New business owners overwhelmingly chose limited liability company as their entity of choice when starting a new business. There are three main reasons why this is so.
REASON #1: Personal Liability Protection
Running a business is risky undertaking. This is not only because an entrepreneur is putting lot of time and money into the business but also because a business is inherently a target for lawsuits. Businesses must interact with other parties such as customers, vendors, suppliers, contractors, employees and partners.
With every interaction, there arises a chance that an accident or a dispute may arise either now or in the future. In addition, when a business starts to make money, these other parties and their lawyers may focus even more on potential lawsuit claims and other ways to extract money from a profitable business.
Without the use of an asset protection vehicle like an LLC, you as a business owner will always be at risk for these lawsuits and the liability that can arise from them. You can lose your house and all your personal savings from just one business lawsuit. A limited liability company provides a layer of protection between your business and your personal assets.
REASON #2: Business Credibility
By operating through a limited liability company, your company name will be entitled and required to end with an LLC designation. The public will automatically know that your business has engaged in smart business planning and made an investment to organize itself properly by filing and creating a legal entity for your business.
This will distinguish your business from the thousands of others out there that are operating as sole proprietors. This is because anyone can come up with a business name and claim themselves as a business. While those may be legitimate businesses, it is difficult to separate the good from the bad fraudulent ones.
Having a limited company is a lot like having a BBB seal. The public knows that businesses with such designations are backed by someone serious about business and the planning and undertakings required to launch a business properly.
REASON #3: Business Continuity and Growth
When you start a business without a legal entity, your business is inextricably a part of you. This mean that when you die or become disabled, your business ceases as well. By that time, your business may be very valuable but in order to preserve it and continue it, your heirs and estate administrators will have to spend a lot of money and time restructuring all the contracts, relationships and details.
Many businesses will end up closing if this happens because it is too complex and expensive to restructure.
When you establish an LLC to run your business, you are creating a business which is separate and apart from yourself as the owner. The business continues despite what happens to the owner or owners. If the owners were active managers, of course there will be some interruption but the legal entity continues to operate because all the operational contracts, details, and other components required to run the business are with the limited liability company.
Also, if you ever need to bring in investors, a legal entity is almost always required because a sole proprietor business is not set up to bring in investments. Unfortunately many people start businesses thinking they will not need investment but later when they get to expansion stage, they face this big limitation and it becomes much more expensive to transfer a business into an LLC then it is to start one under a limited liability company to begin with.
LLC formation and its benefits are well worth the cost and effort for any small business.
