Who gets stuck with the tab when a small business is in the red? If you are a sole proprietor, running the enterprise without legally incorporating it, you do. All debts and other liabilities are your personal responsibility, and that means creditors can come after your home, your bank accounts, your car and pretty much anything else you own in order to collect.
Every entrepreneur needs to consider the ramifications of a possible business disaster and to take proactive measures to limit the damages. A limited liability corporation (LLC) does exactly what the name entails. Like a standard business corporation, it provides a shield against personal liability should your business fall into financial straits. If your business is sued for breach of contract or outstanding debt, or if someone is injured on the premises, the only thing at stake are the assets held by the LLC.
The protection is not absolute. If you sign a note for a business loan personally — rather than in your capacity as an LLC member — you can’t escape liability for the amount outstanding, and your personal assets are still at risk. Also, courts may “pierce the corporate veil” — that is, hold the principal owners personally liable in cases where the LCC appears to have been used as a sham to conceal improper or fraudulent activity.
But for most small businesses, the LLC structure is an ideal way to operate with a minimum amount of paperwork and government red tape. Notably, an LLC is not a taxable entity. Its owners (known as members) include their net profits from the LLC on their personal tax returns. This “pass through” feature avoids the double taxation borne by standard corporations and their shareholders.
And although forming an LLC requires filing articles of incorporation with the state, LLC members are free to outline their ownership stakes and responsibilities between themselves — preferably through an operating agreement. If you have to dissolve the business, or if a member withdraws, retires or passes away, having an LLC agreement in place will make the succession easier and protect the rights of the remaining members.
Salas Law Firm helps entrepreneurs in the Fort Lauderdale area with their planning and organization, including incorporation as an LLC or other corporate structure if deemed more beneficial to individual goals. To schedule a consultation with a business attorney, contact us online.
John Salas
