What is a limited liability entity? Do I need one?

What exactly is an "entity"?

If you have ever been in a discussion over dinner or coffee, especially with a budding entrepreneur or established business owner, the business shop-talk may have turned toward the nebulous topic of entities. If you were like me when I was first a part of these conversations, I did my best to nod my head, pay attention, then look at my watch, look for another set of people I knew, or find some other convenient excuse to excuse myself from the conversation since I was less and less knowledgeable on the subject matter. 

So, rather than you being in any more conversations about entities in which you find yourself overwhelmed by your own underwhelming understanding of the topic, I want to equip you with a firm foundation of the basics. 

Our working definition is as follows: an entity is a separate legal structure through which an individual, or company, conducts business operations. Pretty simple, right?

What is a liability limiting entity? Are there Pros and Cons?

An entity which limits your liability is any entity which legally separates the activities of your business operations from your personal assets. In short, this is an entity which prevents your personal assets (cars, condos, and cash, etc.) from being seized or sold in order to satisfy the debts of the company. 

For a deeper explanation of the assets that can be seized and sold in these situations please see our published material on Exempt and Non-Exempts Assets.

As you might have guessed, one of the biggest benefits of an entity is that it can be the mechanism that keeps you from losing your shirts (quite literally) should the worst happen and you get sued for an accident or damage that occurred while you were operating your business. It is, in some mays, the least expensive form of insurance you can purchase. Given the number and variations of entity structures, their flexibility in use and application is also a plus.

Your choices encompass LLCs, PLLCs, Series LLCs, LLPs, LLLPs, LPs, and Corporations, or some creative combination of one or more of these entity types.

Another attractive feature is that all or part of a business entity may be bought, sold or traded, giving great flexibility is raising capital, hiring talent, or exiting profitably into retirement. 

The downside of starting, owning and operating your business through an entity are start-up costs, annual maintenance, and annual filings. The intensity of these differs between entities, but the initial and ongoing costs make up a large part of the "cons" of operating your business through an entity. 

What is a non-liability limiting entity? Are there Pros and Cons?

For discussion's sake, I have termed the structures here as "entities" when it is quite impossible to have an entity which does not limit your liability, legally speaking. Here we are just using terminology that will allow us to compare business operating options.

An entity which does not limit your personal liability does quite the opposite of a liability limiting entity and leaves all of your non-exempt assets exposed should the worst happen. In essence, you conduct business operations as yourself, or jointly with a partner as yourselves. 

One of the "pros" of this structure, maybe the sole benefit, is ease of entry into the marketplace. It's as simple as just starting; think about a lemonade stand. You pick a product or service to sell and sell it, or you join forces with another and sell.

Your choices with this type of arrangement are limited to a sole proprietorship and general partnership. 

The "cons" with this type of operation are far and wide, but center around your personal assets being at risk for business operations; you WILL lose your shirts when something goes wrong and you find yourself on the sharp end of a lawsuit. Additionally, unlike a formal entity, it is inherently difficult take on investors or sell the business since YOU are the business. In fact, the potential financial horrors of operating a business outside of an entity should give any business owner pause before proceeding.

Which path should I choose? 

As my grandmother used to say (like many grandmothers, I'm sure), it is better to be safe than sorry. Unless you are just operating a lemonade stand, on the weekends, in the summer, and using store-bought premade lemonade, you need an entity. An entity structure is that foundational layer of protection that blankets your personal assets with security in ways that no other protective method can achieve.

As always, don't hesitate to contact me with any questions that arise. Get even more value by signing up for my e-mail list to receive weekly updates and key insights targeted to advance your business.