Many people mistake the acronym “LLC” as meaning a Limited Liability Corporation, when an LLC doesn’t create a corporation at all. “LLC” is the acronym for a Limited Liability Company. LLC’s are used quite commonly in business, especially small business, primarily as an asset protection tool.
The primary benefit of owning and operating a business under an LLC is the protection of your personal assets from creditors and lien holders. Here’s how it works. Say Connie wants to open her own fitness business. Instead of operating the business as an individual, Connie sets up an LLC. First, she gives it a name, “Connie’s Fitness Gym, LLC”. (After contacting the Secretary of State first to confirm that the chosen business name isn’t already taken).
After that, she files the necessary paperwork required by the State, including the formation documents and Articles of Organization. Once she has been approved by the Secretary of State (which can be expedited and approved within days for a higher filing fee) she must acquire an Employer Identification Number (EIN) from the IRS. (This can be done within an hour, online) Once she has the filing approved, and her EIN, Connie must open up a business checking account under the name of the LLC. And Voila, Connie now has her own business!
So why did Connie do this in the first place? Well, in the asset protection world, she is limiting the exposure of her personal assets whenever she conducts business through the LLC, rather than herself, personally. Creditors and lien holders of the gym may be limited to seizing the assets of the business rather than Connie’s personal assets, like her house, car and other possessions. I said “may be limited” for a reason. This is because these protections are not guaranteed, depending on the type; especially if Connie provides a personal guarantee when signing contracts for the business, or causes harm to one of her fitness gym members due to her gross negligence.
There are two basic types of LLC’s; single member or multiple members. A single member LLC occurs when you alone own and run the business. A multiple member LLC is when you have partners and for all intents and purposes, is a partnership. There is no better type of LLC. The only real difference is the paperwork and business documents.
So why set up an LLC rather than a corporation? Simple; cost and ease. With a corporation you have so many various issues of stock, annual filings, and different taxation structures. With an LLC, you get the same protections as a corporation, but the business earnings are simply added as a schedule to your personal tax return. Additionally, an LLC is far less expensive to set up.
Corporate formations are time consuming and can be expensive, but they may be necessary depending on the type of business you intend to own. To that end, a word of caution: Despite the relative ease of setting up an LLC, I highly discourage anyone from doing it themselves without at least some legal advice. There are a variety of considerations to be made when determining if an LLC is the right choice for you. Also, lawyers who set up businesses know how to prepare the documents correctly and expeditiously, which can be a blessing when starting a new venture.
LLC business formations are yet another aspect of estate planning and asset protection. I have seen them in action protecting my clients and I recommend forming an LLC whenever you intend to own a business or real estate. They are inexpensive but invaluable business tools.
Anthony J. Medico, Esq., has practiced law for over 15 years. To ask a question for this column, or to receive Medico’s free Estate Planning Survival Guide, visit his website at www.ajmedico.com, send an e-mail to Anthony@ajmedico.com or call (203) 661-8151.
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