Most of our plans incorporate LLCs. LLCs insulate their owners’ personal assets from claims arising from within the business. Without such protection, it would be too dangerous for an entrepreneur to invest capital in a business with its inherent risks. This concept, called internal protection, goes back to the industrial revolution and is a foundation of our commercial system. Traditional “C” corporations also provide internal protection, but they suffer from the double taxation of income. Contrarily, LLC income is directly passed-through to its member owners and taxed only once. LLCs are also simpler to operate. Consequently, most entities formed today are LLCs.
Just as important, LLCs can provide external protection. Suppose you host a Christmas party and an inebriated guest leaves the party and becomes involved in a car accident where someone is injured or killed. As a “deep pocket,” you could be sued and, although you are certain it was not your fault, suffer a judgment for millions of dollars. This is where knowledgeable LLC planning comes into play. The plaintiff’s attorneys will find the task of seizing assets owned by a properly structured LLC in a legally-favored state considerably more difficult.