Should you get an LLC for your business? Well, that depends. Here are a few things to think about as you explore your options.
Reason #1 to Get an LLC: Legal Protection
The main reason why businesses choose to file for an LLC is for legal protection. In the law’s eyes, an LLC is a separate entity from you. That means if something happens and your business gets sued, you are protected from losing personal assets.
To illustrate, consider two examples.
Bob is running a small business as a plumber. He decides against setting up an LLC because he doesn’t want to deal with the paperwork and fees required. One day he accidentally leaves a pipe cutter at a client’s house, and their three year old cuts himself with it. The hospital gets him patched up, but now Bob faces a big lawsuit and loses everything including his personal house, car, mutual funds, etc.
Jack also runs a plumbing company, but doesn’t want to risk his personal assets. He sets up an LLC to give him legal protection. A similar event happens, where his negligence on the job ends up in a lawsuit. His business is in trouble and loses its assets, but Jack’s personal belongings and bank accounts aren’t taken away.
While this incident may not pertain to your business, keep in mind that accidents happen. Patrons of your restaurant may slip and fall. That widget you made might not have warnings on the label and get swallowed by a baby. Your software might have a huge loophole that lets in tons of viruses or hackers.
If you feel like your business is relatively risk-free and you don’t need an LLC, that’s up to you. But you’re missing out on important protection that millions of business owners won’t go without.
Reason #2 to Get an LLC: It’s Easier to Raise Money
Most businesses require some form of capital. They don’t handle everything with cash, because they can often leverage cash to make more money.
For example, let’s say you only have $1,000 in the bank but you know if you spent $5,000 on materials and labor, you can make $10,000 worth of product. Will you let your $4,000 shortfall hold you back? Probably not, assuming you have access to credit. You’ll borrow cash now to make more money later.
It’s generally easier to raise money as an LLC versus a sole proprietor or partnership. The extra structure and corporate entity give banks and investors more confidence that your business is here to stay.
Pass-through Federal Taxation on Profits
For some business entities, taxes can get a little messy and complicated. Not so with an LLC, as the company’s profits go straight to the members’ personal tax returns. This means it’s easier to file your company’s taxes, because they just ride along with your personal taxes.
This also means if you suffer a loss, the taxes you personally owe the federal government goes down. That’s something we always like to hear, right?
Is an LLC the right entity for every business? No, definitely not. Sometimes it makes more sense to file for a C Corporation or S Corporation. But in general, the people asking us about LLCs are business owners currently operating as sole proprietorships and partnerships. In that case, we definitely recommend considering an LLC for the reasons described above.