What is at Stake?

Everything you own personally (now and in the future) could be at stake in this decision…

“Limited Liability” business means that the business is a separate thing from you personally and if setup and managed properly it gives the owners of the business a level of protection from things that happen within the business.  Put simply, it makes the business liable for things that happen as a result of business dealings and situations, rather than the owners personally. 

Before we get too deep into discussing what form of business you should start, let’s talk a little about whether or not you need to have a limited liability business at all… 

The Sole Proprietorship is the Default Business

When you start an informal business and don’t incorporate or start an LLC, you are automatically a Sole Proprietorship without filling out anything else.

The IRS expects you to report all the income you generate in this business on your own personal tax returns.  You are also able to deduct many of your business expenses on your tax form, but the taxes for the business and you personally are all on your personal tax return.

The Sole Proprietorship Offers No Protection

There is no distinction between you and your business legally or financially. The business is officially your name although you can “do business as” a different name.  Even with a Sole Proprietorship, you should maintain a separate bank account and records of income and expenses for this business, but this is for ease of recordkeeping and tax preparation.  If someone sued your business, then all of your business and personal assets would be fair game to payoff any judgment against you. 

The sole proprietorship is acceptable for one-person micro-businesses with extremely low revenue,  no expectation of growth, and low liability risks.  If you are buying and selling $5,000 a year in beanie babies on eBay then you are probably ok to stay a sole proprietorship until you dream to expand and get larger.

The Six Triggers

There are at least six “Triggers” that I think make it almost mandatory that you start a limited liability business (it isn’t that hard or expensive):

·       Having a partner in the business OR

·       Having employees in the business OR

·       Startup losses likely to be incurred OR

·       Future Revenue Projections more than about $20,000 per year (not a hard number) OR

·       Business requires outside investment to fund operations OR

·       Business has risk of harming someone physically, financially, etc.

If even ONE of these Triggers describes your business, then you likely NEED a limited liability business. 

There is one other HUGE BENEFIT to having this more formal business structure.  It provides a structure to realize your financial dreams.  Once you have a business, your mind starts to look for business opportunities, and they are everywhere.  If you are looking to escape your Hamster Wheel job, then starting a business of your own could provide your escape route and there is something about the formality of a Corporation or LLC that is psychologically more valuable….

To be continued…