Why Form an LLC?
An LLC (limited liability company) is the simplest way to gain some protection for your personal assets. Any time you start a business you take on the additional risk of lawsuits and bankruptcy. No one opens a business with the intention of either of those things happening to them, but you must be prepared for the possibility. An LLC will help you separate your personal assets from your business assets and limit your potential losses in either of those negative eventualities.
How it Works
An LLC is a business entity that you register with the Secretary of State. In most states, it is very inexpensive and easy to form an LLC. Once you have the Certificate of Existence for the LLC, you can open a bank account, sign contracts, and take on debts and obligations all in the LLC’s name, not yours. If the activity of the LLC and its agents (you, at first) results in litigation or collections, these actions must first be taken against the LLC and its assets. You can choose to keep the LLCs assets at a very low level by withdrawing profits into your personal accounts, thus sharply limiting what can be lost in a successful suit against the LLC, or bankruptcy.
How it Doesn’t Work
An LLC will protect you from civil lawsuits, but not criminal ones. If you perform an illegal act as part of your business activity, the LLC will not successfully protect your personal assets. In addition, in the early years of your business, most of the people who will enter into a contract with you or issue debt to you will probably require a “personal guarantee” that also pledges your personal assets to the debt.
You can also lose the protection of the LLC by failing to renew the registration on time, failing to file and pay the appropriate business taxes, and failing to separate your personal activity from your business activity. In essence, if you don’t act as if the LLC is a separate entity from yourself, and don’t maintain the legal measures that verify the existence of the LLC, it can be dissolved by a judge as invalid.
The bottom line for LLC
Forming an LLC is an inexpensive and important step in setting up your business for long-term success, but care and attention must be given to the LLC to maintain its effectiveness as a limit on your personal liability.
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