I am going to discuss one of the most common questions I get when I speak to audiences with newer businesses. Should I be an LLC, should I be a corporation, and is it okay to be a sole proprietorship? It really depends on your situation, so we really want to look at your circumstances. I get clients in all of these different baskets, and we really have to look at it, carefully.
Now, typically, if you have more than one person in your business, you want to get rid of the sole proprietorship. Sole proprietorship means unlimited liability for the owner. Personal assets are fully exposed. This is very dangerous. However, if you’re the only person in your business, odds are your personal assets are probably exposed anyway, because you’re taking all the actions on behalf of that business. There’s no real entity to hide behind.
As soon as you have one employee, then we start looking at stuff like an LLC. That’s where we have a legal entity, separate assets, and liabilities. This a different legal person than the owner, so those assets and liabilities belong to that separate legal person. And, if somebody else is acting on behalf of the LLC, we have a clear block for liability, right? We generally do not allow that liability to attach to the owner’s assets, absence of some particular law, such as payroll laws, et cetera. So, LLC started adding a lot of protection, particularly when we have a second or third person involved in the business. So, that’s where we’re going. If we’re holding a lot of assets, maybe it’s an LLC.
So, sole proprietorship is very simple and probably can manage your risk with insurance. The LLC is going to start emerging as soon as we have employees and we want to get that firewall, separate assets, and separate liabilities.
But the corporation also offers separate assets and liabilities, so how do we choose between an LLC or a corporation once we get to the level where we know an entity is needed? Well, we need to look at the circumstances.
Does the LLC have future plans to go public? That’s probably a corporation. Might they be bringing in a private equity investment at some point in their growth history? That looks more like a corporation. Do they want the formalities and troubles of having a board and directors and all that work? If they don’t, we’re moving back to LLC.
So that choice between LLC and corporation often hinges on the future plans of the organization along with what we’re planning to do with the assets. And which one you pick really depends on where you’re going in the future.
So I work with clients, we form both, but it depends partially on tax, partially on future plans. You need to sit down with your lawyer and really get to a detailed answer. Let me know if you have any questions.
This posting is intended to be a tool to familiarize readers with some of the issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. This article should not be treated as legal advice to any person or entity. Freeimages.com/Photographer Christophe Libert.
About the Author
Shawn McBride — R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Firm, PLLC. Shawn works successful, private business owners in their growth and missions to make a company that stands the test of time. You can email R. Shawn McBride or call (214) 418-0258.
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