I received a question via my website last week concerning a person going into business for himself and whether he needs to set up a Limited Liability Company (LLC). A Limited Liability Company (LLC) is a form of incorporation that is extremely versatile while maintaining all of the benefits of forming a traditional corporation. LLCs are much easier to form and get set up than traditional companies. You don’t have to file an annual registration report with the Secretary of State and you get to decide how you want to have the LLC taxed. It can be taxed as a partnership if there are two or more Members (Owners of the LLC). The LLC can also choose to be taxed as a ‘C’ Corporation or as an ‘S’ Corporation. One of the most powerful benefits is that if the LLC only has one Member (owner of the LLC) it can choose to be a ‘disregarded entity’. This means that for tax purposes only the LLC doesn’t exist. Perfect for a small business with few, if any, employees.
The main benefit of forming any type of corporate entity is limiting your personal liability. This means that if the company generates a liability, the corporate entity traps the liability within itself so that creditors cannot touch the assets of the Owner. Take, for example, a rental house. If the rental house is owned by Mr. and Mrs. Smith and someone gets injured on the property, it is possible, and likely, that Mr. and Mrs. Smith would be sued personally and their home, car and bank accounts could be at risk. In the alternative, if they had formed an LLC and someone had been injured on the property, a properly formed and operated LLC would protect their personal assets and limit the liability to only the property inside the LLC.
There are a couple of things to look out for when you are going to set up an LLC. A lot of non-attorneys are setting these up for people. They go online and file Articles of Organization for the individual, charge them a little bit of money, and send them on their way. The Articles are only the first step in properly setting up an LLC. The “guts” of the company is its Operating Agreement. In my opinion, an LLC without an Operating Agreement is worth less than the cost of the paper the Articles are printed on. If the LLC was ever sued, the first thing a Judge would look at to see if the LLC was properly formed and operated would be to review the Operating Agreement. I recently had a client that told me his banker set up an LLC for him. This was a national bank with multiple locations in most cities. The customer service representative filed the Articles of Organization for him, opened the LLC’s bank account, and sent him on his way. He left thinking that he was completely protected. Might have saved him a buck up front, but could have cost him his and his family’s home.
One last thing I tell all of my clients. Having an LLC is great, but your first line of defense is insurance. Talk to your agent. Make sure he completely understands your business and informs you of what potential risks you have. You want to make sure that if sued, any potential plaintiff’s attorney looks at your LLC, combined with your insurance, and sees that it is cheaper, easier and more effective to take the insurance check and run versus trying to come after your personal assets.
Please feel free to contact me if you have any questions about LLCs and how they can protect you and your family.
I provide in-home childcare (currently as an unlicensed facility. I would like to become licensed either at my current location or eventually at a site outside of my home. In addition to childcare center licensure, I would also like to eventually seek accreditation as a preschool.) and am considering getting set-up as an LLC or a Not-for-profit (as an educational organization). From what I understand, a Not-for-profit Corporation is one that has formed and then filed for 501(c)3 Status, but can any type of Corporation (C Corp, S Corp, LLC) file for 501(c)3 Status? Please help me to understand and give me your professional opinion on what the best structure would be for an in-home daycare with big dreams to become a quality preschool someday.