One of the things that’s a reality is that business is risky. But one of the ways to reduce that risk is to form an LLC, a Limited Liability Company. Yes, that’s right – it basically means Reduce Your Risk Company. It is especially helpful if you have any type of assets. That is why Happy Apps is really Happy Apps LLC.
(Disclaimer: I’m not a lawyer neither do I play one on TV.)
On the other hand, if you start doing business and don’t start an LLC or some sort of corporation, then you are by default known as a Sole Proprietor or a Partnership (if there’s more than one of you). This means that your assets are the company’s assets and vice-versa, also known as unlimited personal liability.
Let’s put it in a way that Mac enthusiasts would understand:
If the LLC was available 30 years ago back in 1976 when Apple was founded, then we might have remembered Ron Wayne. Who is Ron Wayne? He is the long-forgotten third founder of Apple. According to Woz, Ron was worried about owing money for computer parts which they were using to assemble the Apple Is which were basically pre-assembled motherboards. He had some “gold hidden in his mattress” that he was worried about. Sadly, he sold out his 10% share of Apple for a pittance ($800). [Note: 10% of Apple is now worth around $5.6 billion.]
So what would have been different if Steve Jobs, Woz, and Ron Wayne had founded Apple Computer LLC? An LLC is another entity apart from the “members” of it. It owns assets and has liabilities just like a person would. So Ron, being the money man, could have put in say $3000 or however much it cost to make a few batches of Apple Is and other operating expenses. And then he could sleep soundly on his gold-stuffed mattress because even if for some reason the Apple Is didn’t sell, the only thing that they would lose would be that $3000.
There’s also something charming about the way the risk of Apple “filtered out” Ron Wayne for his lack of enthusiasm.
I think there are obviously things to appreciate about the LLC entity, but surely young Apple and Ron Wayne had options to consider. If Wayne was sitting no a bunch of money and wanted to protect it, surely he could have proposed to fully incorporate Apple?
I like the completely self-made aspect of Apple’s history, and it’s aided by the naive approach Jobs and Wozniak took to their early “legal organization.”
Good, practical example — thanks for that. I always hear about LLC and I know the advantages, but it’s interesting to hear of a time when that would have been a good idea, instead of just theoreticals.
Nice example. This is an important part of doing business these days.
I have been investigating doing this myself. I have also heard about filing as an S Corporation. I know LLC is a rather new option, but am unsure what the actual differences are between an S corporation and an LLC, and what would be the best for what is likely to remain a 1 or 2 person operation for the forseeable future.
It’d be great to hear about how you went about filing (process, costs, did you need a lawyer, benefits are obviously less liability, are there any drawbacks?) Keep the posts coming!
I live in Delaware, where our state motto is “if you don’t incorporate here, you’ll be taken over by someone who has.” I was involved in a small corporation a while back, and we decided to go S-Corp. The reason for chosing one versus another vary from state-to-state so check your local laws.
Incorporating as an S-Corp in Delaware is about the easiest thing to do. It takes about 100$ in fees, and someone called a “registered agent” in delaware. Basically, it’s someone the state can contact if there’s a problem. There are a number of CPAs or lawyers that offer the whole kit and kaboodle for about 500$.
The advantages of the SCorp vs. LLC in Delaware are that SCorps basically require less paperwork, and are easier on the taxes. You get (basically) all the same rights, although SCorp’s can’t go into real estate. SCorps can upgrade to CCorps (a form and about 100$ more in fees), but there is no easy way to go from LLC to CCorp. There is no path to SCorp besides starting as one. (There are a few limitations to the amount of money you can make as an SCorp, and a few other fine points.)
Personally, I recommend SCorps for friends. They offer the same “protection” of LLCs, and are quite simple come tax time.
I am not a lawyer.
I am not interested in being your registered agent.
Talk to someone knowledgeable about your own state’s laws.
Get more information about setting up an llc on this blog