Any time you go into business, you're courting financial risk. From lawsuits to everyday losses in the marketplace, there's always some chance that your business will encounter serious tumult. There's no such thing as a sure thing.
With that said, there are smart and strategic steps that any business owner can take in order to mediate and minimize risk. One of the most important steps you can take toward safeguarding your finances is to select the right legal formulation, preferably one that offers plenty of built-in personal liability protections.
Business Formulations at a Glance
For example, when you start earning any kind of income on the merits of self-employment, your business is automatically considered to be a Sole Proprietorship. In a Sole Proprietorship there is no legal distinction between the business and its owner, nor between business assets/liabilities and personal ones. In the event of a lawsuit or an aggressive creditor, Sole Proprietors stand to lose everything.
For this reason, most serious entrepreneurs reach a point where they want to choose a more rigorous, robust legal formulation. Two that are known for offering financial safeguards are the Limited Liability Company (LLC) and the Corporation.
LLCs vs Corporations
While both of these legal structures can help you shield your business from financial loss, there are some important points of distinction.
Let's start with the LLC. Unlike Sole Proprietorships, LLCs actually are distinct legal entities, allowing you to keep your personal assets and liabilities separate from your business concerns. The upside is that, if your business runs afoul of litigation or other serious risks, you can limit your personal risk exposure. You don't have to worry about your personal savings or family nest egg being seized.
A Corporation will offer the same robust financial safeguards, with some added perks. A Corporation allows you to sell shares, attract investors, and ultimately take your business public, none of which is possible with an LLC. However, there are also some drawbacks, most notably a much more stringent regulatory environment.
For companies that have an aim to go public, incorporation is a must. But for businesses that simply want to safeguard their financial assets without taking on onerous regulatory burdens, the LLC is the more flexible and manageable solution.
Steps for Forming an LLC
To register your business as an LLC, and to start taking advantage of these financial protections, there are a few important steps to follow. Note that the specifics can vary according to the state you're in, so it's always best to check with your Secretary of State or Chamber of Commerce.
Choose Your State of Registration
Technically, it is permissible to register as an LLC in any state of your choosing. Is it worth shopping around to compare tax rates and LLC regulations from one state to the next? In almost every case, the answer is no. Registering in your home state is always the most financially prudent option, unless you are dealing with real estate investments spanning multiple states.
Name a Registered Agent
Every LLC is required by law to choose a Registered Agent, which can be either a person or an organization tasked with receiving your legal correspondence. Note that you must choose an Agent who has a physical mailing address in the state where you have registered. For example, when forming an LLC in California, it's essential to find a Registered Agent in California, as well.
Complete Articles of Organization
Articles of Organization is the name of the document you must file with your Secretary of State in order to formally establish your LLC. The information you'll need to provide may include basics about your business scope and purpose, your contact information, and so forth. There is typically a filing fee attached to this, and may be anywhere from $20 to $300.
Create an Operating Agreement
Though not legally mandatory, this document can help clarify roles and responsibilities within your company, leading to a more frictionless experience working with potential business partners. In other words, it can spare you from legal headaches down the line.
Choosing Financial Protections for Your Business
When launching a business, you'll face many important decisions. Foremost among them is the type of legal entity to choose, which can impact your financial protection and preparedness. Consider registering as an LLC to keep your financial assets safe.