for you.

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