The Crucial Role Of LLCs In Protecting Your Business

We live in a litigious age. No matter what your industry is, you run the risk of being served a lawsuit, which can not only topple your business but perhaps compromise your personal assets, as well.

Fortunately, there are a number of legal protections you might consider to mitigate risk and shield your finances.

One of the most pragmatic options is to be prudent in the business structure you choose.

There are a number of legal structures available to small business owners, but when it comes to personal liability protections, the most advantageous option is likely the LLC. 

Understanding Legal Business Structures

To understand what makes the LLC model so advantageous, it may be helpful to compare it with the other options.

The primary structures for business owners to choose from are the Sole Proprietorship, Partnership, LLC, and Corporation.

Sole Proprietorship

The Sole Proprietorship is something of a default option. When you first start generating income on the basis of self-employed activity, the government will automatically classify you as a Sole Proprietor.

When you are a Sole Proprietor, it means there is no legal distinction between you and your business. To put it differently, your company is not its own legal entity; it’s just an extension of you.

This is advantageous in some ways, as it means very light regulatory overhead. But when it comes to legal liability protections, Sole Proprietorships don’t have a lot to offer. 

Simply put: If anyone brings a lawsuit against your business, they’re really bringing it against you… and your personal assets may be up for grabs.

Partnership

A Partnership works in much the same way as a Sole Proprietorship, with the key distinction that you’re inviting other professionals to share in running the business.

But the fact remains: If you’re interested in personal liability protections, a Partnership really doesn’t offer you anything.

LLC

The LLC, or Limited Liability Company, differs from the previous two models in a couple of critical ways.

The primary one is that an LLC actually does stand as its own legal entity, which means you can keep your personal assets and liabilities distinct from your business one.

As such, if someone brings a lawsuit against your LLC, you can feel a certain peace of mind knowing that your personal next egg or family savings account is safe and secure.

You can invest in your business confidently, knowing that your personal risk exposure is limited by the LLC.

There are some other important benefits to the LLC model, too, but more on those shortly.

Corporation

If you really want to make your business formal, you can incorporate. Corporations certainly offer robust personal liability protections, on par with those offered by the LLC.

But there is also considerably more administrative overhead: You’ll need to create bylaws, sell shares, hold annual shareholder meetings, and more.

Corporations can be the way to go if you ultimately want to go public with your company, or if you desire to attract outside investors. Otherwise, the LLC format may offer the best marriage of flexibility and legal protection.

Additional Benefits Of The LLC

It’s worth noting that personal liability protection is just one of the advantages you can expect from the LLC format.

Some additional benefits include:

• Pass-through taxation. Unlike Corporations, which are subject to double taxation, LLCs only require members to declare profits and losses on their personal tax returns, and to pay at their normal rate.

• Ease of management. When you register as an LLC, you can choose between self-management or bringing in a third-party management team to help you run the company, simply according to your needs and preferences.

• Regulatory ease. An LLC does not require you to create governance documents or to hold annual meetings, and your public financial disclosure requirements are very minimal.

• Enhanced credibility. Registering as an LLC proves that you’re taking your business seriously. As such, it can open up opportunities for business loans, lines of credit, and other financing options.

These are just a few of the reasons why the LLC format might be the best bet for your new small business, not least due to the personal liability protections you’ll get.

How To Register an LLC

There are a few steps required to register an LLC, and while the process can vary a little bit from state to state, it usually looks something like this.

• Choosing the state of registry. First and foremost, you’ll need to choose the state where you wish your business to be registered. Generally, this just means choosing whichever state you’re headquartered in, and where you generate income. For example, if your business is based in Houston, you’d simply want to register for an LLC in Texas.

• Selecting a Registered Agent. Every LLC needs to have a Registered Agent, someone whose job is to receive legal and tax documents on behalf of the business. A Registered Agent service typically runs between $100 and $200 annually, so it is not a tremendous expense.

• Completing Articles of Organization. This is the name for the document that must be filed with the Secretary of State, along with a nominal filing fee. The amount varies by state, and may be anywhere from $20 to $300.

• Making an Operating Agreement. Your Operating Agreement outlines the terms under which the LLC is managed day-to-day. This is not legally mandatory, but can help you avoid potential disputes and conflicts down the road.

• Setting up a business bank account. To maintain the LLC’s legal protections, it’s imperative to have a business bank account that is distinct from any personal checking or savings accounts.

Get The Protection You Need With An LLC

No matter your industry, the threat of litigation is something to take to heart. Among the best ways to avoid it?

Establish your business as an LLC, using the steps outlined here and consulting with a business attorney as necessary.