Protecting a Small Business as a Limited Liability Company (LLC)

By Jennifer Reuting

Tens of millions of Americans operate small businesses. They range from small, home-based side businesses to fully operational companies with many employees.

For the most part, these individuals operate without protection. Granted, they may not take what they do too seriously. They may consider themselves independent contractors or consultants, but in today’s litigious society, operating without even a basic level of liability protection is a bad move.

Not to mention that establishing your (albeit “small”) business as an LLC helps others take it more seriously. If it’s clear to the world that you’re serious about your business, others will be serious about it as well.

If you’re operating as a sole proprietorship, you’re probably used to a specific way of being taxed and the liberty of not having to keep records or officially document decisions. And, unless you’re a full-fledged operation, you may think that this is worth the risks.

Spending a lot of time and money to form a corporation or an LLC is overkill for a simple, at-home web designer, plumber, or dog walker, right? Well, consider this: What if one of the dogs you’re walking bites someone? Or the pipes you installed burst, causing tens of thousands of dollars in water damage? When you’re sued, you risk losing everything — not just your business, but all your personal assets as well.

Very few businesses wouldn’t benefit from the protection of an LLC or a corporation. If you’re still operating as a sole proprietor, your accountant or CPA probably has advised you to remain so.

What a lot of tax professionals don’t understand is that even if a particular business may not derive tax benefits from forming an LLC or a corporation, operating as a sole proprietorship is still a dangerous proposition because of the risk of losing all your personal assets in a lawsuit.