From our experience, forming an LLC is one of the most popular choices for small business owners when starting a business.

There is often a misconception that it is a separate tax entity. However, an LLC is a legal entity, which can have several different types of tax treatment, as shown below.

Single-owner

  • Default tax treatment: Sole proprietorship (Schedule C on personal 1040)
  • May elect: S-Corp or C-Corp

Multiple-owner

  • Default tax treatment: Partnership
  • May elect: S-Corp or C-Corp

If you are a single-owner who chooses to leave the tax treatment as that of a sole proprietorship, then the benefit is wholly legal. An LLC is meant to protect the owner in the case of a legal issue.

One of the most important items to know, though, is that you should not co-mingle your funds between business and personal (keep your business books separate from personal as well) and you will have a better chance of actually receiving this benefit in the case of a lawsuit. Otherwise, if you mix your business and personal, the protection from your LLC may not be as you hoped, since there is a good case for why your personal should be included (since it has business transactions included).