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Ask Dave

There's no magic number

Meghan is a small business owner. She asks Dave if there's an asset level she should reach before moving to LLC status. Dave says there is no magic number for this sort of thing.

QUESTION: Meghan is 26 and has been running her own business for over a year as a sole proprietor. She has a gross revenue of about $94,000 and a personal net worth of about $68,000. Meghan asks Dave if there’s a targeted asset level you should reach before moving to LLC status.

ANSWER: The only reason you would do that is when you reach a certain level that you’re afraid you have a target on your back. What I mean by that is you have enough in the way of assets that someone might come after you in the event of a lawsuit.

We started Ramsey Solutions as a sole proprietorship. Later on we took it to an S Corp, and then — in our case, because of Tennessee law — we shifted from the S Corp to the LLC. Either way, the reason you’d want to do that is for liability protection. If you have large personal assets or your company is starting to have some size, somebody might try to come through and take your home or something like that.

In your case, I wouldn’t worry about it right now. Whatever business you’re in, make sure you have normal, liability-type insurance in place. That shouldn’t cost a lot. I wouldn’t go to the trouble for an LLC in your case, paying the extra processing fees and filing fees and everything. You don’t need extra paper work right now.

When you get to where you have enough money that you have a real and legitimate reason to believe someone might try to sue the business and sue you personally, then you’d want to put an LLC in place. But you need a reason to think you have a target on your back, and at this stage nobody’s going to bother you.

There’s not really a magic number for this kind of thing — so the number is when you start worrying about stuff like that happening. I think in our case it was about a half-million or so.