LLC–a good thing

Let’s ignore DBAs, business licenses, zoning laws, and all of the other legal issues that come up when you start your own company and just look at selecting a business entity. It’s an important step that many small new businesses don’t spend enough time on, for the same reason that you have already stated—they don’t think they have enough money to do it right.

There are several different kinds of business entities from which you can choose. You can run your taco truck as a one-man (or woman) show, and be a sole proprietor. You could bring a friend into the business and form a partnership. If you’re really interested in developing this truck into a bigger company, you could also choose to set up a limited liability company (an LLC) or a corporation. Those are your basic options, although there are more out there.

Nine times out of 10, I recommend a limited liability company to entrepreneurs, regardless of their size. An LLC offers you the tax advantage of a sole proprietorship or partnership, with the added benefit of limited personal liability. What’s personal liability, and why do you want to limit it? Well, say Paula Plaintiff orders a taco from your truck and the awning on the truck falls down and hits her on the head, causing serious brain damage. Let’s further assume she sues you for $2 million, a not unreasonable sum considering the

$3 million McDonald’s coffee verdict. Your taco truck is worth $50,000. If Paula can’t be made whole again by taking money from the business, she could go after you personally for the rest — including your house, your car, and if you’re married, your spouse’s assets also. Now let’s rewind a bit and assume that you have properly set up your business as an LLC. The most Paula could walk away with is what’s in the business — your taco truck.

Many people think that they don’t need an LLC because they have a good insurance policy. While insurance is important, it will cover you up only to a certain amount. Let’s assume that you have a $1 million policy in the above scenario. Paula would get your taco truck, the $1 million in insurance, and then …  your house. If you properly limit your personal liability, all Paula would get is the taco truck and the insurance policy.

An LLC is also extremely flexible. You can choose to pass your profits and losses through the company to its members, or you can choose to be taxed like a corporation. LLCs do not have stock like corporations, nor do they observe corporate formalities (like having a board of directors, holding annual shareholders’ meetings, issuing stock certificates, keeping minutes, maintaining a corporate record book, etc.).

Corporations are far more complex than the other forms of business and involve more regulations. If you think you may want to set up a corporation, please see an attorney.

Mary Hudson is a business law attorney with Hudson & Luros, LLP, in Napa, and can be reached at mary@hudsonluros.com or 877-6279. The information provided here is not intended as legal advice, nor does it form an attorney-client relationship with the author. The author makes no representations as to the reliability or accuracy of the above information. In a perfect world we wouldn’t need disclaimers — or attorneys.