Three Reasons Your Business Startup Should Be an LLC Instead of a Sole Proprietorship
Bootstrapping a startup means looking for every opportunity to cut expenses. Thus, it is common for first-time business owners to skip over registering their business, assuming that running it as a sole proprietor will be sufficient. While it’s true that sole proprietor status is the least complicated to manage — less paperwork, fewer filing requirements, the most flexibility — the reality is that the benefits of organizing as an LLC far outweigh the complications.
LLCs Provide Protection
The structure of an LLC or corporation exists for one primary purpose — to separate business and personal liability. With sole proprietorships, all of your personal assets, including your house, cars, and savings, are potential targets for any lawsuit or judgment against the business. Don’t assume that none of your dedicated customers would ever sue — if you make an error that costs them dearly, their attorney will turn to you for reparations.
In addition, businesses can struggle for all sorts of other reasons, such as a lagging economy, that are out of control of the owner. With the protections of limited liability, the business can take the fall without significantly impacting the owners. Sole proprietorships and partnerships can leave the owners holding the bag, and paying off the business’s debts (or worse, filing personal bankruptcy)…outcomes that will affect you for years.
LLCs Provide Opportunities for Your Business
Particularly in the case of independent contractors, securing an LLC can open doors not available to sole proprietor independent contractors. The reason for this is that many large companies secure independent contractors for months or years at a time, and hiring a individual, sole proprietor, into those positions can put the larger company at serious risk. If you have LLC or corporate status, there is no doubt that the hiring does not meet the standards of being an employee, because the presumption of independence is evident in the entity status, thus the company is more likely to hire your company over a sole proprietor.
LLCs Open the Doors to Growth
Operatinga business as a sole proprietorship not only limits your options, but also can limit your thinking. As a solo owner, there is no easy way to bring in investors for growth and expansion. With an LLC or corporations, your options are wide open for including partners as you see fit. You can build the business’s credit separately from your own, enter into contracts, and own property in the name of the business, presenting a more professional image. And, your own ideas of how far the business can go can be influenced by the formality of organizing as a limited liability entity. Something about formalizing your operations inspires a lot of folks to think bigger than just working for yourself.
Sure, there are valid arguments for selecting sole proprietorship status. Whether you organize as an LLC or corporation, there are some fees and paperwork required, usually once or twice per year. And, new business owners are often required to provide personal guarantees for bank or vendor debts even with formal organization, meaning the protection features are not always comprehensive.
But if you are starting a business with any plans for growth, organizing as a limited liability at the start will protect you from devastation down the road. Of course, not every business gets sued, but why risk all you have in exchange for a few hundred bucks and a couple of filings per year? Owning your own business is the commitment of a lifetime, so it just makes sense to protect it, and yourself, as much as possible.