Any business starts with a simple idea. However, after hours and hours (often more than anyone can imagine), that idea is ready to be shared with the world. The need to protect a business and its creator are where I can help. The type of legal entity that fits both the creator and venture will vary. A Limited Liability Company, or LLC, is a popular legal entity for smaller creative endeavors. The five main reasons an LLC might be the correct entity type are:
1. It creates a barrier between any potential legal claim and individual assets.
2. It creates additional means of distributing income and avoids dual-layered taxation.
3. It creates a vehicle for investment.
4. It creates built-in safeguards for growth within the company.
5. It solidifies the duties of officers and directors.
First, an LLC creates a legal boundary that limits potential liability. In other words, if you created the crockpot that burned down the Pearson’s home, having an LLC as the owner of the crockpot company would prevent Rebecca Pearson from suing you to take your home.
Second, a corporation is generally taxed at a corporate level, and then any income you take from a corporation is then taxed on a personal level. (There are variations S Corp. v. C Corp. that we will discuss later). The double taxation can be very frustrating because you are paying the government twice for the same money. I am not an accountant, and they are more equipped to explain the tax implications of an LLC. But, take my word, a good accountant is worth their weight in gold. A good accountant is there to help you maximize the amount of money you realize from your business because you and your business are taxed only once. An LLC is a vehicle to help maximize your end result.
Third, we all hope that our idea is worthy of investment, if and when needed. An ideal situation is one where we can grow our business at the rate it can sustain itself, and no loan or outside influence (investment) is needed. However, when that might not be the case, investors will generally have more faith in a fully formed and functional LLC. Although you can create an LLC at the time you need investment, an older entity will generate more stability than a newly formed one. Additionally, if the time ever comes to sell it, a sole proprietor business cannot be sold or transferred.
Fourth, creating an LLC also requires that one have an operating agreement. The operating agreement may be quite straightforward. If desired, Utah does provide a template when registering a new LLC. The general template is legally sufficient. However, as a company grows, its needs and structure will also generally outgrow the general template. A more thorough operating agreement can guide the company and its officers/directors/partners as it grows as well.
Fifth, the specific jobs of various partners will also be outlined in the operating agreement. If multiple people are starting the business, an agreement between them is a MUST before starting (it’s always easier to agree to something at the beginning in writing rather than fighting it out when there is a problem). However, even if the business is starting with a single person, setting the standards for when there will be more than one is always a good idea. The operating agreement will set the boundaries of each person’s duties and obligations to the LLC.
The formation and creation of an LLC at the initial stages is something that will help set a business up for success as it grows.