About 73% of all businesses are sole proprietorships. There are a number of advantages of being a sole proprietor.
It’s the least expensive way to form a business. You get to take business tax deductions. You’re free to work however you please since you have total control of the business.
It’s a simplified way to get started as an entrepreneur. If you’re looking at your options for your business, you might be wondering, “Do I need an LLC?”
An LLC does have a lot of advantages over sole proprietorships. Is it the right option for you? Take a look at this article, which explains why you should consider an LLC over a sole proprietorship.
1. Protect Your Personal Assets
What is an LLC? It means limited liability corporation. As the name suggests, one of the key advantages of an LLC is that you have limited liability in the event of a lawsuit or claim against your business.
From a legal perspective, there’s no difference between your assets and your business assets as a sole proprietor.
If you have a job that goes wrong or a client wants to sue you for breach of contract, your personal assets are at risk.
You could lose your home, savings, and other assets.
An LLC creates a line between you and your business. As long as you maintain separate accounts and separate your business from your personal life, they’re treated separately.
If you’re sued, then your business assets are at risk, not your personal assets.
2. Protect Your Business Assets
LLCs also protect your business assets if you’re personally in trouble. A good example is personal financial debt.
You might have a lot of medical bills or credit card debt personally. If you default on those payments, your business assets are protected.
3. Protect Intellectual Property
Intellectual property is often the competitive advantage for many businesses. You can protect all of your intellectual property by creating a separate LLC.
That shields the intellectual property from lawsuits and other liabilities. The main company can lease the intellectual property from the LLC that holds the intellectual property.
Of course, there needs to be transparency about payments between the two companies.
4. Get Outside Investment
Do you want to get people to invest in your business? Seed funding and angel investors will invest in an LLC.
If they invest in a sole proprietorship, they become general partners, and they have the same personal exposure that the sole proprietor does.
If you want to get venture investment or go public, an LLC won’t do. You’ll need to form a C-Corp.
5. You Invest in Real Estate
If there’s one business where you want to reduce your risk, it’s real estate. You have a lot of money tied up in property, and you have to protect those assets.
You could get into a car accident and face a personal injury lawsuit. The attorney can’t include your real estate as part of the settlement claim.
6. Create a Distribution Plan
Are you bringing partners into your business? A business that’s selling online can expand quickly in this market, and having more people can help you grow your business.
Instead of operating on a handshake agreement as a sole proprietor, make it official.
An LLC’s operating agreement details who the partners are and how they share the profits.
If a partner decides that they want a greater share, they can’t just take it. It has to be approved by the other partners. The operating agreement gets amended.
7. You Can Set an End-Date
Let’s say that you were contracted to work on a major project. The project has a definite beginning and end date.
It is possible to set a start and end date of an LLC.
You can register the LLC and have the liability protections for the duration of the project. You can’t do that as a sole proprietor because your personal assets are still exposed.
How to Form an LLC
Forming an LLC is simple and complicated at the same time. That’s because you need to have a couple of legal forms. These documents are the operating agreement and articles of organization.
These documents form the basis of your company and they’re legally binding since they’re sent to the secretary of state’s office.
You don’t want to copy these documents from search engines. If you have partners, the profit-sharing clause could be wrong in the articles of organization.
This could lead to legal issues down the road if there are any disagreements between the partners.
You need to have a name for the business. This requires a search to ensure that the business name isn’t taken. You should also do copyright and trademark searches to make sure you aren’t infringing on someone else’s work.
Some states require that you have a registered agent. This is a place that accepts important legal and tax correspondence.
You could list yourself as the registered agent, but your name and address become public record. It’s best to use a registered agent for privacy and security.
You’re probably wondering how long it takes to form an LLC. It depends on your state. Some states take as little as a few days, while others take a few weeks.
Do I Need an LLC?
After you read this article, you shouldn’t ask yourself, “Do I need an LLC?” An LLC offers a lot of benefits over a sole proprietorship.
You can legally protect your personal and business assets. LLC is a great entity to use when you start a business.
You have the liability protections and room to grow. Now that you know the basics of an LLC, you’ll need to know how to grow your business.
Check out the Business section of this site today!