Learn from a business attorney about forming a limited liability company or LLC, what are your risks for doing or not doing so, and whether you should form an LLC.
August 29, 2019
If you're an entrepreneur, self-employed professional or independent contractor, a provider of goods or services, a creator, user, or owner of creative works or intellectual property, or are simply starting a new business or project, you've probably wondered if or whether you should form a LLC or other business entity and what your level of legal and other liability and risks are. As business attorney, I regularly advise and represent clients in forming limited liability companies.
What are the risks if you don't forming an LLC?
In determining whether you should form a limited liability company, you first have to understand the liabilities and risks to you personally if you don't form an LLC. If you are the only person involved in the activities, operations, or business, and you don't form a LLC or other business entity, you will be deemed a sole proprietor. If you have others involved or working with you in the activities, operations, or business, and you don't form an LLC, you will likely be deemed a partnership, and more specifically a general partnership.
As a sole proprietor you're personally responsible for the debts and liabilities of the business. This means that you can be sued personally and your personal property, money, vehicles, and homes can be awarded to creditors of the business, regardless of whether any of your items awarded to any creditors were obtained or had any relationship to the business. This means you're personally liable for any claims that your business is liable to other people or businesses, including any claims of breach of contract, personal injury, copyright and other intellectual property infringement, product liability, employment law claims, and any other claims.
In addition to being personally liable if you're a sole proprietor, you're also personally liable if you're instead a partner in a general partnership. Not only are you personally liable as a partner for any actions or claims against the partnership, but your also liable for the actions or claims any partners that result from their activities on behalf of the partnership. Each partner and the partnership are all jointly and severally liable. This means that any claimant or plaintiff can choose to recover from the partnership or any partner in any proportion they choose for any damages caused by the partnership or its partners. This includes recovering damages 100% from you, 100% from your other partner or partners, 100% from the partnership, or any proportion totaling 100% from two or more of you, any other partner, or the partnership.
What are the benefits of forming an LLC?
Given the risks of personal liability to owners of sole proprietorships and general partnerships, there is a great advantage in being able to limiting the personal liability of business owners. That's where forming a limited liability company can be beneficial. The "limited liability" in limited liability company or LLC is obviously in the name for a reason. Under the law, even if the owner is acting on behalf of the LLC, the owner of the LLC is not personally liable for the debts and actions of the LLC or its agents.
This means that any creditors, plaintiffs, of claimants who sue the LLC or its owners or agents will only be able to recover from the LLC, but not the LLC's owners or agents, for any debts owed to them or damages awarded to them by a court or jury. The LLC owner's personal finances, homes and real estate, vehicles and any other personal property are safe from any debts of the LLC and any claims or lawsuits against the LLC. This is true so long as the LLC's owner is not acting outside the scope of their authority or the purpose of the LLC.
In addition to limiting the personal liability of an LLC's owners, forming an LLC has several other benefits. First, there are the potential savings and options via pass through or S-corp taxation. Second, forming and maintaining an LLC is typically an easy and affordable process, especially when in comparison to forming or maintaining a corporation or one of the various types of partnership possibilities. This makes forming an LLC beneficial and often a preferred business entity, especially for solo entrepreneurs, creators, and professionals, but also with multiple owner or multi-member small businesses and new startups.
How to form a limited liability company and should you actually form an LLC?
Forming a limited liability company requires you pay the filing fee or tax and file the LLC's articles of organization with the state in which you're opening the business or where your principal office is located. In addition to the articles of organization, and depending upon the exact structure of your LLC, your industry, your location, and other various factors, you may also have to file or draft other documents, including an LLC operating agreement, assumed name application, and more. These are typically filed with the Secretary of State's office.
There are obviously benefits to forming an LLC and numerous risks to not doing so, including limiting the liability for business owners. Whether you should form an LLC is dependent upon many factors. Depending on your industry, your goals, business plans or model, your business' target market, products or services, size, and state or location, an LLC may not actually be the best option. Instead of an LLC, another business entity, like a corporation, limited partnership, or a limited liability partnership, may provide more benefits or protection and be the better option. A business attorney can further advise you on whether or not forming an LLC is in your best interest and can assist you in properly forming one.
If you want any additional information on business law, business entity formation, or
limited liability companies, including forming LLCs, or if you need legal assistance or advice with forming or maintaining an LLC or another business entity, please contact us at The Fruitful Firm anytime.
Zach Scott Gainous is a business attorney in Nashville, and the founder and managing attorney of Nashville business law firm The Fruitful Firm. Zach regularly provides legal expertise, advice and representation to clients across many industries or professions, including music, entertainment, sports, media, technology, and more.
Disclaimer: This article or post is not and should not be considered or used as a substitute for legal advice or the hiring of an attorney. You should always carefully seek out legal advice and representation from a qualified attorney to assist you with your legal matters and issues.