Although many small businesses are limited liability companies (LLCs), some founders may not actually need LLC protections. See if that includes you.
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by Jane Haskins, Esq.
Jane has written hundreds of articles aimed at educating the public about the legal system, especially the legal aspe...
Updated on: March 21, 2024 · 4 min read
Many small businesses are organized as limited liability companies, or LLCs, because an LLC offers many of the same liability protections as a corporation, but with a less rigid structure and fewer administrative requirements.
But not everyone needs an LLC. Some businesses will do just fine as sole proprietorships, while others should form a corporation instead. Here are some basics to help you decide what's right for you.
Forming an LLC gives your business its own legal identity. In the eyes of the law, it's a separate “person" that can own money and property, have a bank account, make agreements, sue people, and be sued.
Because of this, your business's creditors generally can't go after any money or assets that aren't owned by the LLC. Your home, bank account, and other personal assets are protected. By contrast, if you operate a sole proprietorship or general partnership, you and the business aren't legally separate, and everything you own is at risk.
LLCs also have other advantages:
Unlike a corporation, an LLC can't issue stock, and this complicates matters if you want to take on investors. Many investors prefer corporations over LLCs.
If you are a licensed professional such as a doctor, lawyer, accountant, architect, or engineer, your state may not allow you to form an LLC.
Depending on your state, you may choose to form a professional limited liability company, professional corporation, or professional limited liability partnership instead.
There are also limits to an LLC's liability protection. You will still be personally liable if someone sues you for your own negligence or wrongdoing—even if the accusations are related to your business. An LLC does not protect your assets if you personally guarantee a contract or loan. And it won't protect the business itself from losing everything in a fire, flood, lawsuit, or economic downturn. LLC owners may also face the risk of so-called "alter ego" liability, which, under certain circumstances, can make them personally liable for their company's debts and obligations. You can help mitigate this risk by making sure to observe the formalities of operating an LLC, such as by holding board meetings, keeping business bank accounts separate from personal accounts, and using separate office space, among other things.
Because of these limitations, an LLC is never really your first line of defense against business problems. Insurance is essential to protect you and your business against the unexpected. An LLC then adds an additional element by helping to protect your personal assets from your business's creditors.
Your business is most likely to benefit from being an LLC if either of these is true:
Forming a business entity like an LLC or corporation is almost never a bad idea, but it isn't always an absolute necessity for solo business owners.
To decide whether you need an LLC, consider:
If you're trying to limit your business liability, make sure you have adequate business insurance. If you have business partners, employees, or significant risks, an LLC can provide another important layer of protection.
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