One of the questions that I get asked often, is “do I really need an LLC”?
Like a good attorney, my answer is, “it depends.”
The choice of whether or not to form an LLC depends on a number of factors. You should review your goals with a licensed attorney in your state to make that determination. If you are in California please schedule a free no obligation consultation with me. I’ll help you make the decision.
Do you already have a business or are an independent contractor?
If you have started out as a sole proprietor with or without a DBA or you are an independent contractor you may benefit from forming an LLC. An LLC provides you with a layer of protection against the claims of creditors on your personal assets. It is a liability shield. It does not save you from every possible case where you may be found liable. However, if formed and maintained correctly it will reduce the likeliness that you will be found personally liable. It is possible to get through the protection that an LLC offers so it does not relieve you of all responsibility.
Do you have a home or will be purchasing a home in the future?
An LLC is like a bubble. Every asset in the bubble is available for creditors to take in the case of liquidation, dissolution, or a lawsuit. Assets on the outside of the bubble are not typically available for creditors to take. This means that your personal assets including your house that are not in the LLC are not available for creditors. The key is that you have to treat the LLC like a bubble. You cannot co-mingle funds, treat the LLC like a personal piggy bank, or use it to commit fraud, and expect to keep your limited liability status. If you do, then the court may make the determination to allow the creditors access to your personal assets. It is best to: keep em’ separated.
Do you have employees?
As a business owner, you are “vicariously liable” for the wrongful acts of your employees. The wrongful acts must be committed while in the scope of employment (with some exceptions). This means that without an LLC, your personal assets are at risk if your employee does something illegal while working for you. There are some exceptions, however, if an employee does something wrong (i.e. runs a red light while driving your delivery truck), then you will most likely be found liable for his/her actions.
Do you have a partner?
It can be very exciting starting a business, many times people will start one without thinking about the long-term consequences of having a partner. However, when you start a business with a partner (without a partnership agreement or business entity) you become jointly and severally liable for their actions. Much like an employer/employee relationship, if the partner enters into a contract or commits an illegal act you are personally liable for their actions.
Final Thoughts on Forming an LLC
There are many reasons why you would want to form an LLC. An attorney and CPA should assist you with your decision to begin an LLC. There are other business entities that can serve the same or similar purpose as an LLC but have different benefits. Perhaps the worst decision you can make is to do nothing and remain personally liable.
An LLC only relieves you of personal liability for the acts of third-parties and contractual liability done while acting in the capacity of the owner/member. You will remain liable for your own personal illegal actions and contracts signed outside of the LLC or if you personally guarantee debts.
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