Being an entrepreneur isn’t without its fair share of challenges. You’ve got small and big decisions to make — sometimes within seconds. Deciding which business structure you’ll use is only one of those choices. Yet, it can have significant implications now and down the road.
Although a sole proprietorship is perhaps the most convenient way to do business, it may not be best for you. An LLC or limited liability company might be the right fit instead. And it’s next on the list for convenience and ease of setup. But before you cement your decision to start an LLC, here are four things you should know.
1. Legal Separation
When you’re a sole proprietor, there is no legal separation between you and the business. If your company runs into financial woes, your personal assets are on the line. Yep, this means if your business owes debts in a bankruptcy filing, your personal bank accounts could be fair game. Property like your house and car might be on the chopping block as well.
However, the definition of LLC says there is a legal separation between its owners and the entity. With an LLC, you get some degree of personal protection. Say someone sues your company. Your individual assets won’t typically come into play regardless of the suit’s outcome. The same “rule” typically applies if your business goes under.
While the entity and its financial assets remain vulnerable, you don’t have to worry about potentially losing your home. In addition, an LLC may have more than one owner. The entity remains legally separate from all the people with ownership stakes. An LLC can also be taxed in the same way a corporation is, creating another line in the sand.
2. Name Guidelines
Picking a name for a sole proprietorship usually doesn’t come with a set of rules. For some solopreneurs, their business may not have a separate name at all. They pick up freelance gigs using their own name. Alternatively, they may use platforms that anonymously connect clients with talented independent contractors.
If you start an LLC, you’ve got to pick a name. And the naming conventions will vary by state, so you’ll want to check out the rules before you register. However, some general standards apply regardless of which state you’ll operate in.
Your LLC’s name must be different from that of other registered businesses in the state. No copycats or striking similarities are allowed. You’ll also need to include LLC in the name, whether it’s abbreviated or spelled out. Your state may also have a list of words that are off-limits, including offensive language. Also, stay away from trademarked words and reserve your name so another business doesn’t take it.
3. Transferring Ownership
If you’re the sole owner of a limited liability company, you may be able to transfer ownership with ease. Since you’re the only decision maker, you could decide to hand over the reins to whomever you choose. It could be a family member, a former colleague, or someone interested in taking on a new venture.
Where transfer of ownership gets more complicated is when an LLC has more than one owner. An LLC with two or more owners represents a multi-member company. Major decisions like selling the business require all members to agree. So, if your partners aren’t on board with transferring ownership, it becomes a roadblock.
Even if you’re only selling your share of the company, all members must agree on it. The process can take longer, especially if you’re vetting candidates. And if someone wants out and gets sidelined by their business partners, the company could take a hit. When professional relationships become strained, it can be difficult to keep a business running. States may also have rules for whether an LLC can continue if one of its owners dies or declares bankruptcy.
4. Formal Paperwork
Starting a limited liability company doesn’t require as much paperwork as a corporation, but it does involve some. Unlike a sole proprietorship, you can’t just start operating and earning income. You need to register your company and its name in the state you plan on doing business in.
Plus, if your LLC will be operating across state lines, you’ll have to register in each of those jurisdictions. The stipulations for expanding an LLC’s operations to multiple states can add complexities. No, you probably won’t have to file annual reports and hold shareholder meetings. However, you’ll want to check the legal requirements for each state you plan on operating in. Some jurisdictions do require LLCs to file annual reports.
Even if your LLC will be in a single state, seeking legal advice isn’t a bad idea. You might also want to bring an accountant on board to help with the books. When there is legal separation between you and your company, you want someone in your corner who knows the rules.
Starting a Limited Liability Company
Forming an LLC is a step up from a sole proprietorship. You’re establishing legal separation between your assets and the company’s. An LLC creates an entity, but as an owner, you will still benefit from its income.
While limited liability companies usually don’t require as many formalities as corporations, the stipulations can vary between jurisdictions. Forming an LLC may be the right move for your business. Even so, knowing the pros and cons will lead you to the best decision.