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Any time you launch a new business, you’re inevitably taking on some calculated risks. Even if you make all the right strategic decisions, there’s always a chance that you could lose money, face legal peril, or simply not find the audience you’d hope for.
While entrepreneurs can’t totally avoid risk, they can take smart, strategic actions to mitigate it. One of the best ways to do so is to choose the right legal structure for their business, one that limits personal liability exposure. And generally speaking, that means choosing the Limited Liability Company, or LLC.
In a business environment that’s increasingly litigious, the significance of the LLC structure can’t be overstated. In fact, it’s by far the most popular option among small business owners, in large part due to its effectiveness in moderating risk.
To put it simply, the LLC is a legal structure that creates a separate entity for your business. With a Sole Proprietorship, there is no legal distinction between the business and its owner; the LLC creates that distinction, in turn allowing you to keep your personal assets and business assets separate. This also allows you to keep your business liabilities distinct from your personal ones.
What does this mean, exactly? Essentially, it means that if somebody brings a lawsuit against the company, your personal assets (such as a family bank account) are not in jeopardy. Along the same lines, your personal assets are protected from any potential creditors.
In addition to personal liability protections, another big advantage to the LLC structure is its administrative ease. Compared to other types of business (including Corporations), getting an LLC started is relatively straightforward. The basic steps include:
There are countless reasons why the LLC is so popular among today’s entrepreneurs, and so crucial to the business landscape more broadly. Consider just a few of the advantages of the LLC format.
It’s worth double- and triple-underlining this point: One of the most essential reasons for choosing the LLC format is that it limits our exposure to legal risk.
Even if the worst-case-scenario arises and you’re served a lawsuit from a customer, business partner, or disgruntled employee, you can rest assured that your family’s house, your kids’ college funds, and the retirement account you have with your spouse are safely off limits. This allows you to move forward, growing your business with relative confidence and peace of mind.
Business owners also choose the LLC structure because it offers tax flexibility.
The default position for an LLC is to report to the IRS on a pass-through basis. In other words, the LLC partners declare profits on their personal tax returns, and pay their normal income tax rate.
However, LLC partners can opt to be taxed as a Corporation, meaning paying the corporate tax rate. For growing companies engaged in advanced tax planning, this flexibility may sometimes be really advantageous.
It’s important for any business to convey a sense of professionalism, but this is especially crucial for companies looking to bring on investors, court venture capitalists, or simply make headway with a new clientele.
The LLC structure can confer on any business a certain legitimacy, making it clear that the company is a “real” one, not just a hobby or a side hustle. Specifically, when you have an LLC, you can open a bank account in your business’ name, and you can accept checks made out to the business rather than to you personally. All of this is important for establishing some baseline credibility.
The use of Registered Agents to receive legal and tax documents is actually a requirement for LLCs. With that said, it can also work to your advantage.
That’s because a Registered Agent helps you to stay organized and on top of paperwork, a tedious administrative task removed from your plate. As a business owner, this frees more of your time for value-adding tasks, such as creative work, strategic planning, and team development.
Similarly, the LLC structure provides some flexibility for how you actually manage the company day-to-day.
This is one area in which the LLC structure compares quite favorably to that of the Corporation. When you choose to run your company as a Corporation, there are a number of rigid requirements you have to comply with, including electing a Board of Directors.
By contrast, LLCs make it possible for business owners to exert a lot of autonomy over how their company runs. As the founder of an LLC, you can choose whether or not to bring on partners, you can allocate managerial responsibilities however you want, you can even hire an external management team to handle day-to-day stuff on your behalf. This flexibility can be especially valuable for companies that are looking for scalability, and may require a pivot or evolution down the line.
You may eventually decide you want to bring some investors on board to help fund your business’ growth. While LLCs cannot issue shares to stockholders, they can get business loans and lines of credit, something that’s not always an option for Sole Proprietorships.
Additionally, the credibility that comes from being an LLC may make it easier to entice venture capitalists to come on board, providing the financial resources needed for sustained business growth.
Many business owners crave privacy, something that LLCs allow and Corporations really don’t. That’s because Corporations have rigorous reporting requirements, often making it necessary to reveal certain information about your company to the general public.
That’s not the case with LLCs. While specific reporting requirements can vary by state, most states do not mandate a lot of personal information to be revealed, not a lot of financial data about your LLC.
Another reason to choose the LLC format is that it makes succession planning fairly easy. Specifically, you can include provisions in your Operating Agreement to pass along the company via inheritance or gift.
By contrast, this type of easy transference is really not an option for a Sole Proprietorship, where you are the business, legally speaking.
As you consider your best available options to limit your risk and to protect yourself (and your family) from legal vulnerability, one of the most important decisions you’ll make is which legal structure to choose for your company. Generally speaking, the LLC is the best option for personal protection, and thus one of the most significant legal entities shaping the business world.
Amanda E. Clark is a contributing writer to LLC University. She is a graduate of Eastern Michigan University and holds degrees in Journalism, Political Science, and English. She became a professional writer in 2008 and has led marketing and advertising initiatives for several Fortune 500 companies. She has appeared as a subject matter expert on panels about content and social media marketing. She regularly leads seminars and training sessions on trends and tactics in professional writing.