You have decided to take a leap of faith and start your own business. After many late nights and lengthy discussions you have developed a sound business plan that is sure to succeed. Maybe you have even spoken to your accountant who suggested that you form a limited liability company (LLC), but is it really worth the cost? The short answer, YES!
Every new business owner will receive unsolicited advice, some good and some bad. One common tip for the up and coming entrepreneur is to form an LLC, but why?
Although forming a corporation or an LLC is a common suggestion, many people do not understand how important it really is. Unfortunately, many first time business owners either believe they are too busy to create an LLC - or do not think it is worth the cost - but, failing to create an LLC can put you and your personal assets at unnecessary financial risk.
The primary purpose of forming an LLC is to limit the personal liability of the owners (members) of the business. The law treats an LLC as a “person” separate from its members. An LLC can own property, enter into contracts, and otherwise conduct business in its own name. If a business is not organized as an LLC or a corporation, that business is treated as a sole proprietorship or a partnership, and judgments and claims against the business can be satisfied out of the personal assets of the owners (your personal bank accounts, homes, and other personal property. A lawsuit against a sole proprietorship or a partnership could put the owners’ personal assets at risk.
Forming an LLC provides its members with what is commonly referred to as a “liability shield” that, generally speaking, protects its members from having personal liability from the judgments or debts of the LLC. Except in limited circumstances where the owning member has guaranteed the LLC debt for example, a lawsuit or claim against the LLC can only be satisfied out of the assets owned by the LLC. In essence, only LLC assets are at risk.
Another advantage of forming an LLC is that the LLC and the assets owned by the LLC are distinct and separate from the members themselves. This allows the members to explicitly lay out their rights in the LLC and its property. Rather than commingling assets, a common problem in sole proprietorships and general partnerships, members of an LLC by way of a properly drafted operating agreement, may set out the rights, duties, and expectations of each member with respect to the governance of the LLC and its assets. Many of the important rights that can be agreed on at creation include: distribution of profits, dealing with succession, dividing multiple lines of business, and managerial control.
The cost and time necessary to form an LLC is minimal compared to the possible liability that waits in the future if you do not protect yourself now. Forming an LLC now protects you and your personal assets from those unexpected claims in the future. Do not put your family and personal assets at risk. Speak to a professional about the benefits of an LLC.
Published by Davis W. Puryear on February 27, 2018.