Should I form an LLC

I build furniture and sell it online.
The business has and only ever will
have two employees, my wife and I.
Obviously it’s a small company. Should
we form an llc? If so what are the
benefits and tax implications? Recently
one our tables that cost 4000 was
destroyed when the freight truck was in
an accident. Their insurance would only
reimburse us 75. Was a total loss.
Would an Llc have helped, or was there
another way we could have avoided such
a loss?

Asked on September 8, 2016 under Business Law, Virginia

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 4 years ago | Contributor

First, an LLC format would not help you with a table being destroyed in shipping. Your options to get compensation in that case are 1) claim under your own insurance, if you have the relevant insurance (you should; a business like yours should have insurance covering your product); or 2) you could  have sued the freight company if their driver was at fault (e.g. driving negligently or carelessly) in causing the accident for the *full* amount of your lose (or if another driver caused the accident, you could sue him or her).
In terms of whether you should have an LLC, the answer is yes: you should set up one that elects "partnership" (not "corporation") tax treatment.
Here are the advantages:
I) It will protect your personal assets (e.g. home, car, bank or investment account, etc.) from most business related liability, such as for breach of contract, product liability, loans which you did not personally guaranty, etc. It doesn't protect from all liability--you can still be held liable for debts you guaranty, certain tax debts, or if you personally do something wrongful in the course of business (e.g. driving a company  van, you run someone over), for example--but it still provides a lot of protection.
II) With partnership tax treatment, it is a "pass through" entity for tax purposes. There is no separate or double taxation: profits and losses pass directly through to your own income and tax return. This in turn means that if you have a tax loss from the business, it reduces your personal income taxes.
III) Related to the above, it is easier to take and justify business expenses as an LLC than as sole proprietorship, make it more likely you will get a tax benefit for your business expenses.


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