Why an LLC is Not Enough to Protect Your Business
For many business owners, the first step to establishing and protecting their business is to file for a Limited Liability Company ("LLC"). There is a commonly held assumption that an LLC is the all-in-one business protection tool and a way to avoid taxes. Unfortunately, this is not the case and there are several other steps to get the most out of your LLC and maximize your legal protection.
An LLC is designed to protect your personal and business assets by separating them in a legal sense. As opposed to protecting against lawsuits, an LLC actually protects your assets in the event of a lawsuit. In other words, it does not prevent the rain but provides you an umbrella.
How do you prevent the rain? A strong contract agreement in place coupled with a good insurance policy and/or liability waiver will help. You want to take an approach to prevent the occurrence of lawsuits, not just prepare for when they come. It is worth investing in a lawyer who understands your industry and can craft tailored agreements and contracts to help you avoid expensive conflicts.
Simply having your LLC does not imply you have a trademark on your name. It just means no one else in your state can call their LLC the same name. In order to trademark your name, slogan or logo, you will want to file a trademark search to see if the mark is available. If it is, you can register the trademark and enforce it if needed. Remember that this is a costly process, especially for new business owners, so it is best to wait to file this until you have a proven method, name or well known brand to trademark.
An important myth to bust is that there is no tax advantage to forming an LLC; it is purely a legal tool. A benefit of the LLC is that in the future, you can take advantage of the S Corp tax election (which could save thousands in taxes.) However, you do not save any money or unlock any tax deductions just by filing your LLC. You can deduct business expenses regardless.
In order to maximize the effectiveness of your LLC, you must respect the separation of the assets by not commingling business and personal funds in the same bank or credit card accounts. Respect those boundaries and so will the law. Also, in the even of an IRS audit, commingled funds can ultimately be very costly for you because it confuses the IRS and they assume all deposits are income, since they cannot distinguish business from personal.
LLCs are a great way to protect your business, but they are not the only step you need to take. Contracts, insurance and policies and procedures in place will provide you with the most comprehensive legal protection. Don't forget trademarks too - having a registered trademark can be critical if someone tries to rip-off your brand or products. For more information on LLCs and how to get the most out of them, check out our podcast episode here.