Determining whether your business should be an LLC (or a Sole Proprietorship) is daunting even with a grasp of the basic differences. Ultimately, it’s a question of diligence between you and the corporate veil.
The corporate veil is a legal concept most easily illustrated by the Wizard of Oz. The towering, Technicolorful personality of Oz is all smoke, thunderbolts, and righteous indignation. It is awesome in the truest sense of the word.
But there’s something out of place.
“Pay no attention to the man behind the curtain,” commands Oz, a wizard tragically unfamiliar with the nuance of reverse psychology. So we pay attention, and behind this curtain we find nothing more than a meek, CGI-crazed old man. As soon as the illusion fades, so does our respect and awe.
The LLC is a popular form of business structure because it separates you as an individual from your company, Oz. Basically, you aren’t individually liable for actions taken as a representative of your company (this is a generalization, but a useful one). You are effectively concealed behind a legal curtain – a “corporate veil” – of liability.
Now remember, it’s a corporate “veil” – not a suit of armor. Like the illusion of Oz, the LLC is effective only as long as you can’t see the person hiding behind the curtain.
This means that a sharp legal argument combined with any number of possible circumstances may pierce that corporate veil. More often, though, a simple lack of diligence by the business owner makes this easy. Common oversights include accidentally commingling company and personal funds or failing to properly document a change in business procedure. In such circumstances, you could inadvertently pierce the corporate veil yourself, potentially making you individually at risk for civil lawsuit and possibly criminal charges.
So should my business be an LLC, Randy?
I’m going to answer this like the attorney that I am: it depends. Mostly, it depends on the size of the company and the nature of your work.
An LLC requires more paperwork (but not an overwhelming amount) than a simple Sole Proprietorship, along with an annual personal property tax (in Maryland, $300 minimum). Most of the time, the liability protection is worth this hassle — especially if you work in medicine, dentistry, law, or own some form of store or restaurant.
It’s bad enough to lose your business in a lawsuit; it’s even worse to lose your personal bank account and home. I’m not saying that would happen without an LLC, but I can’t guarantee it wouldn’t.
Good luck and good hunting.
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The Fisher Law Office is renowned for its experience in estate planning, probate administration, asset protection, and business development. Annapolis attorney Randall D. Fisher has practiced for over 20 years, maintains the highest peer review rating for ethics (AV Preeminent) by Martindale-Hubbell, and is a sucker for long walks on the fairways.