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.
By way of a simplified example, let’s say you are a brand new web developer working another part-time job while building your business. You are doing work for a client and the client turns on you. Assume that this client claims you had something to do with his website going down for a day, or with a security breach, or copyright infringement, etc. that cost the client $50,000 in revenues or expenses. If this client files an action in court and the judge rules in his favor, he must now must collect on that $50,000 judgment.
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.
By way of a simplified example, let’s say you are a brand new web developer working another part-time job while building your business. You are doing work for a client and the client turns on you. Assume that this client claims you had something to do with his website going down for a day, or with a security breach, or copyright infringement, etc. that cost the client $50,000 in revenues or expenses. If this client files an action in court and the judge rules in his favor, he must now must collect on that $50,000 judgment.
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, all Mr. Hyde can get are whatever assets are in the LLC. If, for example, there is a balance of $7,500 in your LLC bank account and the LLC doesn’t own any other assets, the most Mr. Hyde can get is the $7,500 in your business account, and he can place a lien on any future business income or business-owned assets - but your personal assets will not be subject to these liens.
However, if you were doing business as a sole proprietor, this client could garnish your wages from your part-time job, place a lien on your home or other assets you own, and garnish your personal bank accounts, and Mr. Hyde can keep this up until he gets as much of his $50,000 from you, personally, as possible.
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:
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 info@morrisseylawaz.com.
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However, if you were doing business as a sole proprietor, this client could garnish your wages from your part-time job, place a lien on your home or other assets you own, and garnish your personal bank accounts, and Mr. Hyde can keep this up until he gets as much of his $50,000 from you, personally, as possible.
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 info@morrisseylawaz.com.
Back to Helpful Articles and Information page