When Should I Form My LLC?
North Texas, especially North Dallas, is becoming the business startup epicenter that Silicon Valley was in the 1990’s and early 2000’s. People are moving here from all parts of the USA and from around the world for the big tech and healthcare companies that are relocating here. These are people that have a great work ethic, are highly intelligent in their field, and never stop having new ideas. They’re creating new apps, new processes, new fitness clothing, new personal training ideas, new bakeries for niche cookies, cakes, and crackers. They all have an idea and dream of making their idea a reality by placing it in the stream of commerce. Whether it’s a new client in my office, or I’m talking among friends (many of whom are entrepreneurs), or at social networking groups, the question that always comes up is: When is the best time to form my LLC?
Really, what they’re asking is: When do I have to form my LLC? How long can I continue to operate as I am now before I have to spend the money and the time to create an LLC or Corporation?
The Answer obviously varies depending on the business and where they are, but in general, it’s always better to form your LLC sooner rather than later. Whether you have a law firm that focuses on start-up business (like mine, ahem), or try an online business builder for the bare bones package, or if you have the free time to devote 30-40 hours of study time and try your hand at creating it all yourself, you are definitely better off by having those LLC protections from Day 1.
The basic concept of an LLC is that the assets and liabilities of the LLC are separate from your personal assets and liabilities. So if the LLC is sued, only the assets belonging to the LLC are at stake. The same is true if you are personally sued (a car accident, for example), then only you personally are liable and the assets in the LLC are normally safe. However, the protections of an LLC (I refer to them as Walls around the LLC in my discussions with clients) are not impenetrable and they can be weakened or even knocked down completely if the owner of the LLC doesn’t act properly. For instance, if the owner of the LLC is using the LLC’s bank account to pay his or her personal expenses then they have commingled the funds and merged their personal identity with the LLC identity. Once you’ve merged both identities, the Walls are no longer there to protect. I use commingling here to show that certain actions can weaken or remove the protections.
The length of time an LLC has been acting as an LLC is also an important factor that strengthens those Walls of protection. If you have an LLC that was formed on Day 1 of the business and all the leases, contracts, accounts, etc., are in the name of the LLC from the beginning and there has been no commingling, then the Walls are much stronger on that LLC versus an LLC that formed three months ago after the business had been operating for six years and the leases and accounts are still partly in the owner’s name and partly in the LLC’s name, with the owner still paying some of the expenses of the LLC out of their personal account. The Walls on that LLC would be weak and susceptible to being knocked down, exposing the personal assets of the owner.
By starting the LLC at the beginning, the owner becomes comfortable putting leases and accounts in the name of the LLC (providing stronger protections). As you open a bank account or sign a contract you know to make sure it is in the name of the LLC. It’s simple and easily done because you are only doing one at a time. This is in contrast to a business that’s been running as a sole proprietorship or dba where all the accounts and leases are in the name of the owner or dba and now, years down the road, you are attempting to convert the business to an LLC because it is doing well and you are worried about angry customers or lawsuit happy people. You now have to convert all your contracts, leases, accounts, correspondence, domain name ownerships, patents, trademarks, etc., over to the name of the new LLC, in addition to creating the LLC.
Converting an existing business to an LLC costs three to four times more versus the cost of creating an LLC on Day 1 of a business.
It’s often a hard decision because you are just starting out and you would rather take the money you’d spend on forming an LLC and put it towards your product development or advertising, but often, forming an LLC gives you the legitimacy and foundation that you need to build a successful enterprise. Down the road, if and when you want to sell your now booming business, it is so much easier and cheaper to sell an LLC as opposed to a dba or sole proprietorships and potential buyers prefer to buy an LLC for the protections and stability that are built in to it.
Take the time to research, weigh the pros and cons, and then make your decision. If you believe in your idea and believe it will be successful, protect yourself and your idea, and form an LLC.
Blaise Regan is a Partner at Regan & Frisbie, PLLC, a law firm focusing on Wills, Trusts, Probate, Contracts, Business Formations (LLC, Corporation, S-Corp Designation), and Business Disputes.
Regan & Frisbie, PLLC is located at 5850 Town and Country Blvd, Suite 501, Frisco, Texas 75034.
Comments or questions, feel free to email him at Blaise@RFPlawfirm.com or call him at 469.200.4737.
*Nothing in this Article is to be considered as the rendering of legal advice for specific cases, or creating an attorney-client relationship, and readers are responsible for obtaining such advice from their own legal counsel. This article is intended for educational and informational purposes only, and no warranty or representation is made as to the accuracy or completeness of the information contained herein.