In my last post, which is the first of a five-part series on LLCs, I discussed the history and overall purpose of the Limited Liability Company as a business entity.  In this post, I’m going to explain how the liability protection works for the different types of companies that an LLC is best for.

WHO AN LLC IS GOOD FOR

An LLC may be a good choice for you if you are one of the following:

1. One guy who wants to protect his personal assets from his business liabilities.
2. A small or medium-sized company whose partners want to have the flexibility an LLC offers, with an appropriate and well-defined management structure, and who are willing to put in the time and effort to set it up correctly.
3. A very large company that wants protection against liability in particular areas.

THE LIABILITY BUCKET

To understand the liability aspect, it helps if you think of buckets.  As a business owner, you have a bucket for each set of problems and liabilities you have, and how you want to handle them.

If you are a solopreneur or a very small company, you only need one bucket because all you need to do is protect your personal assets from your business liability.

If you are small company that provides different services and some of them are riskier than others, you might want to split them up into different buckets, or LLCs.  Say you have a company that does roofing and siding.  Roofing is a much bigger liability than siding, so it would be wise to put those in separate buckets so the assets you have on the siding side (no pun intended) are protected from any liability on the roofing side.

If you are a medium-size company who wants a bucket, a splash pad, and a waterslide, and you’re willing to go to the trouble of setting it up, an LLC is good for you.  It allows you to have formal arrangements about how the members (what partners are called in an LLC) relate to one another, how they invest money into the company, who can buy in to the company, whether they can buy in with sweat equity, etc.

Lastly, major global companies with operations all over the world form LLCs to protect the assets of one division from the liability of the others.  For instance, BMW operates BMW North America as an LLC to protect their other divisions in Europe and Asia from the liabilities of the North American division, and vice versa.

Before you say, “Good, that’s for me – I’m forming an LLC,” you should read my next post.  I’ll be explaining why there are certain types of entrepreneurs for whom an LLC can be a disaster.