Why Set Up an LLC or Corporation?
Do you need to register your business? The answer is, generally, no. You may start a business at any time without registering it. There are a few exceptions. Certain businesses may require a license and/or a permit to operate. For example, a bar is required to obtain a liquor license. However, you don’t need to register a construction or lawn service business to start operating.
If you don’t need to register most businesses then why does everyone talk about LLCs and corporations? The main reason is liability protection.
LLCs and Corporations Provide Liability Protection
When a LLC or corporation is set up, the business is considered a separate entity from the owners of the company. Think of the business as a person separate from the owner. This split creates liability protection for the owners of the business. If the business is sued, then the owner’s assets are protected from the lawsuit. This also holds true for debts. Debts owed by the business are not owed by the owner. Vice versa, debts owed by the individual are not owed by the business. Of course this is a simple view. Business debts get a little more complicated if the owner pledges personal assets as collateral to secure the business debt.
Operate Your Business Properly to Ensure Liability Protection
Creating a separate business entity doesn’t automatically create unlimited liability protection for the owners. Liability protection can be compromised by the owners. You need to treat your business like a business. This means creating an operating agreement; establishing a separate business bank account; don’t comingle personal and business funds; printing business cards, letterhead and flyers; establishing a separate mailing address or P.O. Box; keeping track of your business records using accounting software such as QuickBooks; and maintaining operation formalities. There is a legal term called piercing the corporate veil. This means if your business is sued, the opposing side will try to treat your business and you as one. If successful, your liability protection will no longer be valid. The opposing side will be able to include your personal assets in the lawsuit. It is important to properly maintain and operate your business as a separate entity to maximize liability protection.
Learn more about the different business entity structures: DBA, LLC, Partnership, S-Corporation, and C-Corporations.