Small Business Builder: Becoming Limited Liability Company

It's easy in the state of Anarchy.

Pratt Falls and Hi Jinx are general partners in the company FJ Entertainment. Pratt founded the company as a sole proprietorship to provide children's entertainment. Finding that he was more amusing when working with Hi than he was on his own, he took Hi on as a partner.

Now they want to add pony rides and hire employees. To do so, they need to raise capital. There are also greater risks (for example, they could be sued if a child falls off a pony or if an employee is injured on the job). And, after all, one of the partners is named "Jinx." Pratt (more business-savvy than Hi) considers incorporating, which would, to some extent, protect personal assets from liability for lawsuits and company indebtedness. They could get the protection with liability insurance, but they also want to raise money by selling shares.

In the end, however, Pratt chooses a fairly new form of organization — the limited liability company, or LLC.

Here's Why, More or Less

Fewer dollars: FJ Entertainment is located in the state of Anarchy (east of Virginia and south of Louisiana). Though the company must file with the state (just as for a corporation), in Anarchy, as in most states, it is less expensive and complicated to set up an LLC than it is to set up a corporation.

Fewer hassles: LLCs need not conduct annual meetings, prepare annual reports or follow many other rules that apply to corporations (though Pratt happens to think that having annual meetings and reports is a good idea).

More protection: The LLC shields its owners' personal assets in the same way a corporation does.

More members, more money: An LLC is owned by "members." To raise money to buy, house and care for ponies, the company can sell interests to members — as many or as few as needed.

More flexibility: There is great latitude in operating an LLC. The members can elect managers just as a corporation elects directors, or they can run the company themselves.