4 Ways Forming an LLC Boosts your Credibility

There are many great reasons to form a limited liability company (LLC) these days, and it is indeed one of the most popular business entities in existence today. In fact, there are thousands of new LLCs formed every day in America, as entrepreneurs of all kinds flock to this business structure to form the basis of their companies.

The advantages of an LLC are almost too numerous to list. This entity provides personal asset protection, which prevents creditors who sue your business from laying claim to your house, car, personal bank accounts, and other individual assets. It also is a much more flexible business entity type than a corporation, which means you have more options regarding how you set up and operate your business. In addition, the LLC has some choices regarding how it pays taxes, which can save you a tremendous amount of money compared to some other structures with more stringent taxation guidelines.

One aspect of the LLC that I don’t hear discussed as much is how much it can heighten the perceived credibility of your company. Compared to a sole proprietorship or a general partnership — which are both informal business entities — forming an LLC makes it quite a bit easier for potential customers to view your business as being fully legitimate, while still requiring far less time, money, and hassle than incorporating your company as a corporation.

In this guide, I’ll discuss the four main ways forming an LLC can boost the credibility of any business.

Increased Formality

From the moment a potential customer sees your LLC’s business name, they know they’re dealing with a legitimate business. How? One of the most important rules for naming an LLC is that it must have either the phrase “limited liability company” or the initials “LLC” (or “L.L.C.”) in its name.

This indicates to your clients that you’ve taken the time, energy, and money to form a formal business entity rather than operating as an unincorporated business, like a sole proprietorship or a general partnership. Even if they don’t know exactly what an LLC is, or why business owners would form one, it’s still an element that enhances the credibility of your company.

The LLC Indicates That You Take Your Business Seriously

With a sole proprietorship or a general partnership, there is no actual business name. Instead, the business is known by the owner’s personal name. For example, if your name is Linda Smith, your unincorporated business entity is also simply referred to as “Linda Smith.”

Obviously, this isn’t the most professional way to market a business, as people are much more likely to place their trust in a company that has its own name, rather than doing business with individual people. A sole proprietorship or general partnership may obtain a doing business as (DBA) name, which does allow you to create a new name for your business, but has some problems of its own.

In fact, let’s discuss the DBA a bit more in-depth right now…

Exclusive Naming Rights

One huge advantage of forming an LLC instead of registering a DBA name is the fact that an LLC holds the exclusive rights to its business name, whereas the holder of a DBA does not. This means that if you form an LLC, no one else in your state can use the same name (or even a name considered to be too similar to yours) for their businesses.

This is the one big drawback of a DBA name: it provides zero exclusivity. Let’s say you register a DBA for the name “John’s Breakfast Diner,” as an example. The DBA gives you the rights to officially refer to your business by this name, rather than as your personal name. However, there is nothing stopping another company from deciding they like your name and using it for themselves.

In this example, another restaurant opens in your state, and they want to use the name “John’s Breakfast Diner.” First off, they are allowed to do so, as a DBA does not prevent the use of your business name by other entities. However, the even more damaging aspect is that if that other restaurant formed an LLC or corporation using the name “John’s Breakfast Diner,” they would now own the exclusive rights to that name, and you would no longer be able to use it for yourself.

I know that this seems enormously unfair, and I agree! This is why I never advise readers to register a DBA instead of forming an LLC.

Business Banking

One minor advantage of a DBA is that it does allow a sole proprietorship or general partnership to obtain a business bank account, but that just highlights another shortcoming of the DBA. If someone lays claim to your DBA name, you’ll have to change your business banking setup. That means getting new checks with a different name on them, and many other hassles and complications.

With an LLC, you have the peace of mind that your business banking is secure, and won’t need to be changed every time someone else decides that they like your DBA name. In addition, maintaining a business bank account helps you keep your business and personal finances entirely separate, which is crucial because it helps you maintain your personal asset protection.

Finally, when you compare an LLC and a sole proprietorship or general partnership without a DBA, this is an even more impactful way to boost your credibility. This is because sole proprietors and general partners cannot open business bank accounts without a DBA. At the point where you need to register an assumed business name to open a bank account, I’m not sure why you wouldn’t just take that one extra step to form an LLC.

In Conclusion

There are plenty of good reasons to form a limited liability company these days. The most commonly discussed benefits of the LLC are the way it provides personal asset protection, and the fact that it allows its owners to take advantage of a flexible taxation model.

However, one of the most overlooked aspects of the LLC is how it boosts the credibility of your business in several distinct ways. In my opinion, the exclusive naming rights afforded to LLC owners is enough on its own to make the LLC a better option than a sole proprietorship or general partnership, for the vast majority of readers. When you add in the other advantages — increased formality, showing you’re serious about your company, and the ease of business banking — it’s typically a no-brainer to form an LLC instead of simply operating as a sole proprietor or general partner.

I hope this article helped you to better understand the ways forming an LLC for your business can enhance the credibility of your company, and I wish you nothing but the best of luck in your business future!