Do I Really Need an LLC or Corporation? Maybe Not

As a Massachusetts business attorney, I have many solo entrepreneurs ask me for help in establishing an LLC or a Corporation. They usually presume that an LLC or Corporation is necessary to protect their assets. I then ask them to take a step back and discuss whether an LLC or Corporation is likely to meet that objective. For many solo entrepreneurs, the answer is no. Indeed, for many potential legal issues, an LLC or Corporation provides the solo entrepreneur no protection whatsoever. In this article, I will explain why an LLC or Corporation may not be worth the annual expense, and the factors to consider when determining whether an entity is appropriate.

LLC and Corporation registration has become a cottage industry. Companies like Legal Zoom are flooding the airwaves warning business owners that without an entity, they could “lose everything.” Of course, a solo entrepreneur’s fear of lawsuits and “losing everything” is low-hanging fruit. The legal industry is making tens of millions of dollars preying on this fear.

When determining whether to create an LLC or a Corporation, one must understand a universal legal principal applicable in all 50 states: Individuals can ALWAYS be held personally liable for acts of their own negligence — even if the individual created an LLC or Corporation. No legal entity, no matter how structured, can shield us from personal liability for our own negligence. That is bedrock law across the nation. Thus, if a business owner is alleged to be personally negligent in performing his or her duties, the “victim” can ALWAYS sue the owner personally. If successful, the victim can then go after the owner’s assets. Since business owners are primarily concerned with liabilities arising from allegations of personal negligence, the LLC or Corporation is often of little value.

If an entity will not shield a business owner from claims of personal negligence, then what does an LLC or Corporation accomplish? For the solo entrepreneur, an LLC or Corporation can offer the following benefits: 1) Protection from personal liability arising from negligent acts committed by employees, contractors, or other agents of the owner; and 2) Protection from contractual liability for contracts between the business and a third party where the owner has made no personal guarantees. For instance, if a business is incorporated and an employee is negligent, then generally speaking, the “victim” can sue the employee and the business entity, but not the owner. As another example, if an LLC is a party to a 5-year lease and the owner made no personal guarantee, then in the event the business goes under and defaults on the lease, the business owner is generally not liable.

Therefore, before deciding to create an LLC or Corporation and incurring yearly filing fees and maintenance, speak with a Massachusetts business lawyer about your business, its activities, and its structure. Only then can you make an educated decision regarding what, if any, value an LLC or Corporation will bring you. To the extent you remain exposed to personal liability, other risk management strategies can be explored and implemented to protect your personal assets.