A question I (sort of) know the answer to, but someone is borrowing my business law book right now because he is trying to set up a Limited Liability Corporation (LLC). So I unfortunately don’t have the exact details of the advantages.
The reason one forms an LLC, or ANY kind of wierd corporate structure is generally two fold: protection and tax advantage.
With a sole proprietorship or partnership, one has little on the protection side. That is, if you slip and break your spine in Skippy’s Flower Shop, you can sue the shop, and if the expenses go beyond what the business is worth, you can go after Skippy’s PERSONAL assets as well (that is, his house, car, bank account, etc.)
With Skippy’s Flower Shop, LLC, however, in this same scenario, once you drain the shop of all it’s assets, that’s it. Skippy’s personal assets are protected. On the downside, however, Skippy’s corporation gets taxed at the corporate rate. Then he pays himself a salary, which he ALSO must pay personal income tax on. That is…double taxation. So that protection comes at a steep price. In the previous example, the sole proprietorship or partnership only taxes the individual owners on their personal income taxes.
Before 50 lawyers chime in though, I should add that this is an overly simplified analysis and it will no doubt lead you to ask why one might chose to be an LLC over say a C-Corporation or S-Corporation, or even a Limited Liability Partnership (LLP) - In fact, most law firms are set up as LLPs. Again, the protection and taxation issues apply. The other issues with many of these other types of entities has to do with the ability to raise capital and corporate control (i.e. who has the power to change things or determine how money is spent.)
If you’re really interested in the subject, I’d recommend a book called “The Entrepreneur’s Guide to Business Law” which is a great reference for anyone thinking about setting up their own business IMHO.