SCORE

When mentoring new business clients at SCORE, one question that is raised in seemingly every session is this: should I form an LLC (limited liability company) for my business??

I met with my attorney recently to ask him about forming an LLC for my small business. I was surprised at how this conversation went.

Me: I’m here to put my property management business into an LLC. Can you do that?

Attorney: Sure I can do that. But first, let me ask, what exactly are you trying to accomplish?

Me: I’d like to add a layer of protection from liability in case I get sued. Isn’t that correct?

Attorney: Well, maybe ... Here are a few things to consider:

  • First, the LLC may not provide the protection you are looking for. In case of a lawsuit against your business, it is likely that both the LLC and you personally will be named in the suit. If liability protection is what you seek, proper insurance should be your first tool. Get with your agent and make sure you are properly covered. Add umbrella coverage as your second tool
  • Second, some people think that an LLC will shield them from having to pay back borrowed money. This is highly unlikely, since most bankers will ask for your personal guarantee on any loans the business takes out
  • Third, an LLC costs money to set up. It also adds complexity—there are articles of organization and an operating agreement to contend with, for starters. There are also additional tax returnsrequired when there are two or more members in the LLC

Me: Wow! So if I chose not to form an LLC, it could cost less, and be simpler? And if I get the insurance right, I can get the protection I was looking for? I’m in! That was a short meeting!

NOTE: This article is not meant as legal advice. Be sure and consult your attorney, insurance agent and accountant to see what is right for you.

About the Author(s)

Paul Krecke

Paul Krecke, a volunteer business mentor with SCORE’s Tip of the Mitt chapter, with a business background in clothing retailing and commercial real estate. His column, “Scoring in Business,” appears the first and third Tuesdays of each month in the Petoskey (MI) News-Review.

Real Estate, Rental & Leasing, Retail & Wholesale Trade
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