By Princess Jones
If you’re a freelancer, a solopreneur, or a one-man shop, you probably started your business as sole proprietorship. You chose a name, secured the appropriate licenses and permits, purchased or rented a location and supplies and advertised its existence. Voila, you were in business. Piece of cake, right?
But this isn’t always the best route to take in the long run. Sole proprietors expose themselves to numerous risks, the most serious being personal liability for company debts. That’s why many opt to form a limited liability company (LLC) either in the beginning or as time goes on.
Is an LLC for you? Here are some pros and cons to help you decide.
Limited Liability. As mentioned, your personal assets are fair game as a sole proprietor. Thus, you’re one texting teen on an icy sidewalk away from a shark attorney devouring your business. However, as the owner of an LLC, you will not be held personally liable for business debts. This could come in handy if your business ever gets sued, defaults on a loan or any other serious financial crisis occurs.
Perpetual Existence. Sole proprietorships end upon the death of the owner. However, an LLC can have multiple owners and thus continue to operate in perpetuity. For example, you could allow your child to take partial ownership when you’re no longer willing or able to run the business on your own and thereby ensure its continued existence instead of selling it or letting it expire.
Hassle. You’ll have to jump through a few time-consuming hoops to form an LLC. Depending on your state, you will be required to:
- File articles of organization
- Prepare an operating agreement
- Pay two newspapers to publish your articles of organization or a notice related to the formation of your LLC for at least six consecutive weeks
- File a “certificate of publication” with an affidavit of publication from each newspaper that published your articles of organization
- Select a business name that is not being used by another corporation, limited partnership or LLC and indicate it is an LLC in its name, such as by changing “XYZ Ice Cream Shop” to “XYX Ice Cream Shop, LLC.”
Cost. Depending on your location, you’ll pay anywhere from $30 to $200 to register your business as an LLC. And in some states, you’ll be required to pay additional fees and taxes. For example, California requires an annual LLC tax of $800 along with a fee of $900 to nearly $12,000 based on annual income in excess of $250,000.
The Bottom Line
The main benefit to forming an LLC is limited liability. You’ll separate your personal and business assets and thus shield the former from problems with the latter. And, perpetual existence is a nice little perk although, unfortunately, that only applies to your business, not you specifically!
On the downside, you’ll jump through a few hoops to establish your business as an LLC and pay a few hundred (or thousand) dollars in the process. Keep this in mind if you’re strapped for time or cash or simply loathe bureaucracy.