When it comes to owning or running a business, there really are just two options, generally speaking, that are open to you: You either run your business in an informal way such as many freelancers or sole proprietors, sometimes called ‘solopreneurs’ often do, or you go through the process of creating a formal company or legal entity that is registered with the government.
While there will likely be advantages to be had by running a business as a freelancer or solopreneur, the chances are that there are also several disadvantages that probably outweigh these advantages. On the other hand, although there are numerous advantages to registering your business as a legal entity, the question usually is, exactly what type of legal entity or business structure is best for your business? The best answer that often applies to most situations is; it depends. However, this article aims to make an argument as to why a solopreneur should consider forming a Limited Liability Company (LLC) as opposed to other business structures.
Of course, there are other types of business structures such as Partnerships and Corporations, and these might be more suitable for certain types of businesses. For example, a solopreneur would have to take on one or more partners or members in order to successfully register a business as a partnership, and while a single-member owned business can register as a corporation, one advice usually given by business lawyers is that certain ‘non-mandatory’ conditions be met before this route is taken.
Having said that, it is essential to know exactly what creating an LLC entails, what it can mean for your business and why you should consider forming one.
Understanding the Fundamentals of an LLC
While LLCs have been around for some time, they have not particularly been a popular business structure for small business owners, until quite recently. There are specific requirements necessary to register (and maintain) a corporation, and most small businesses find these requirements quite burdensome. An LLC provides the same type of protection you would receive under a corporation, but without the burdensome regulations and formalities.
Generally, an LLC should be created with two members or more. But, if you are a solopreneur, you can register a Single-Member LLC (SMLLC.) Creating a single-member LLC is easy to set up and run and provides the same sort of flexibility you get as a Sole Proprietor.
Basically, if you are looking for an uncomplicated and straightforward way to register your business in a way that protects your personal assets, then an LLC is the best option, and we’ll share our reasons in this article.
A Few Reasons to Consider Forming an LLC Include:
Limited Liability Protection
One of the main benefits of registering an LLC is the limited liability protection. Typically, if you run a Sole Proprietorship, then your personal assets are usually not protected from any debt obligation that the company might incur. The implication of this becomes more real if there is a lawsuit against your business, which you lose. The absence of a limitation of liability means that in the event of a lawsuit against your business, you could lose your personal property if you lose the case. With an LLC, only your business assets are liable in a lawsuit against the business.
As such, an LLC provides a limitation of your liability so that your personal assets are protected from such debts and lawsuits.
Probably one of the reasons why entrepreneurs shy away from registering their businesses is the misconception about double taxation. However, when you register your business as an LLC, you won’t have to deal with this problem. With an LLC, taxation is simple and flexible.
For taxation purposes, single-member LLCs are treated as “disregarded entities”, which means that you will not need to file separate tax forms for your business. You will instead be filing your business profits and losses on Form 1040, which is the form that citizens and residents of the U.S. use to file their individual tax returns. This situation is what is referred to as a “pass-through” taxation, wherein the profits and losses of the businesses are passed through to the individual, who files these on their individual tax return, thereby eliminating double taxation.
Compliance requirements are an essential point that makes forming an LLC worth considering. A limitation of liability is generally assumed to a corporation or an LLC, however, this can be stripped for several reasons one of which is a failure to comply with required regulations. Knowing all the laws is where a corporation can become cumbersome because there are so many ongoing regulations. It is also what makes an LLC such a good idea because you get the benefit of liability protection without so many formalities attached.
Of course, the requirements vary across states, so it is a good idea to speak to a good business lawyer to help you navigate through the specific requirements and conditions that may apply to the type of business you want to register.
The Fictitious Name Problem
Sometimes, a solopreneur might decide to operate using a different name. For instance, John F. Samson might own a cleaning service, and he decides to run it using the name, ‘Simply Divine Cleaning Services.’ There is nothing wrong with that; however, if another business chooses to register the same name, there is nothing to stop them from using it to carry out their business. Even worse is a situation where they end up trademarking that business or product name, which happens to be the same name you use for your ‘fictitious’ company, or Doing Business As (DBA) name. You would automatically need to cease using that name, otherwise, face the threat of legal action if they find out. Creating an LLC and registering a specific company name ensures that your business name is reserved and that no one else can use it in or for their business.
Finally, having the LLC designator at the end of your business’s name lends credibility to your business. It not only shows your customers that your business is registered with the state, but it is also an indicator that your business is there for the long haul.
In conclusion, while nothing prevents a solopreneur from doing business without registering a formal business entity with the state, there are drawbacks to this business structure. Creating an LLC offers several benefits, including limited liability protection we have spoken about. Consult with a business attorney so that you are well briefed on your options as well as the process of creating an LLC.