Tip #3: Fortunately, there’s an LLC

TIP #3

Fortunately, there’s now a middle option between the two extremes and that is a Limited Liability Company (LLC). They take the convenience of a sole proprietorship and the strong protection of a Corporation. Most companies these days are formed as LLCs. Once you form your LLC you are putting the business assets in the LLC and you are keeping your personal assets such as bank accounts and your house in your personal name. If you personally get sued your company is safe, if your company gets sued your personal assets are safe. The key is keeping them separate.

EXPLANATION

LLCs are right in the middle and combine both convenience and protection. They have low reporting requirements like a Sole Proprietorship, but they are a separate entity like a Corporation and so they have the same protections as a Corporation. Most companies, big or small, are now typically formed as an LLC. It limits the liability (risk) of those involved with the company.

The owners of an LLC and Corporation are similar in a lot of ways, but have different names. The owners of a Corporation are called Shareholders and own shares of the Corporation. The owners of an LLC are called Members and own Membership Interest in the LLC. The document that governs a Corporation is called the Bylaws and the document that governs an LLC is called the Company Operating Agreement.

Practical and Actionable Takeaway: If your company is an LLC, make sure it has its own EIN, an Operating Agreement (bylaws), and that it has its own bank account in the name of the LLC using its own EIN.