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Why It's Important to do Business Through a Limited Liability Entity versus a Sole Proprietorship

If I’m the only owner of my small business, why do I need to form a business entity?  Why can’t I just operate my business as a sole proprietor?

The short answer is that you never want to do business as a sole proprietor, but in a nutshell, here’s a one very good reason:  Whenever you do business as a sole proprietor, you are exposing all of your personal assets to risk, whereas doing business through an LLC, corporation or limited liability partnership limits your risk to only those assets that are owned by the business entity. 

There are exceptions to this rule; for instance, you could be held personally responsible if you personally caused the harm due to your own intentional or reckless acts. However, where a simple error or accident occurred in the course of doing business through your limited liability entity, your personal assets will be protected.

In general, if: (1) you’re doing business as an LLC, (2) all your contracts are in the name of the LLC, and (3) you’ve kept the income and expenses of the LLC separated from your personal funds, then only the assets that are in or owned by the LLC are at risk.    A judgment creditor can place a lien on any business-owned assets and may be able to get a Charging Order against distributions you take for yourself from the business - but your personal assets will not be subject to these liens. 

Charging Order limitations are a way to use your LLC to further protect your personal assets.  To read more about this asset protection benefit to having an Arizona LLC, click here: Charging Orders. 

How Do I Form an LLC in Arizona?

In order to form an LLC, you will need the following:
  • A name that no other company or corporation is using in Arizona
  • An official, physical street address for the company
  • A statutory agent for service of process
  • A statement that clearly indicates whether managers or members will be in charge of the day to day management of the LLC
  • If the LLC will be manager-managed, the names and addresses of each manager and each member who owns a 20% or more interest in the LLC
  • If the LLC will be member-managed, the names and addresses of each member of the LLC

Once approved, you may have to publish your Articles of Organization in the county where your business is located.  You will also likely need a federal tax identification number and an operating agreement, and you may need specific permits and licenses.

To discuss how we can help form your LLC or  incorporate your business, please call our offices at 480-556-1902 or email us at [email protected].

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Jeana R. Morrissey, PLLC
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