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Tax time: should you reorganize your business?

This time of year, taxes are often on the mind as people scramble to complete income tax filings. If you operate your own business as a sole-proprietorship, your businesses income is your income and you are only taxed once. For some business, this structure may be fine. It places few demands on the owner administratively, and if you have limited expenses and exposure, a sole-proprietorship may simply be the easiest form from which to operate.

However, it always contains the risk of the liabilities of the business overwhelming your own personal finances. To protect yourself and your family from such an outcome, you may want to consider changing the legal form of your business into a Limited Liability Company.

This structure can permit the same tax treatment you obtain as a sole-proprietorship but it allows you to limit your exposure to the liabilities and judgments of the business. An LLC is a very flexible business form, and it can remain relatively basic, or if your business needs to grow, can become ever more complex to meet those demands.

While you can set up an LLC with minimal structure and planning, it is probably a better idea to take the time and develop your organizational document, which is known as the operating agreement. This document functions as an outline of the rules by which your LLC will operate.

You may want to discuss the contents of the operating agreement with an attorney,  and create an agreement that you fully understand. By observing all of the necessary rules and formalities in that agreement, you will ensure that your single-member LLC will remain entitled to the liability protection the form offers.

Source: wsj.com, "How to Form an LLC," page accessed April 2016

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