A Limited Liability Company (LLC) is the business entity of choice for thousands of American organizations forming every year. It is a relatively simple structure, offers greater protection than being a freelancer, and it gives a genuine appearance of professionalism. It isn’t the right choice for all businesses, especially those with complex investment backers, with overseas interests, or possibly even if you intend to take the business public in the future.
Having performed your own due diligence and determined that setting up a business is right for you, the next question is what type of business entity should you incorporate? Common options include freelancer, partnership, or corporation.
One of the reasons that people choose to file as an LLC is to protect oneself against the liability of the business. This type of structure won’t protect you from every possible failing or debt, but below is a list of what an LLC will protect you from. Bear in mind that regulations change according to state, and your own actions can impact the level of protection you are entitled to.
There is always a degree of risk in setting up a new business, or branching out on your own. For some, it is this risk that deters them from becoming an entrepreneur. If you have considered running a business but worry about the financial effects it has on your personal circumstances if you become one of the 20% of US businesses that fail within their first year.
It is easy to run up business debt. If the company fails, you could be left owing money to suppliers who provided goods but did not receive payment. You could owe money on property and equipment lease, and you could end up owing money to customers that have not yet received their products or fully received the services you are contracted to provide.
Filing an LLC means that you and the business are two separate entities. It is the business that owes this money, and not you, so while there are steps that can be taken to close the business down and to chase debts from the business, you will not be held liable for the money that is owed.
It isn’t just debt that an LLC will protect you against. Whether your business supplies products or offers services to customers, there is the potential that these could malfunction or even cost the customer money. In these instances, the customer is often within their rights to sue for compensation. As a sole trader, you would be held liable for legal fees as well as the compensation itself. With an LLC, it is the business that is obliged to pay this money, which means that you are protected.
There are exceptions to these rules. The most common exception is in the case where the individual business owner is found to have been guilty of negligence or other wrongdoing. If you were to commit tax fraud and falsely tax returns for you and your business, you lose the protection that the LLC should offer. If you provide a personal guarantee for a loan, you will still be responsible for its repayment even if the business fails. Finally, if you fail to meet federal or state regulatory requirements, you might not receive full protection.