Limited Liability Company: The Best Reason to Form an LLC

Establishing a Limited Liability Company (LLC) is an essential step in owning and running a business.

Establishing a Limited Liability Company (LLC) is an essential step in owning and running a business.

Just a few years ago one of the best reasons for forming an LLC came home to me. Oftentimes I have found that you can’t share an experience or write better than with a true story. 

I handle business and litigation work and I had a client who had found a great business opportunity. He explained that he sold vinyl siding for a living. Things were going very well and he wanted them to go even better. He had a contact at a big box store that wanted to sell more vinyl siding too. One way to sell more, was to enhance the products' visibility within the store. Big Box guy asked my client if he could arrange to build large displays in each store to really show off the advantages of vinyl siding. They talked and agreed that my client would be hired to build the displays which would result in higher visibility and higher sales.

My client explained that they negotiated a price per display. Based on the price, my client could hire two workers to build the displays within the stores. He would make money on every display built, and would make money in enhanced commissions when the vinyl siding sales increased. He figured that not only would he make money from the start, but that as the displays were to be built in dozens of big box stores, his commissions would go through the roof. The carpenters would make money and the Big Box would make money too. This looked like the perfect "win-win". Jobs created, product selling, people getting what they needed; everything a good deal should be.

Now, in over thirty years of law practice, I have heard a lot of business proposals…some good, some really bad. I had to admit that this looked pretty good. Making money from different streams on the same deal had appeal. A long time business client, he had come to me to ask my advice again. My job was to help him structure the deal so that there was as little risk as possible, while streamlining and increasing profits and the probability of success. He did not like surprises and over the years had learned that our planning paid off.

We agreed on a plan to put his new display building business into a separate company by forming a Limited Liability Company, an LLC. The LLC was his, as sole Member. He would put a modest about of money and equipment into the Company. The company would contract with a couple of carpenters in each place where a display would be built. The company would purchase the raw materials for each build. As the displays were completed, Big Box would pay the LLC. My client would be paid by his Company and the business would expand. Big Box had plenty of stores, and if this worked, they would agree to hire his Company to build more displays for different products. My client could then approach manufactures of products other than vinyl siding, which had the possibility of even more commissions and the safety of diversification, just in case people stopped buying vinyl siding. Everything looked, sound, and seemed to have great potential.

We formed the new LLC, capitalized it, and the business was off and running on it's first build. Four days later he hit a snag…a big one.

The two carpenters showed up to build Big Box their first display. Now these guys were good, and they made good money for what they did. The first day, everything went as planned. They worked in the store, building a giant display in the designated place. The second day moved right along. Everyone showed up on time. Mid-way through the morning it happened. One of the carpenters was climbing up to frame the top part of the display when he slipped. He fell about 20 feet to the floor of the store, crashing down on his side onto his shoulder, arm, wrist and head. When rushed to the hospital, the doctors discovered multiple fractures of his arm, shoulder, along with substantial damage to the tissues and muscles involved…his career as a carpenter was over.

My client took the news that his friend was hurt hard. Big Box took the news hard too: they stopped construction and told my client to leave the store. He left, worried about his friend and wondering what this all meant for he and his family.

I got a call and reassured my client. We had done things right, he had been smart in his pre-planning and execution.

The carpenter got a lawyer…

The lawyer for the carpenter saw opportunity. A carpenter in his early thirty's who earned over 50 thousand a year, injured and never able to work in his field again. He did the math…50K times for about 30 years… 1.5 million dollars. Then you take into account the medical and rehabilitation bills for this poor man… this was a big injury case.

Now when you consider a one-third fee on a case worth a couple million dollars, you create real incentive for a personal injury lawyer…I knew as I had represented dozens of injured people over my years and have defended dozens of people and businesses from these claims. I had advanced thousands in costs and realized the thrill of a verdict well over a million dollars…I knew where this was going.

I met with my client. We presented the LLC documents and business documents that showed clearly that this new business had nothing but the initial start up assets and debts. We showed the contracts with the carpenters…not employees but independent contractors. The lawyer went away, filing his lawsuit against Big Box.

Sure, my client lost some time and a bit of his initial investment in the LLC. This was nothing compared to his losses had he not used planning and the LLC to insulate and limit his risk. Without the LLC, he probably would have lost his home, his cars, his bank accounts and would have had to file for bankruptcy protection.

Is the initial investment in pre-business planning and the cost of an LLC worth it? As my client would say: It’s priceless.

Posted on January 27, 2015 and filed under Business.