Why Should I Form an LLC?

By Allison A. Economy, Esq.

The entrepreneurial spirit is alive and well from Maine to California. Great ideas are spreading with help from television shows like Shark Tank, where hopefuls seek investors to fund their products, and online shopping forums like Etsy, where sellers can offer their handmade goods to buyers around the world. A great idea can mean big business and big reward, but it can also mean big trouble if entrepreneurs do not take certain precautions to separate themselves (and their personal assets) from their business operations.

Frequently, when a person begins building a business, the “business” is just that person, and no formal action is taken to create a separate entity. This is what is known as a sole proprietorship or d/b/a (“doing business as”). A sole proprietor is entitled to all profits of the business, but he or she is also responsible for all the business’s debts, losses, and liabilities. This means that the sole proprietor’s personal assets (house, car, savings accounts, etc.) are vulnerable to creditors of the business.

It is important for a business owner to protect herself right from the start, even with regard to a small business run out of that person’s house. One way of doing this is by forming the business as a limited liability company or “LLC.”

LLCs provide limited liability protection to their owners, which means that an owner is typically not personally responsible for the business debts and liabilities of the LLC. Creditors cannot pursue the owner’s personal assets to pay business debts or satisfy judgments.

LLCs also provide a lot of flexibility to their owners with regard to ownership, management, and taxation. LLCs do not need to have multiple owners. Single-owner LLCs are permitted and quite common. This means that a sole proprietor can form his business as an LLC and still retain complete control over its profits.

Further, the owners of an LLC are free to organize the company as member-managed (where all the owners participate in running the business) or manager-managed (where only designated owners, or even non-owners, are given the responsibility to run the business).

Another benefit of the LLC structure is that business income or loss can be “passed-through” to the owners and reported on their personal income tax returns rather than on a separate business tax filing. Alternative, the owners could choose to have the LLC treated as an S corporation for tax purposes, while facing fewer state-imposed annual requirements and corporate formalities than a true S corporation would have to comply with.

If you are an entrepreneur, there are a number of reasons why an LLC might be right for you. In this digital media age, the world is getting smaller, and you never know when your business is going to become the next big thing.