Reader Q&A: Should I Form a LLC or the Business First?

Chicken eggTime for another edition of Reader Q&A! If you have a question for me, feel free to send in your questions. I love hearing from you.

I recently received a question from Kevin C. in Oregon,  who wanted to know: “Would it be better to begin with an LLC when starting your business rather than starting your business and trying to form an LLC later?”

Answer: This is a real “chicken or the egg” question – which should come first?  The LLC? Or the business?

First let me tell you what most stuffy lawyers would say. They’d say you should absolutely form the LLC first. Don’t do a thing until you’ve spent thousands of dollars and weeks of your time devoted to setting up a LLC, including hammering out an operating agreement, filing the articles of organization with the state, etc.

But here’s the thing. A lot of people don’t have the money to do that. Or they don’t know if their business will succeed.  They don’t even know if their business idea is something the market wants.

So why spend all that money and time and hassle when you don’t even know if the business will work?

That attitude is why so many online legal document preparation sites like LegalZoom (affiliate link) have done so well in recent years, and why the legal profession is changing.  But that’s a discussion for another day.

I take a different approach.

You have to understand that everyone has a different amount of resources when starting a business.  There is a full spectrum in terms of where people start out when they start their businesses.

At one end of the spectrum is Donald Trump.  If Donald Trump has an idea for starting a business, he has a team of lawyers, accountants, insurance professionals, and others who hop to work and make sure everything is iron tight before he gets started working on his new business.

Most of us don’t have Donald Trump’s pocket book.

On the other end of the scale are 100% boostrapped businesses. They simply cannot afford to form a LLC because they don’t have the money. They probably don’t have a lot of assets to protect, so the advantages of a LLC are diminished.

If they didn’t take a risk in starting their business without having a separate legal entity set up, then they wouldn’t start the business at all.

That’s not a good thing because we want people to start businesses. It’s good for society. It’s good for creating jobs. Some of our biggest and most successful businesses today were started by founders who didn’t have two nickels to rub together at the outset. That’s what this nation was built on.

There are also people who fall somewhere in the middle. They don’t have Donald Trump’s private jet, but they also are not completely broke.

People start boostrapped businesses all the time without forming a LLC or a Corporation or a Limited Liability Partnership because they want to conserve cash at the outset, because they don’t have many resources to protect, because the complication of setting it up is too much of a barrier, or because they simply can’t afford it. So they just get started as a sole proprietor and deal with the consequences later, or set up an entity later.

If you are starting a business, I think you have to ask yourself where you fall. If you have plenty of resources, sure, hire a lawyer and set up a LLC. Be sure to shop around first and interview a few lawyers.

If you are going to have partners or if you are going to be starting a business where there is greater potential risk of harm to your customers, or if you have assets to protect, then those factors weigh in favor of forming a LLC at the outset.

If you are a little lower on the resources scale, and/or you want to use an online service, then just promise me this: when the business starts making some money, then devote some resources to going back and buttoning everything up.

This is especially important if you have a partner. You’ll want to go back and make sure the operating agreement and/or bylaws of whatever entity you start is not just a cookie-cutter document you got emailed but actually is tailored to your situation.

I love to receive your questions! Send in your questions for Reader Q&A here.

Photo credit: Flickr/Mark Turnauckas

  • automotive sales jobs

    Keep on writing, great job!|

  • homebuilders

    Excellent web site. A lot of useful information here. I am sending it to a few friends ans also sharing in delicious. And of course, thanks for your effort!|

  • Charisse Rosko

    My Partner And I just wish to share it with you in which I’m really new to wordpress blogging and absolutely liked your website. Very possible I am prone to store your webpage post . You undoubtedly have magnificent article posts. Get Pleasure From it for swapping with us your web page.

  • Cheap townhouses

    I was suggested this blog by my cousin. I’m not sure whether this post is written by him as no one else know such detailed about my problem. You’re incredible! Thanks!|

  • satellite internet

    It’s awesome for me to have a website, which is beneficial for my knowledge. thanks admin|

  • Connie Tinius

    Might be mostly extremely difficult to find well-informed viewers on this theme, still, you look like you fully grasp those things you’re revealing! Gratitude

  • satellite internet

    Have you ever thought about adding a little bit more than just your articles? I mean, what you say is valuable and all. Nevertheless imagine if you added some great visuals or video clips to give your posts more, “pop”! Your content is excellent but with images and videos, this site could definitely be one of the greatest in its field. Excellent blog!|

  • logbook loans

    Wow that was unusual. I just wrote an extremely long comment but after I clicked submit my comment didn’t appear. Grrrr… well I’m not writing all that over again. Anyway, just wanted to say excellent blog!|

  • construction jobs

    I always spent my half an hour to read this web site’s content daily along with a cup of coffee.|

  • trądzik młodzieńczy

    looney toons soundslong hair cut styleslord of the ringslooney tunes party suppliesl’oreal hair color couponslong legs fashionlooney toonslong hairstyles 2011lonestar candle supplieslord of the rings battle for middle earth 2 demo

  • Lachelle Cely

    It really is almost unthinkable to encounter well-educated americans on this matter, however , you seem like you fully understand the things you’re writing on! Thank You

  • rural internet

    Neat blog! Is your theme custom made or did you download it from somewhere? A design like yours with a few simple adjustements would really make my blog shine. Please let me know where you got your theme. Appreciate it|

  • szybka pożyczka gotówkowa

    Mamaki has a smooth mild flavor and taste great the way it is or you may choose to add flavoring. Hot or cold Mamaki tea blends nicely with whatever flavorings you prefer. For example, Lemon and honey is a popular flavor additive for Mamaki Tea. Because Mamaki is such a rare plant only growing on the remote Hawaiian Islands few people have ever had the opportunity to enjoy its flavor and rejuvenating benefits.

  • Milda Jose

    It’s nearly unattainable to find well-qualified men and women on this content, however you come across as like you fully understand exactly what you’re raving about! With Thanks

  • satellite internet

    I am sure this post has touched all the internet people, its really really fastidious paragraph on building up new website.|

  • outside sales jobs

    If you are going for best contents like me, simply pay a visit this website every day since it provides quality contents, thanks|

  • removals quote

    Very energetic blog, I liked that bit. Will there be a part 2?|