You and a colleague have operated a computer store for the past year, and you have decided to formalize your business relationship. You've always referred to your colleague as your "partner", but you suspect that your business should not be a partnership. What form of entity is right for your business? The answer may well be the limited liability company ("LLC").

With the passage of the Connecticut Limited Liability Company Act in October 1993, 47 states now recognize this entity, which is applicable to almost all business ventures. The LLC is a true hybrid: owners of the LLC (there must be at least two, called "members") are insulated from the business' liabilities, as in a corporation, but the business can take advantage of the flow-through tax benefits of a partnership. The LLC is formed by filing "Articles of Organization" with the Secretary of State in your state, and though not required, you and your colleague would probably want to enter into an "Operating Agreement" governing the management of the LLC.

Before the advent of the LLC, only the corporation or the limited partnership offered limited liability. But the corporation brings with it the risk of double taxation of the corporation's earnings (unless you are the owner of a S corporation, with its own host of limitations), and the general partner of a limited partnership is exposed to full liability. The other option would have been to enter into a formal general partnership allowing both of you to manage the business. But unlike members of the LLC, all general partners are exposed to full liability.

The LLC, though free of most state and federal restrictions, must be formed with care in order to ensure its members limited liability and classification as a partnership for tax purposes. So if your customers are threatening to sue because they are receiving more electric shocks than bytes of information when they turn on your computers, you may want to ask your legal or tax advisor about the benefits of choosing the LLC.

Matthew C. Susman is a partner in the New Haven law firm of Susman, Duffy & Segaloff, P.C.