I recently visited the Kennebunk Farmers Market and Craft Show, observing amazing work from many local artists. I had a pleasant conversation with one vendor there and noticed his business card stated he was a sole proprietor. I was curious about his decision to operate his business as a sole proprietor and asked him, “Why not an LLC?” He turned the question around on me: “Why an LLC?” A fair point, and a great question.
What exactly is an LLC, and how does it differ from other business structures? The Limited Liability Company (“LLC”) is a mixed entity. It’s structured like a corporation, provides liability protection like a limited partnership, and borrows a few ideas from ordinary partnerships too. One of the reasons the LLC is so popular is its liability protection. If properly formed and filed, members have a full liability shield which protects the members’ personal assets. Maine’s LLC act explicitly states, “[a] person who is a member of a limited liability company is not liable, solely by reason of being a member [of an LLC.]” 31 M.R.S. § 1544. Another draw to the LLC is its flexibility: founding members are able to establish how the business will run instead of relying on default rules. Finally, because the LLC is a mixed entity, it offers a more relaxed approach to business formalities than you’d typically find with a corporation.
As with any business decision, the choice to form an LLC comes with benefits as well as drawbacks. Again, the issue of liability comes first. The LLC is a relatively new business formation, and that novelty means the law around it is still developing. If an LLC isn’t formed correctly, the founding members can end up personally on the hook anyway—courts have ways of holding someone liable as if the business were never properly set up in the first place, especially when the paperwork was incomplete or there was business activity that predates the legal formation of the LLC. Flexibility can also be seen as a negative. If the LLC agreement isn’t well-drafted, it can create real headaches for members trying to navigate unforeseen circumstances down the road. Finally, while LLC formalities are less burdensome than corporate formalities, members – especially those running single-member LLCs – still need to take care to avoid behavior that would make it easy for someone to “pierce the corporate veil” and reach their personal assets after all.
So, why an LLC? As with most legal questions, the honest answer is: it depends. Every business is different: different risks, different goals, different stories. What works for one establishment might not work for another, and even the situation of the same business can change over time — and that’s exactly the point. The decision of how to structure your business isn’t one to make on a hunch or because it’s what everyone else is doing; it’s worth a real conversation, with someone who can look at your specific situation and help you weigh the trade-offs. Whether you’re just starting out, thinking about switching from a sole proprietorship, or simply want peace of mind that you’ve made the right call, we’d be glad to help you figure out what makes sense for your business. Give us a call at (207) 985-1815 – we’d love to hear your story.
