Just what IS a limited liability company? Part 1. It’s not a sole proprietorship.

[This begins a seven-part series of posts discussing the characteristics of limited liability companies and comparing them to the characteristics of corporations, general partnerships, and sole proprietorships. Here’s the entire list.

Part 1. Background on sole proprietorships.
Part 2. Background on partnerships.
Part 3. Background on corporations.
Part 4. LLCs are distinct legal entities, separate from their owners.
Part 5. A limited liability company’s owners are not liable for the LLC’s obligations.
Part 6. Options for an LLC’s management structure.
Part 7. Options for an LLC’s tax treatment.]

Thumbnail image for 436459_79130934.jpgLimited liability companies or LLCs, particularly Indiana limited liability companies, will be a frequent topic of posts on this blog. To set the stage, I’d like to start with the most basic question: Exactly what IS a limited liability company? It will take me a few posts to go over the basics, but then I’ll move on to more sophisticated topics.

Way back, a long time ago, when I was in school (probably high school, but I’m not sure), I was taught that there are three types of business structures: sole proprietorships, partnerships, and corporations. Even then, that was a bit simplistic because there were other types of businesses, but that covered most of the waterfront. Today, it doesn’t come close because the most popular form for new small businesses is a limited liability company. However, the easiest way to understand what a limited liability company IS is to understand first what it is NOT. So let’s start with sole proprietorships.

As I learned way back then, a sole proprietorship is the classic one-person business in which the owner and the business are one and the same, even if the business is operated under some other name. I always thought of Drucker’s General Store on the television shows Petticoat Junction and Green Acres. (I told you it was a long time ago!) Most likely, Drucker’s General Store was a sole proprietorship. Sam Drucker and his store were one and the same. In other words, anything the store owned, Sam owned. On the flip side, anything the the store OWED, Sam owed.

For example, if someone slipped and fell on a pickle from Sam’s pickle barrel (I don’t remember if Sam had a pickle barrel, but he MUST have had one!) and successfully sued the store, the plaintiff could take money not only from the store’s cash register and bank account, but also from Sam’s bank account – and maybe even his house. That’s a disadvantage of a sole proprietorship. An advantage is that (unlike corporations, as well discuss later), the business itself does not have to pay income taxes. The income from the business goes straight to the owners Form 1040, on Schedule C to be specific, and the owner pays the taxes.

So a limited liability company is not a sole proprietorship. Next we’ll discuss partnerships, another type of business structure that differs from an LLC.

If you’re think about starting a business, feel free to contact our office for an initial consultation.