When starting out in business, you may have wondered what is a limited liability corporation. This article will provide an overview that can help answer this question.
It would impossible to walk through life without seeing the initials LLC following the name of the business. Many assume, however, that the financial ventures of an LLC (Limited Liability Company) are outside the scope of most small businesses.
This is not an accurate assessment and it often leads to many small businesses remaining sole proprietors as opposed to reclassifying as an LLC. This is unfortunate as forming a limited liability company can be tremendously beneficial to a business. There's simply confusion about what is a limited liability corporation.
Overview
What is a limited liability corporation? On a baseline level, the purpose of an LLC is to protect the personal assets of the business owner. This is achieved by turning the business into a legal entity that is completely separate from the owner. So, if any debts or liabilities are incurred by the LLC company, the personal assets of the managers/owners can not be attacked.
Conversely, if a sole proprietorship goes into heavy debt from losses or civil actions then liens against your personal property is fair game. Obviously, if a small business owner who was on the losing end of a million dollar lawsuit could be looking at his or her personal assets being wiped out. With an LLC, such a situation can be avoided because the managers of the LLC are no longer personally liable. Instead, it is the business entity and that is liable and only the business' assets can be levied.
A LLC also remains a viable option to forming a corporation. While there is nothing inherently wrong with forming a corporation there are a number of additional taxes associate with such an entity. With an LLC there is no business/corporate tax on top of the individual tax on earnings from the business.
So, in a way, an LLC is the middle between a sole proprietorship and a corporate entity. It has all the benefits and asset protection of a corporation without all the red tape, taxes and regulations that corporations must deal with. Plus, legally forming an LLC is not complicated and can be done relatively quickly.
Is An LLC Right For Me?
Now, there will be those sole proprietors who feel the costs associated with forming an LLC are an impediment. Such a sentiment indicates a fundamental lack of understanding of the benefits of an LLC. Again, its a misunderstanding of what is a limited liability corporation.
An LLC provides a significant number of protections that are not afforded under a sole proprietorship. As such, whatever costs incurred by forming an LLC more than make up for what could be lost if LLC protections were not in place.
Remember, today's society is a litigious one and that means small businesses will always be at risk for civil action. Additionally, the economy of the United States is known for its up and down periods. If a business hits a down cycle at an inopportune time then the potential to post significant losses is possible. Both of these aspects are unavoidable, but losing your personal assets IS avoidable.
The conduit for avoiding such personal disaster is found in forming an LLC. So, if you are a sole proprietor and your business is growing in size and scope then you may wish to give serious consideration to forming an LLC.
You may also want to set up some time with your accountant who can explain further the tax consequences of an LLC and explain even further the nuances of what is a limited liability corporation.
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