Do You Need to Form an LLC?

One advisor says that almost anyone engaged in online commerce should have one for protection.

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LLCs, or limited liability companies, are often used by small business owners to protect their assets and keep their businesses separate from their personal financial lives. But James Duggan, a wealth planning attorney based in Chicago, says anyone selling anything online, from knitted gloves to e-books, should also consider forming one, and that even non-business owners with significant investments can also benefit financially from the legal arrangement.

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Traditionally, LLCs have been used by businesses: Entrepreneurial ventures, real estate development companies, and hedge funds are just a few of the types of businesses that use LLCs in order to protect the owner’s assets should the business get sued, among other reasons, such as tax advantages. But Duggan says that today, wealthy individuals are increasingly using LLCs, as well. “Clients who are investing money are not unlike a fund manager, and they’re seeking the same types of protections and benefits… to insulate assets from creditors, to formalize ownership of assets, to maximize profit,” he says. LLCs can also help people transfer assets to their children, Duggan adds.

There’s also a whole other category of people who should consider forming an LLC, Duggan says, and that is anyone who engages in entrepreneurial activities online, from selling e-books on Amazon to handmade scarves through a personal website. “Anything can happen with knitted goods… In every circumstance, there’s a lawsuit that exists. If you’re creating something that has value, with value comes the risk that somebody might attack,” he says, and an LLC can provide some level of protection, especially over personal assets.

Forming an LLC, though, isn’t free. Duggan estimates that working with a lawyer to create a customized LLC will cost anywhere from $5,000 for a relatively simple situation up to $30,000 for more complex ones. From Duggan’s perspective, that cost is worth the legal protection and other benefits that LLCs provides. That’s why he says that even part-time entrepreneurs should creative an LLC as soon as they begin selling anything. Otherwise, he says, “The entrepreneur has unlimited liability for any debts that arise. Say you have no entity in place and are sued for any reason. If you don’t have an LLC, that you are personally on the hook for that.”

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Websites such as Legalzoom.com make it relatively easy (and cheap) to form LLCs, and individuals can also file documents directly with their state, which bypasses legal fees. But Duggan warns, “There are real dangers to using canned documents. Clients have different objectives. We customize the structure to each client’s circumstances,” he says, adding that states’ LLCs vary, meaning they don’t all offer the same protections.

Still, for small-time business owners, the prospect of dropping a few thousand dollars on legal fees to form an LLC can be intimidating. Readers, have you considered creating an LLC, and if so, are you glad you did?

Twitter: @alphaconsumer