One of the best ways to improve your financial situation is to start a side business that grows into a full-time income. But operating a business as a sole proprietor leaves you and your personal assets little protection from lawsuits. To better protect your assets set up your business correctly from the beginning as a Limited Liability Corporation or LLC. Here are some tips on what you will need to get started with creating your LLC.
What is the big deal with avoiding being a sole proprietor? It all comes down to liability. If you are working on your own and being paid in your name directly as a sole proprietor, if you make an error, cause an accident, or in any way open yourself up to liability. If a customer (or really, anyone) were to sue your business they would be suing you directly. That would open up all of your assets – your home, your cars, everything you own – as potential payment if you are found liable.
Forming a limited liability corporation helps you avoid some of this personal liability. If you or an employee are sued as part of the LLC, the LLC takes the brunt of the lawsuit and at worse would be liquidated. This would protect your personal assets. However, some have argued the benefits of an LLC are overstated because a single-member LLC is still, essentially, you doing business. If you as the only employee commit a great liability, a lawyer will argue that not only should the LLC’s assets be made available in the suit, but your personal assets as well.
Here are a few things you will need to get started:
To get started you will need to file with your specific state to create the limited liability corporation. The specific steps that your state will require is dependent upon the state.
For most states you need to file to form the LLC and pay a filing fee. The filing papers include the address of the business, founding members, and other important details. Filing fees can be as little as $100 and as much as $800.
Another important aspect in protecting your personal financial assets is to literally separate them from your business assets. The first part of this is to separate your personal money from business funds by opening up a business checking account. It is also a good idea to set up a separate credit card account for your business.
Failure to separate these funds can open up your personal savings to lawsuits. The person who sues you could make the case that it is impossible to tell the difference between what money belongs to the business and what belongs to you personally, likely leading to all of your money being included as potential payment for the suit. You would be wiping out a big benefit of having an LLC if you do not separate your funds.
Having professional assistance from a lawyer or accountant in setting up your limited liability corporation is not a requirement. You can find the forms online for your state, send them in, and set up your accounts with a bank on your own.
However, if you are serious about this business (or are converting a successful sole proprietorship to an LLC) you should seriously consider getting professional assistance. A lawyer can file for your LLC, review your contracts, and provide advice that will protect you moving forward. Likewise an accountant can tell you what type of accounts you want for your funds and help you set up your books properly. Being able to hand off your tax documents at the end of the year to a professional that will minimize your tax paid while also helping you (or protecting you) during an audit is a smart business decision.
The above list are just some of the basics that should apply to every LLC out there.
Your business will have specific needs, here are some to think about: