The term “LLC” is short for “Limited Liability Company” and not, as some people erroneously presume, Limited Liability Corporation. In fact, an LLC is set up specifically by business members who wish to avoid the limitations that incorporation would place upon their business. The term, then, clearly separates the LLC from the Corporation. Although it is true that the two entities share some characteristics, it is important to note the differences. The fashion for creating businesses as Limited Liability Companies has grown in recent years, as companies prefer to have the element of freedom that they consider an LLC gives them.
As the name suggests, an LLC is a popular way of doing business not least because it allows its members to bear limited liability for company financial losses and debts. In a world where it is increasingly difficult to steer a business through its first few years – immediacy being an unfortunate side-effect of competition and of the higher stakes inherent in it – many businesses feel that they cannot perform on an even footing, or anything approaching that, if they do not have some amount of borrowing power. However, and particularly in the present financial climate, many people quite reasonably consider borrowing and debt to be excessively risky. By forming an LLC, it is possible to at least remove personal liability for debts. In an LLC, debts which are unpaid at the time that the business ceases trading must be met out of whatever the business can raise – they are not transferred to the members of the LLC.
The dual positive effect of this is that it avoids the individual members of the company from being liable for the company’s unpaid debt, and at the same time protects the individuals’ credit ratings. Rather than a situation where individual members of the company were too risk-averse – and thus limit the chances that the business has to grow and make a real difference – this practice allows businesses to operate with a degree of confidence which allows them to take bold, innovative and potentially risky steps in the knowledge that the downside to their actions will be comparatively low when the potential upside is taken into account. It is unlikely that we would have half the successful companies we do have if the individuals involved had to commit their life savings to making things work.
An LLC can be created by a sole individual, or by a considerably larger group of people. Many of the benefits of an LLC are predicated on the fact that it will usually feature a larger number of people, but the practice itself is not limited to that status. For an individual looking to “become” an LLC rather than operating as a sole proprietor, there are a number of things to take into account. The fact is that becoming an LLC can involve a lengthy process and may not be totally necessary. A rule of thumb to follow is that if the business is going to take risks and act fast, LLC status is beneficial. Otherwise, sole proprietorship is more than adequate, and considerably more convenient.
Disclaimer: This article is for informational and entertainment purposes only, and should not be construed as legal advice on any subject matter.