The decision to form an LLC falls under the category of things that should not be rushed. Whether you’re a business owner, freelancer, contractor, or partner in a company, you need to consider all aspects of forming an LLC before taking the plunge and making it official.
There are several factors that you need to take into consideration when making this decision. You don’t want to rush into an LLC and end up regretting your choice down the road because of something like unforeseen tax implications or limitations on potential investors.
Here are some common scenarios when forming an LLC makes sense:
You’ll have Employees
If you’re running a business that employs people, you’ll need an LLC. This is because an LLC is the only business structure that offers protection from liability, worker’s compensation insurance, and the ability to withhold taxes from employees’ paychecks.
Owners of S corporations (which are similar to LLCs) are personally responsible if one of their employees gets hurt on the job and sues the company.
This means you could lose your personal assets if you don’t have enough in insurance coverage or money in your bank account to pay out the employee. Partnerships and sole proprietorships are generally not held responsible for employee injuries, but there are some exceptions to the rule.
You’re a Freelancer or Contractor
If you’re running a freelance business, forming an LLC is a great way to protect yourself from getting sued. If you work under a company name, that company could find themselves in a bind and come after you for payment.
If you form an LLC under your name and use a DBA for the company name, you’re protected from any potential legal action from the company you work for. If an individual comes after you for payment, you can use your LLC as a shield against their lawsuit.
You Want to Protect your Business’s Assets
In addition to protecting yourself financially in the event of a lawsuit, forming an LLC helps to protect your business assets as well. For example, if your office building was damaged in a fire, if the roof of your building needed to be replaced, or if there was flooding in your building, your business assets would be protected.
Your personal assets, like your home, savings, and car would not be protected. If you have assets that you want to protect and you don’t have access to insurance, forming an LLC is one way to do that.
You Want to be Transparent in your Business Dealings
Transparency is one of the biggest advantages of forming an LLC. If you’re working on a freelance project or contract with a government agency, forming an LLC makes it clear that you’re running a business.
In most cases, contracting with the government requires you to put a DUNS number on the contract. If you don’t have a DUNS number, it could delay or even kill the deal.
Note that when dealing with a government agency, transparency is not just about having a DUNS number. You also have to let them know how you intend to make money. If you have a freelance business that makes a profit, you almost certainly have to use an LLC.
You’re Starting a Company with Friends or Family
If you’re starting a company with friends or family, forming an LLC may be a good idea. This is because it keeps your business separate from your personal assets.
For example, if your friend or family member gets sued and they lose the lawsuit, they could lose their house or car. These assets would be used to pay the judgment because they were mixed up with your friend’s or family member’s business. If you both have an LLC and a friend or family member gets sued, their assets stay intact. In addition, your friend or family member can’t come after your assets if you co-sign on a loan for them or do them any other financial favors.
Your Company will be Worth Lots of Money (and you Want Investors to know it)
Let’s say you’re running a profitable business and are interested in getting investors for your company. You can take your regular business and turn it into an LLC.
This will make your company’s value go up because investors know that LLCs are protected against tax and liability issues. This means that the value of your company goes up by as much as 40%.
Why would you want to do this? If you want to sell your company, you can get more money for it if your company is valued higher. The downside is that it could be harder to find a buyer because they know that the taxes and liabilities associated with owning your company will go up.
Ultimately, forming an LLC is a big decision and one that should not be rushed. Take the time to consider all the different scenarios in which an LLC may be beneficial and decide for yourself if forming an LLC is right for you. When you do, you’ll be taking a big step towards protecting your business.