I recently created a video for The LLC Expert website- explaining why any business owner should always do business through an asset protection vehicle such as an LLC (limited liability company).  Many think through this analysis of whether to start an LLC the wrong way.

For example, it is improper to think that you do not need LLC protection just because you are the sole owner or because your business is just starting and not making money.  Liability protection has nothing to do with either of these factors.

I usually get people to understand how to think through this by using examples.

My video talks about a colleague in the internet marketing industry who recently started an internet consulting business. She only started her consulting business less than 3 months ago.  And, she is facing a PERSONAL lawsuit from her first client who only paid her $250 for consulting.  The shocking part is that the client is suing her for $10,000 in damages.

Her client spent over $10,000 in adwords advertising after the consultation and is now complaining to her about her advice.  They are want her to pay for the $10,000 that did not turn into an sales.

She made two mistakes.  One, she should have started an LLC for her business so this would be a business problem not a personal problem.  Second, she should have used a contract which limited her liability.

Watch the short video here for more details: LLC Protection Explained

The LLC Expert website has an in-depth learning center if you want to learn about the limited liability company and provides the fastest LLC formation service backed by a compliance guarantee.

My answer is very clear – NO.  Given the very low costs to form a limited liability company or a corporation, and the relative ease of maintaining one of those entities, it just NEVER makes sense to operate a business without one.

If you operate a business as a sole proprietor, you are 100% personally liable for anything that happens with your business.  What this means is that everything you own is at risk.  Why take on this risk when for a few hundred dollars you can protect your personal assets from being at risk by using a limited liability entity such as an LLC or corporation.

Most people think that if they operate only a small business, then it is not worth it.  This inquiry has nothing to do with how much money your business makes. Instead you need to think about what assets you have or might accumulate later in life.  If you have a home, your equity is surely worth protecting.  If you have money in saving accounts or investment accounts, don’t you want to shield those from being lost due to your business activity?

Even if you own nothing of value today, if you intend on acquiring anything of value later, you will risk losing those assets from business activity you engage in today.

Another reason people do not protect themselves is because they think- “no one will ever sue me” or “what kind of liability can I ever get in with my small business?” All you have to do is look at the lawsuit statistics in this country.  Unfortunately, we are a litigation happy society and there are many lawyers who will take on any case for money.  Last I heard a person’s risk of being sued is higher than the chances he or she will be hospitalized.  If you run a small business, you become an even bigger target.

Instead of guessing at what liability, dispute or problem your business might ever get into, isn’t it better to just use an LLC or corporation from inception to gain the benefit of the protection.  It is like a very cheap insurance policy.  Thousands of small business sole proprietors are shocked every day to get lawsuit papers that open themselves up to losing everything.

Now some people think insurance policies can cover any risk.  I have seen one too many cases where there was an exclusion or limitation in a policy which resulted in significant personal liability from a business obligation.

In today’s business world where there is a lot of risk and a lot of changes, it never makes sense to operate any business as as sole proprietor.  If you want to learn more about this, I created a web page with an analysis of sole proprietor v. LLC. Click here: Sole Proprietor v. LLC

It amazes me that business owners still ponder over whether to run their businesses as a sole proprietor as opposed to using an asset protection vehicle such as a corporation or a limited liability company.

All you have to do is look at the small business lawsuit statistics in this country to know that the risk of being sued is so high. Business is all about risk and interacting with others.  As a business you may have arrangements with contractors, service providers, bankers, investors, employees, partners, customers and anyone you have any relationship with no matter how small.

Each interaction gives rise to a potential of problems.  Why take on an open ended risk of being personally liable for any and all business liability when, for a few hundred dollars, you can create and use a limited liability entity to give you a layer of protection?  This one step is a cheap insurance policy that can save you thousands if not millions later in losses.

Also, think about it.  If your business ever becomes successful, it becomes a lawsuit target. Lawsuits are almost always about money and once your business is generating money, the lawsuit predators will be lurking.

If you run a sole proprietor business, you are creating a ticking time bomb.  The more successful you get, the more attractive your business is for anyone looking to extort money.  Even worse, because you personally and all your assets will be at risk for a lawsuit, any potential plaintiff or attorney knows they have even more leverage against you.  What will you pay to make him go away?  Probably a lot more if you know your home, savings and other asset are at risk.

I just think it is crazy for any business, no matter how small or how remote liability can be, to not use a limited liability entity given the low costs and ease to maintain one.