We’ve all heard the benefits of forming an LLC. But so many of us have put it off because we’ve also heard the other side of the story: An LLC can be more complex and more expensive to start than a sole proprietorship is.
This can be true in some cases but if you’re serious about your business, an LLC has just too many benefits that simply can’t be quantified or ignored. From the comfort of knowing you’re personally protected against lawsuits to building your brand and solidifying credibility within the business community, these are advantages that are difficult, if not impossible, to obtain without forming an LLC.
But here’s another twist: The rules change state by state.
Lucky for you, Rocket Lawyer understands that one-size doesn’t fit all so we’ve already done the research for each state. Using our Where to Form an LLC? An Interactive Map, simply choose the state you want to form your LLC in then the state-specific information, including fees, rules, and forms, will be provided to start and run your LLC. Not so complicated anymore, is it?
Still not convinced? Here are three benefits that can help your business when you form an LLC:
1. Protect your personal assets from business liabilities.
Legal protection: We hear it all the time but what does it even mean? Well, let’s say, you’re a sole proprietor. This means you and your business are viewed as one and the same in the eyes of the law. You’ll be personally responsible for the debt and liabilities your sole proprietorship incurs.
Now imagine being hit with a lawsuit as a sole proprietor with no legal divide between you and your business. If your business has no funds to pay for its debt or business obligations, your personal assets will be pursued to cover for your business. All that money you saved by not forming an LLC will seem miniscule compared to the asking price of your liability suit against you and your business. And how can you quantify a peace of mind?
But an LLC, just as the name suggests, offers legal protection because you and your business are considered separate. Think of it this way: Once your LLC is up and running, a legal wedge will divide you and your business into two different entities. This means your personal assets are protected even if your business is in debt or experiences lawsuits.
It’s very similar to a prenuptial agreement; you get the benefits of a marriage while enjoying legal protection if the marriage goes south. In that same fashion, with an LLC, your personal and business assets, debts, and liabilities will never intersect or merge, providing a whole new meaning to work-life balance.
2. Have the ability to raise capital and grow your business.
Any business needs capital to start, run, and grow their business. It’s a bit pointless to have a backlog of million-dollar ideas if you don’t even have the proper funding to bring them to life. Unfortunately, a sole proprietorship presents challenges in financing its operations. Since a sole proprietor is prohibited from selling stocks, it’ll be extremely difficult to recruit investors with no real incentive to contribute to your business.
With no legal protection, most investors are naturally worried about lawsuits and liabilities that might cost them more than their investments do. So what’s the next best option for a sole proprietor? You may need to dip into your own savings or obtain a personal loan. You may encounter some difficulty with banks since they’re hesitant to lend loans to less “credible” businesses that have yet to incorporate or form an LLC.
An LLC, on the other hand, has many different ways to finance their business, like:
- Getting “investors” to back up your business. You can’t sell stocks in an LLC but you can have an investor, or even a friend, become a member or owner of your LLC. If you choose to be a multi-member LLC, you can pool all your money together to raise more capital for your business. Plus, investors are much more likely to invest in an LLC since they’ll be legally protected against business liability.
- Using banks for small to large loans. Banks are more favorable towards an LLC than they are to a sole proprietor since an LLC has limited liability and holds a reputation for being a credible, established business.
- Receiving government-sponsored grants and loans. It can get pretty competitive to receive these types of funding but it’s still a good idea to check out the Small Business Association for more information.
3. Build your brand for the future.
This may be the last item on your list of priorities. But building your brand for the future is an important first step to establish longevity in an otherwise tumultuous economy. By forming an LLC, your business gains legitimacy since the LLC designation shows that you’re serious about your business.
In contrast, there’s very little effort that goes into simply being a sole proprietor since there are no true formalities to become one. In fact, you automatically become a sole proprietor when you make your first business transaction. Additionally, there is very little distinction between someone who is a long-time sole proprietor and a seller with only a few business transactions.
So even if you’re serious about your sole proprietorship, you’ll lumped into the same group as casual and/or one-time vendors. So if you want to stand out as a credible business, it may be time to start an LLC.
Ready to Start an LLC?
As a sole proprietor, you already wear plenty of hats in your business, from making sales to reconciling ledgers. Let us take care of the legal part and be your legal department so you can go on and do what you do best: your business.