Limiting Exposure: When To Make Your Business An LLC
The letters LLC at the end of a company's name refers to limited liability company. The most important purpose of an LLC is to separate the liability on assets, specifically those of the company and those that belong to the owner personally. To get down to the kernel of the problem, if an individual starts a company without forming an LLC or corporation, then the owner is personally liable for any debts and lawsuits. An LLC protects an individual's personal assets from being involved in any liability. This is important when considering a small business owner's home and the future security of his or her family.
In business, there is a term called "exposure." It refers to what a person can lose in a particular business transaction. If one engages in a business transaction, it is always wise to reduce the exposure to as little as possible. For instance, say an individual lives in a large city and accepts a job offer in a small-rural town that only has one company. If that individual sells his home and buys a new home immediately, then his expose is great. He could be laid-off in three months and lose everything. The best thing may be to keep his original home and live out of a hotel until he is sure about the job situation.
Another method of limiting exposure is to use an investment hedge. If an individual invests in a company and buys a stock at $10, then he can find a financial institution to sell him an option to dump the stock at $8 if the price suddenly plummets. If that company goes over budget on a project and is suddenly liquidated, the stock will have little or no value, however, the investor is protected because the stock in this case is still worth $8. Therefore, the money invested has limited exposure.
An LLC must be seen in the same light as the examples above relating to limited exposure. If the business is in the area of freelance book reviewing, registering as an LLC is probably not necessary. If the business is related to lawn services and landscaping, then registering as an LLC is probably a good idea, because a lot of things can go wrong, such as accidents caused by the owner or his employees, the riding mower accidentally hitting the house, the sprinkler system or water lines getting hit, etc. Be smart and reduce your exposure by working under the status of a limited liability company, LLC.
This article was written by Richard Carranza of Examiner.com for CBS Small Business Pulse.
