I realized recently that I conduct some business-like activities on a regular basis that might benefit from my having an LLC. For example, as a software developer I have personal software projects, purchase web domain names, do some speaking and presentations, etc. Perhaps it would be a good idea to perform all such activities under an LLC just in case they turn into "real" businesses? It strikes me that having a business entity "in my back pocket" might be good practice in general for people who dabble in such things.
Good question, and good answer Steve. I am a business lawyer and frequently face this or similar questions. Steve’s answer is spot on. That being said, it is still a good idea to form the LLC or, better yet, a subchapter S corporation, for a host of reasons including as just one example that it is sometimes more difficult to successfully sue a manager/officer that is part of an LLC or S Corp – the manager/officer may benefit from greater deference including under the “business judgment rule” – than compared to suing a sole proprietor.
Thanks for being the first to post question. It is a great question and one that comes up often in my mentoring session with clients.
One of the biggest misunderstanding about LLCs is that simply by creating an LLC it protects all the members of the entity equally. This is not the case. Members involved in decisions of the business have additional culpability while non-decision makers have limited liability.
Since it is just you, you would be considered the manager and therefore you are the decision maker in the business. As such you will be held to a higher standard than limited members if you had them.
When a person creates a Limited Liability Company with the Secretary of State (SOS), there is a question that asks if the entity will be “Member Managed” or “Manager Managed”. Many founders select the Member Managed option which means that all the members have a role in decision making process.
Since all the members in a Member Managed entity participate in the decision of the business, all the members can be held to the higher standard and can be sued individually.
“Limited” therefore means that the legal exposure of non-manager members is limited to their investment in the business and any legal action against the business cannot extend to the individual member themselves.
Essential members that are not managers in an LLC are considered investors who contributed money, contacts, or some type assets to the business in exchange for an equity stake in the business. As just investors they are not involved with running the business and can’t be help liable for the actions of the business, but are entitled to some share of the profits if the business is successful.
So, in conclusion while having the initials LLC in your entity name and being registered as an LLC with the SOS may make you and others see the business are more “Real” as you say, being a single member LLC affords you minimal liability protection from a disgruntle customer wanting to sue you.