Why New and Small Businesses Need to Think About Creating an LLC

What if you’re just starting out, a freelancer or just a very small business?

If you’ve recently started a business, or are still considering it, one question you may be asking yourself is whether you need to form an LLC (aka Limited Liability Company). Before you decide, you need to understand what LLCs are and how having one might relate to your business. Keep reading, for the answers to those questions and more.

Thousands of new businesses are formed every single day, and they come in all shapes and sizes.

Traditional Businesses

Business that are commonly thought of as “traditional” include real estate investing, construction, house cleaning services, catering businesses, childcare and eldercare services, and pet care services. There are also specialty boutiques, clothing rental shops, and a wide variety of brick-and-mortar types of businesses.

Less Traditional Businesses

Today’s electronic age has birthed a plethora of new business opportunities. There are blogs, podcasts, MLMs, online stores, online marketing, and consulting businesses of all types. Millions of people have started their own freelance businesses and work remotely, providing everything from proofreading services to life coaching and professional counseling services. Some work on their own, as private contractors, while others employ entire teams of people.

Even artists, graphic designers, musicians and creatives benefit from running their business like a business. Starting with the LLC is the first step in ensuring that you’re taken seriously by potential clients and even potential lending institutions.

Considerations for Forming an LLC

There are several factors to think about when considering whether or not you need to form an LLC. It does cost some money to form and maintain an LLC business structure, and the price depends on the state where you form your LLC. However, the cost is minimal — especially when you know the benefits you and your business will reap.

Does Size Matter?

Many people start a business and immediately think it’s too small to warrant forming an LLC. People often think of larger, more established businesses when they think of LLCs — kind of like smaller corporations, but much larger than a sole proprietorship or two friends going into business together. But the truth is, forming an LLC may be the best decision a small or new business owner can make, and there are plenty of reasons why — including legal protections, tax savings, flexibility, and a simple structure.

Legal Protections

Forming an LLC can help prevent your personal assets (retirement savings, home, kids’ college fund, etc.) from being seized for payment of business debts or lawsuits if your business should come under legal attack.

In addition to that layer of protection, you can establish what’s known as an “anonymous LLC” in many states. Doing so keeps your name off public records and can help ward against fraud or other legal hardships.

Tax Benefits

When you form an LLC, you get to choose how you want your LLC to be taxed. It can be taxed either as an S Corp or a Sole Proprietorship. The LLC serves as a pass-through entity for the income generated by the company. This means the profits and losses of your business will be “passed through” your personal tax return, rather than being taxed at the business level. This process avoids double-taxation, and you’ll only need to file one income tax return.

Additionally, having an LLC can validate your business in the minds of your customers and prospective clients. It also legitimizes your business since it’s registered with the state, and in some instances, it can make it easier to acquire financing in the shape of investors or business loans as your business grows.

Asset Protection

Business owners who have significant assets in terms of real estate or collections of some type (art, automobiles, baseball cards, or anything of considerable monetary value) may opt for a Series LLC for even more protection. Forming a Series LLC allows you to “nest” individual assets under the LLC in a “child series” of the LLC.

If a legal issue arises that affects one of the “child” series, it won’t affect any of the assets under the other series. Each child series is independent and can even be managed by different people. A Series LLC provides you with the flexibility to sell an individual asset, or several assets, without affecting the protection of your other assets.

In another scenario, say you accidentally rear-end another vehicle on the road and the victim sues you for damages. With an LLC, your business assets (investment properties, inventory, collections, computers, etc.) are protected from being seized and liquidated.

Customization

LLCs are flexible. When forming an LLC, you can customize your operating agreement to fit the needs of your individual business. You don’t have to deal with the constraints of a corporate structure with officers and shareholders; you can tailor the rules of your business entity to fit your needs.

Do You Need the Protection of an LLC?

The answer to this question is pretty simple. Basically, if you have a business or are about to start one, and you own anything — whether it be a basement full of inventory, your home, or even a vehicle — you need the protection forming an LLC provides.

Leafy Legal Services can help you determine the most beneficial business structure to protect your business, your profits and your assets. Give us a call or drop us an email for a free consultation, and find out how we can help you today.

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