There are many “experts” out there writing about how forming a LLC is an important step in having a real business.
But what is a LLC, really, and what does it do for you?
While some one-person businesses are better off as sole proprietorships, forming a Limited Liability Company, or LLC, is one tool you can use to create boundaries and reduce your personal risk of owning a business.
Unlike corporations and partnerships, Limited Liability Companies are somewhat new in the legal world. They’re a mash-up of partnerships and corporations, which can make the rules a bit confusing.
Like a corporation, a Limited Liability Company is a legal entity that is separate from the owners, and can take on its own debts, have its own checking account, and sign contracts on its own behalf (obviously, a human person does the signing, but the signature is in the name of the LLC). In this way, the LLC can keep the risks of the business—getting sued or going bankrupt—separate from the owner’s personal assets.
Like a partnership, a Limited Liability Company is very flexible and has minimum government requirements once you file the initial papers to form the entity. You should create an Operating Agreement to state the procedures for how the LLC will be run, and use LLC Declarations to create a a paper trail showing that the LLC is a legit business, separate from you personally. But, the Operating Agreement isn’t typically required under state law.
LLCs are only formed when the founders file a one or two page form with their state government, usually called Articles of Organization or Certificate of Formation. This form has just basic information about the company, like the name, address, how the Limited Liability Company will be managed (by all the members or by one or more managers), and who can accept process of service on behalf of the company (a registered agent). Most states also have some kind of annual LLC filing where you update information and sometimes pay an annual fee, business license, or franchise tax.
If you’re wondering whether a LLC would work in your situation, you can schedule a Quick Call with me to discuss your business and decide which legal entity (sole proprietorship, partnership, Limited Liability Company, or Corporation) is a good fit for you!