Jennifer Reuting

Individuals are now, more than ever, realizing the power of the limited liability company (LLC). If you’re like many people, you probably understand that an LLC can benefit you somehow; you just don’t know the next steps to take.Read on to find out the benefits of LLCs, get help naming your LLC, and get the lowdown on the different tax types for LLCs so you can make the best decisions for your business.

An operating agreement is a contract that controls how an LLC (limited liability company) operates and how the members interact with the LLC. You might think that as a sole owner of a company that no operating agreement is necessary — after all, operating agreements are comprised of terms agreed to by all of the members, and well, why make an agreement with yourself?

All LLCs are created with a default tax status. If your LLC has at least two partners and the LLC doesn’t make any tax classification election with the IRS, then your LLC is automatically assigned the default, which is partnership taxation — a favorable form of pass-through taxation. The various forms of pass-through taxation have some differences, but the premise remains the same: The business itself doesn’t pay federal income taxes; instead, the profits of the business pass through to the owners to be reported on their individual income tax returns.

LLCs (limited liability companies) are pretty powerful entities that you can do some pretty amazing things with. But you know how the old saying goes: "With great power comes great responsibility." In other words, if you don't watch out, you can get yourself into trouble. Fraudulent conveyance of assets If you just got sued and want to protect your assets, I'm sorry to say that it's too late.

A sole proprietorship automatically exists whenever you engage in business by and for yourself, without partners and without the protection of an LLC, corporation, or limited partnership. Although it sounds fancy and complicated, forming a sole proprietorship is about as easy as it gets. Forming a sole proprietorship When you begin transacting business, be it selling crafts at the local art fair or doing web design work in your spare time, you become a sole proprietor.

A single-member LLC isn’t actually a different type of LLC. It’s just a normal, regular LLC with one exception: there is only one member. Because LLCs were originally intended to be partnerships, a single-member LLC is still subject to some slightly different rules. Unlike an LLC with multiple members, a single member LLC is not allowed to elect the partnership form of taxation with the IRS.

So now you know that an LLC protects your personal assets if the business gets sued or goes bankrupt. Pretty great, eh? Well, it gets even better. Unlike corporations, LLCs have a dual layer of liability protection called charging order protection. Many moons ago, when a creditor obtained a judgment against a partner of a partnership, the creditor could simply take the partner’s interest in the business (and, proportionally, all related assets) and liquidate them in order to get paid, often leaving a ravaged business in his wake.

As the adage goes, “You aren’t in business until you’ve been sued.” As litigious as society is these days, you don’t even need to be one of the bad guys to be dragged into court. By simply transacting business with the general public, you open yourself up to myriad potential lawsuits, and no matter how arbitrary the complaint is, the destruction (and legal fees) it leaves in its wake can be crippling.