The biggest reason that a business owner should and would want to use a limited liability company for his or her business is because the LLC provides a layer of protection between the business and the business owners. What does this mean?
Most people know what it means generally, but they may not be aware of how it applies and when it applies or does not apply.
Every state’s LLC laws have a provision that says something similar to this (legalese): “. . . no member, manager, organizer or agent of a limited liability company shall have any personal obligation for any liabilities of a limited liability company . . . solely by reason of being a member, manager, organizer or agent of a limited liability company.”
This is a powerful provision. It means that the business and its liabilities are separate from its owners. Without an LLC, if you run a business as a sole proprietorship, you are personally obligated for ALL business debts because the business is a part of you.
Let me give you an example. If you operate a grocery store business as a sole proprietorship and enter into a contract to purchase inventory, you are personally liable to pay for what is owed under that contract. If instead, it is a limited liability company that is the business and enters into the contract, it is the LLC and not you personally who is obligated under that contract.
Another example: If you own that store as a sole proprietorship and someone slips and falls and sues- you and all of your assets will be at risk for that lawsuit. If it is the LLC that owns and runs the store, it it is the LLC and its assets that are at risk for the lawsuit.
So, given this litigious society where plaintiff lawyers are always looking for targets and people sue for almost everything, the benefits of limited liability protection from a limited liability company are so powerful. . . especially given the low costs to form and ease of maintenance.
Now, this protection is NOT ABSOLUTE. If you are otherwise personally negligent or at fault due to some actions you personally did, then the limited liability company will not shield you from those actions even if you were working in your business at the time. For example, if you were delivering groceries to a customer via a company truck and you were at fault in having an accident, you will be held personally responsible for being at fault. So, having a limited liability company is not the substitute for getting business insurance covering your business and its employees.
There are also other limitations where the law feels like due to circumstances, the business owners should be held personally liable. . areas like when the owners contractually agrees to be pesonally liable, committing a fraud, using the LLC for improper purposes or to purposely avoid an obligation and piercing the LLC veil.
The liability protection afforded by a limited liability company is powerful and definitely worth the benefits but please know there are some limitations (you can learn more details about them in my Six Step LLC Formula for Limited Liability Protection eBook) and you do need to make sure you properly form, operate and maintain your LLC in order to preserve this important benefit.