Starting your own business can become overwhelming as each decision in the beginning is very important. One recent client came to us with this question, “How do I separate my personal information from my business information when opening up a new e-commerce business. Should I go with an LLC?

It’s good to hear that the client recognizes the importance of keeping personal assets separate from business assets, but, the client should also be aware that liability is just one of the issues to factor into this decision. Other variables such as business type, startup costs, future plans, & number of employees should also be incorporated into the final decision. However, for this piece, we’ll focus on the liability issue.

Options for Filing As An LLC
When you form an LLC, generally speaking, you can file as a corporation or a partnership. In this case, the business will file as a single member LLC which can be classified as either a disregarded entity or corporation for tax purposes but legally maintain LLC status.

Tax Treatment For Single Member LLCs
As a disregarded entity you are treated as a sole proprietorship for tax purposes and would simply report income and expenses on Schedule C of your 1040 personal tax return. To be treated as a corporation you need to file Form 8832 and elect to be classified as a corporation. You would be required to file tax form 1120 as a corporation.

Reducing Liability
So if you are looking to completely separate yourself from your business, the single member LLC – Corporation status would theoretically offer the most protection. If you are a single member LLC – disregarded entity and you don’t have or plan to hire employees, the IRS states that you cannot use an employee identification number (EIN) for federal tax purposes — even, if you had to get an EIN because your bank required it. Your taxpayer identification number (TIN) or SSN would have to be used in this scenario.

To reiterate, your safest option would be the corporation status. Other factors such as which entity offers the most tax advantages is something that should also be incorporated in your decision.

Please also note that each state has its own specific laws pertaining to LLC regulations so you should review that information as well.

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