As the business landscape grows increasingly competitive each year, small and medium-sized businesses (SMBs) face more threats.
According to Forbes.com’s article on the the 10 biggest risks for businesses in 2022, entrepreneurs will have to face possibilities for data breaches, climate change challenges, the great resignation, inflation, and many others. So how can businesses go about protecting themselves?
Any person running or planning to start a business should consider forming a limited liability company or an LLC. An LLC basically ensures that its owner or owners will not be personally liable for any debts incurred or any business-related lawsuits. And although some of its major benefits are geared toward protecting the business owners, it also has plenty of benefits for the business itself. Here are a few of them:
Lets You Acquire an EIN
Business structures like sole proprietorships and single-member LLCs do not require getting an Employer Identification Number (EIN). But according to LLC.org’s post on ‘What is an EIN and Who Needs One?’, obtaining one will significantly simplify the process of tracking and managing your business expenses. Furthermore, it will enable your business to apply for credit and business loans or with business gas cards EIN-only providers in times of need, making it one of the best benefits of an LLC.
Pass-Through Taxation
LLCs are pass-through entities, meaning any business profits are passed through the businesses to the owner and taxed at the owner’s personal tax rates.
Owners can then qualify for the special 20% tax deduction created by the Tax Cuts and Jobs Act enacted in 2018. CNBC.com also reports that this act is extended until 2025, and possibly extended even more depending on the outcome of the Inflation Reduction Act.
Get Your Business Insured
Depending on the LLC, you may be required to have certain types of insurance in place – most states, for instance, require employers to have worker’s compensation insurance.
This is beneficial in the long run, because many businesses survive their way through lawsuits, insurance claims, and injury claims thanks to the right type of insurance and an LLC in place. Professional liability and general liability insurance are two important ones to consider.
Protect Your Digital Assets
We highlight in our article on ‘How To Protect Your Digital Assets’ that cybersecurity has become a major concern in today’s business landscape. However, surveys have reported that just 5% of small business owners are aware of the threat that cybersecurity poses.
Cyber liability insurance is also one of the ways you can protect your SMB from the high costs of data breaches or ransomware attacks, which are becoming more common nowadays.
Give Your Business Credibility
Lastly, it can protect your business by greatly improving its image. RevenueGeeks co-founder Elisa Bender states in a Yahoo.com article that “Most businesses incorporate to improve credibility.”
By having ‘Inc.’ or ‘LLC’ to your brand name itself, you’ll be able to deter most entities that will want to slander or cheat your organization because they know that you’re likely covered by insurance and other layers of protection.
The Critical Role of an Operating Agreement in Asset Protection
While many states do not legally require an LLC to have an Operating Agreement, skipping this document is a major risk to your limited liability status. An Operating Agreement acts as the “DNA” of your business, clearly outlining the separation between the entity’s actions and the owners’ personal interests.
In the eyes of a court, a business without a formal agreement can look more like a sole proprietorship, making it easier for creditors to “pierce the corporate veil.” By detailing management structures and capital contributions, you provide a legal paper trail that reinforces your business as a distinct legal person.
Maintaining “Corporate Hygiene”: How to Keep Your Protection Active
Starting an LLC is not a “set it and forget it” process; you must maintain “corporate hygiene” to ensure your liability shield remains intact. This involves more than just filing an annual report with the state. It requires keeping meticulous records, such as minutes from annual meetings, and ensuring that all business contracts and invoices are signed in the name of the LLC rather than your personal name.
Most importantly, you must avoid “commingling” funds using a business credit card for personal groceries or vice versa. Clear financial boundaries are the strongest defense you have in maintaining the integrity of your LLC’s protection.
Conclusion
By registering your business as an LLC, you’ll be able to acquire an EIN, enjoy pass-through taxation benefits, apply for business insurance and digital asset protection, and gain business credibility.
You’ll also safeguard yourself as a business owner by not being held liable for business-related debts or lawsuits. There are many more benefits to LLCs, so make sure to do your research as well to find the best course for your business.
Frequently Asked Questions About Starting an LLC
1. How does an LLC protect my personal assets?
An LLC (Limited Liability Company) creates a “corporate veil” that legally separates your personal assets—like your home, car, and savings—from your business’s liabilities. If your business is sued or faces debt, creditors generally cannot pursue your personal property to settle those obligations.
2. Can an LLC really protect me from all business lawsuits?
While an LLC provides robust protection against most commercial debts and slip-and-fall lawsuits, it does not protect you from personal “tort” (wrongdoing). You can still be held personally liable for your own professional malpractice, illegal acts, or if you personally guarantee a business loan.
3. What is “piercing the corporate veil” and how do I avoid it?
“Piercing the corporate veil” occurs when a court decides that your business and personal affairs are too intertwined, stripping away your liability protection. To avoid this, always keep separate bank accounts, sign contracts in the LLC’s name, and maintain formal operating records.
4. Is an LLC better than a sole proprietorship for liability?
Yes. A sole proprietorship offers zero legal separation between the owner and the business, meaning you are 100% personally responsible for all business risks. An LLC is the most common choice for small businesses looking for the protection of a corporation with the tax flexibility of a partnership.
5. Do I need a lawyer to start an LLC for protection?
While you can file LLC paperwork yourself, consulting a business lawyer ensures your Operating Agreement is structured correctly to provide maximum protection. A poorly drafted agreement can leave gaps in your liability shield that a legal professional can help identify and close.
