As of 2024, there were 21.6 million LLCs in the US. A Gallagher survey found that nearly 87% of US business owners covered by insurance claimed on their policies in 2024. That’s a massive percentage of claims proving something isn’t going right with the legal safeguards. Or, maybe more simply, businesses aren’t following them.
Read on for the legal safeguards you shouldn’t forget when forming an LLC.
The Difference Between an LLC, a Partnership, and a Sole Proprietor
There’s a big difference between working for yourself and running an actual business.
A sole proprietorship is the simplest structure. You and the business are the same thing. You take the profits, but you also take all the risk. If your business gets sued, so do you.
A partnership spreads that risk, but only slightly. Two or more people share ownership, and they share liability too.
An LLC, or limited liability company, creates a legal barrier between you and your business. You still control the day-to-day operations, but the company becomes a separate legal entity. If the business gets sued, your personal assets, your home, savings, and car are protected.
That’s the biggest draw of an LLC. It combines the flexibility of small business ownership with the legal protection of a corporation.
In 2025, it’s also the most common structure for new startups and freelancers. It’s the most flexible and easy to scale – we highly recommend going for this option.
How to Form an LLC Correctly
Forming an LLC is straightforward. Here’s the short version of how to do it right:
- Pick a business name
- File Articles of Organization
- Create an Operating Agreement
- Get an EIN (Employer Identification Number)
- Open a separate business bank account
- Check your state requirements
Once you’ve done these steps, you’re officially in business. But don’t stop there, forming an LLC isn’t just about setup. It’s about ongoing protection.
There’s plenty of information online on the IRS and various government webpages. It’s relatively simple to follow; you shouldn’t need to hire someone to do it.
The Legal Safeguards to Know About When Forming an LLC
An LLC gives you liability protection, but it’s not automatic or absolute. You have to maintain it.
Never mix personal and business funds. If you use your personal card to pay business expenses or take money from the business without proper documentation, a court can argue that your LLC isn’t a real separate entity.
That’s what “piercing the corporate veil” means, and it defeats the whole purpose of forming an LLC. And, anyway, for tax purposes and tax relief, you don’t want to be using your personal account.
2. Have a solid operating agreement.
Even if you’re a single-member LLC, an operating agreement proves that your business runs independently. It outlines how decisions are made, what happens if you bring in a partner, and how disputes are handled.
An LLC protects your personal assets but not your business assets. If a client sues or you face a loss, business insurance covers what the LLC can’t. General liability (LLC insurance), professional liability, and property insurance are the main ones you want.
4. Stay compliant with state laws.
Most states require annual filings, fees, or reports to keep your LLC active. Forgetting to file one can make your business “inactive” or “dissolved” in state records. That means you lose your liability protection until you fix it.
Document major business decisions, contracts, and financial transactions. If you’re ever in court, this proves you acted responsibly as a business owner. An LLC gives you structure, but protection only works if you run it properly. And once you’ve correctly set up your LLC, always get the right insurance. Most of the legal safeguards businesses fail on are because they haven’t got the right level of business insurance. It’s the only way to make sure your LLC actually does what it’s designed to.
