LLC (limited liability company)

What the limited liability covers

An LLC is a legal person separate from you. When it signs a contract, takes on a debt or gets sued, the claim is generally against the company and what it owns: the bank account, the trucks, the equipment and the money customers owe it. Your house and personal savings are generally out of reach. A sole proprietor has no such line, because the business's debts are the owner's debts.

You form an LLC by filing with your state's business filing office and paying the state's filing fee. Your state may also require a yearly or periodic report and fee to keep the LLC in good standing, so check before you file and put the due date on your calendar.

Where the protection stops

• Personal guarantees. Banks, equipment lenders, truck lessors and supply houses may ask a small company's owner to sign personally. If you do, that debt is yours whenever the LLC can't pay it.
• Your own work. Owner-operators are on the tools. Whether you can be held personally responsible for damage or injury from work you did yourself, even through an LLC, is a question of your state's law. Ask a lawyer where you work, and insure the risk either way.
• Mixed money. Paying personal bills from the company account, or depositing customer checks into your personal one, blurs the separation the LLC depends on, and a court weighing a claim may be less willing to respect it. Separate accounts also keep your books and job costing clean.
• Your license and paperwork. Forming an LLC doesn't move your contractor license, insurance policies or contracts into its name. Ask your state licensing board whether the LLC needs its own license, a qualifier or a license bond, then make sure your policies, certificates of insurance, bank account, estimates and contracts all name the LLC.

Why it doesn't replace insurance

The LLC decides whose assets a claim can reach. Insurance decides who pays it. Without coverage, a claim against the LLC goes after everything the business owns, and a big enough one can end the business even if your personal assets stay protected.

Example: A helper leaves a hose across a customer's walkway, a guest trips, and the guest's lawyer demands $50,000. If general liability insurance covers the claim, the insurer handles it up to the policy limit. Without coverage, the claim is the LLC's to pay, and its $8,000 bank balance, its $20,000 truck and its equipment are what's at stake. If the owner personally guaranteed the truck loan, that loan still has to be paid even if the business folds. The numbers are made up for illustration.

Injuries to your own employees are a separate matter, handled through workers' compensation insurance under your state's rules.

Taxes are a separate decision

An LLC is a legal structure under state law; how it's taxed is a separate question. By default, the IRS treats a single-member LLC as a disregarded entity, not separate from its owner for income tax, and an LLC with two or more members as a partnership. Either can file Form 8832 to elect to be taxed as a corporation instead ¹. Those choices change what you file and can change what you pay, so settle them with a CPA before your first return. The EIN and Schedule C pages cover two federal basics, and if the LLC will work under another name, see DBA.

Questions to settle before you file

• Who owns it, and in what shares? With a partner, put an operating agreement in writing that covers decisions, buyouts and what happens if one of you leaves.
• What will it cost each year in state fees, bookkeeping and tax preparation?
• When do the license, insurance and bank account switch over? Pick a date, so no job gets signed in one name and insured in another.