Liability Protection for Business Owners
There’s a certain amount of risk that comes with owning a business. But accidents can happen no matter how well a company is run, and the expenses involved in defending a lawsuit could prove to be devastating — whether or not the owner is found to be at fault.
Legal fees add up fast, especially if a case is complicated or goes to trial. In fact, the estimated median cost for a lawsuit ranges from $54,000 for a liability case to $91,000 for a contract dispute.1
A limited liability company (LLC) is a business structure that offers many of the same legal protections as a corporation. Establishing an LLC creates a separate legal entity to help shield a business owner’s personal assets from lawsuits brought against the firm by customers or employees. In theory, the financial exposure of the owners (members) would be limited to their stake in the company, but exceptions may include any business debt they personally guarantee or misdeeds (such as fraud) they carry out.
Here are some additional benefits associated with LLCs.
Tax efficiency. An LLC is a pass-through entity for tax purposes, so a firm may pass any profits and losses to the owners, who report them on their personal tax returns. Members can elect whether the LLC should be taxed as a sole proprietorship, a partnership, an S corporation, or a C corporation, provided that it qualifies for the particular tax treatment.
Simplicity. In most states, an LLC is easier to form than a corporation, and there may be fewer rules and reporting requirements associated with operating an LLC. The management structure is less formal, so a board of directors and annual meetings are not usually required.
Flexibility. Being registered as an LLC may facilitate growth because it’s possible to add an unlimited number of owners and/or investors to the business, and ownership stakes may be transferred easily from one member to another. LLCs may also be owned by another business.
The specific rules for forming an LLC vary by state, as do some of the tax rules and benefits. Because state laws allowing for LLCs have only been on the books for about 30 years, their liability protections haven’t been tested in the courts to the same extent as they have for corporations.2