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

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

Considerations for Forming an LLC

There are several factors to think about when considering forming an LLC. It does cost some money to form and maintain an LLC, and the price depends on the state where you begin your LLC. However, the cost is minimal — especially when you know the benefits you and your business will reap.

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 — smaller corporations, but much larger than a sole proprietorship or two friends going into business together. 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 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. Essentially, forming an LLC is something that can give you the protection and peace of mind that is necessary when starting a business.

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. Many people prefer to keep their names off the public record in case something goes haywire in the business.

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 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, (art, automobiles, 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 “parent” 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.

Do You Need the Protection of an LLC?

The answer to this question is pretty simple. 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.

One thing is clear, an LLC is the way to go in terms of protecting your assets. No matter the business size or the newness of it, it's always a good idea to be one step ahead of whatever could happen. Whether you’re just starting out or have been in the business game for a while, it’s never too late to form an LLC.