Many people come to me with the same question: “I am in the process of starting a small business but I am not sure if it’s worth forming a separate entity for my business. What should I do?” There are several different types of business entities that can be created to protect both you and your business from any number of issues that may arise. One of the most common entities is a Limited Liability Company or a LLC. There are both benefits and disadvantages to forming a LLC; however, the benefits of forming a LLC far outweigh the benefits of doing nothing or operating as a sole proprietorship.
First, LLCs provide liability protection to their owners. The owners of a LLC are typically not personally responsible for the business debts and liabilities of the LLC. In other words, creditors of the LLC cannot pursue the owner’s personal assets, such as their house, bank accounts, etc., to pay the debts of the business. With a sole proprietorship, this is not the case as the individual and business are considered the same entity and the personal assets of the individual can be pursued to pay the debts of the business. Another benefit of a LLC is that LLCs are permitted to establish just about any management and organizational structure that is agreed upon by the company owners. An LLC can be managed by the owners/members or by a single manager appointed by the owners. Other benefits include simple pass-through taxation. LLCs generally do not pay taxes at the business level, and instead, any income or loss is passed-through to owners and reported on their individual tax returns. There are also less stringent government-imposed regulations, and quite frankly, simply having the “LLC” after your business adds credibility to your business.
There are some minimal formation costs and fees that must be paid to the State Corporation Commission and it’s a good idea to have a thorough Operating Agreement drafted by an attorney, but for many small businesses, forming a limited liability company offers flexibility, credibility, and perhaps most importantly, protection for your personal assets.