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Starting a Business and the Limited Liability Company (LLC) Part 1

Posted by attorney Richard Ham

Starting a business is an exciting but stressful endeavor. Picking the right business form can help alleviate some of the pressure and risk associated with the process, and so is a matter that should be considered carefully.

While not right for every business, the limited liability company, or LLC, provides a simple, flexibile business form for the small and mid-sized business. While you should discuss your individual situation with an attorney, every entrepreneur should have at least a rudimentary understanding of the LLC and the benefits that it offers.

Forming the LLC

Without an overt action on the part of the business’s ownership, the business form will be considered either a sole proprietorship or general partnership, depending on the number of owners. To form an LLC in Arkansas, ownership must file Articles of Organization with the state’s Secretary of State along with a $45 filing fee.

Forming an LLC is quite simple and is something that you can do yourself, but it must be done carefully to ensure that it is properly formed and the limited liability it offers is secured. A small mistake could have significant consequences later, so it is important to familiarize yourself with the process before undertaking it on your own. If you are uncomfortable with the potential risks of improperly completing and filing the paperwork, you may want to work with an attorney, who can guide you through the process.

The Benefit of Limited Liability

The LLC offers limited liability to its owners, meaning that they will not be held personally liable for the debts and obligations of the business. The debts of the business are the debts of the business alone, not its members.

This does not mean that the owners cannot be held personally liable for their own behavior; just that they cannot be held liable for the actions of the business, including the actions of employees and other owners. A lawsuit against the business is not against the owners, and so plaintiffs cannot access the personal assets of the owners to satisfy a court judgement.

Consequences of Improper Formation

As discussed above, carefully complying with the law’s requirements in regard to the formation of the LLC is critical. An improper filing can result in a court’s deeming the LLC to be operating as a general partnership or sole proprietorship with no personal limited liability. Consequently, creditors or plaintiffs against the LLC will be able to access the personal assets of the owners to satisfy any debts or judgments due.

Unfortunately, realization of such mistakes may not come until a court rules that a plaintiff may sue the LLC’s owners personally. Since limited liability is probably the most significant benefit of forming an LLC, securing this benefit is crucial.

While starting a business is inherently risky, forming an LLC can substantially mitigate some aspects of that risk.

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