Idaho Business Law What is an LLC, and Do I Need one for My Business

By Lane V. Erickson, Idaho Business Attorney

Congratulations! If you’re reading this article is because you have either a good business idea or you are already operating a business and have questions about things that may help your business run better. Specifically, you may be wondering whether you should operate your business within an LLC structure. This is a good question that every business owner should ask themselves at one point or another.

For over 70 years the premier team of business lawyers at the Racine Law Office have been helping clients in the creation of their business and in the continued operation of that business so that everything is moving forward in compliance with all applicable laws. In other words, we try to help our clients avoid any legal landmines that could be waiting for them out there that they are unaware of. Our team of business lawyers consists of partners Lane Erickson and TJ Budge, and attorneys Nate Palmer and Dave Bagley. Our attorneys have decades of experience, knowledge, and skill in helping business clients deal with all of their business needs.

The purpose of this article is to describe what an LLC is, and how using an LLC can protect both you and your business operation. This article is not designed to be exhaustive but rather can be a resource to you to help you get started in understanding whether using an LLC as part of your business operation is a good idea. If you have questions, we encourage you to contact us.

The best place to start is to talk about what an LLC is. Several years ago, a person who wanted to start a business really only had two options when it came to structuring that business. The first was to do a partnership with the individuals they worked with. The second option was to create a corporation.

A partnership was good because it was simple to create, and it provided favorable tax options for the individuals operating the business. However, in most instances, a general partnership did not provide a lot of protection for the individuals who were the owners of the business from the liabilities of the business itself.

On the other hand, a corporation offered greater protection for the owners of the business. However, most small businesses were not well suited to the structure required by a corporation. Rather, a large business such as General Motors, or Johnson & Johnson, or other similar huge businesses were better structured for a corporation. Additionally, the tax options available to a corporation were limited and were often not favorable to the business owners of a small business.

Because of these two things, some enterprising lawyers got together and said, “What if we created a new entity that provides the favorable tax options available through a partnership, but provides the protections from a corporation?” From these discussions the LLC was born.

An LLC, which is shortened for limited liability company, is a legally recognized entity that provides a corporate shield to its owners and to the business itself. Additionally, the LLC provides elections that can be made by the owners when it comes to deciding how both the entity and the owners of the business will be taxed.

How does an LLC protect the owners of the business? This is a wonderful question. Because a limited liability company is recognized as a corporate entity, it comes with the corporate shield mentioned above. With the corporate shield in place, the business owners are not personally liable for the debts and liabilities of the business itself unless they individually agree to be liable for these things through a personal guarantee agreement.

In other words, suppose that three people get together to start a car wash business. They use an LLC as the business entity. The LLC borrows money to help get the business off the ground but because of a variety of reasons the business never takes off. Rather, the business gets deeper and deeper in debt. Eventually, the owners decide that they are going to shut the business down.

In this example, the owners of the business have the ability to walk away from the business without being personally liable for the debts of the business. The corporate shield acts to protect the owners of the business from the debts and liabilities of the business.

However, if the lender requires the owners of the business to sign personal guarantee agreements then the individual owners are equally responsible for the debts of the business. In this instance, the corporate shield has no impact because the individual owners entered into individual contracts where they agreed to pay the debts of the business if the business couldn’t pay those debts itself.

The corporate shield discussed above also protects the business as well. An example will help illustrate what this means. Suppose we have the same car wash business that we discussed above. We have three owners of the business. Let’s say the business is operating well and is very profitable. Now suppose that one of the owners while on vacation gets into a car accident which results in a death in the other car involved in the accident. Let’s also suppose that the car accident was your business partner’s fault.

In this instance your business partner would be personally responsible financially to the family of the individual who died because of the accident. If your business partner did not have enough insurance to cover that liability, other assets owned by your business partner can be taken to satisfy that liability.

However, the corporate shield acts to protect the LLC from being gutted by the party who holds the liability against your partner. In other words, this individual may be able to take your partner’s ownership interest in the LLC away from him, but when it comes to the LLC itself this individual would have no right of management, no right to control, and no right to require liquidation of the business assets to cover the liability owed by your business partner individually.

Again, this article is not designed to be exhaustive, but to simply provide you with an understanding of how using an LLC could benefit you and your business.

Our team of Idaho business lawyers can help you with any of your business structure or operation needs. Whether you are seeking to create a new business or review a current business, we are available to discuss your options and answer your questions at an initial free 30-minute consultation. Call us toll free at 877.232.6101 or 208.232.6101 for a free consultation. You can also email us directly at lane@racineolson.com or stop by our office at 201 East Center Street, Pocatello, Idaho 83201. We will answer your questions and help you solve your Idaho business problems.