At What Point Do I Need an LLC for my Business?

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You set out on your small business journey, and you’re ready to set the world on fire.🔥

If you’re looking to the future and planning for even more growth, that’s great, but you may want to consider adding a step between where you are now and where you plan to go.

👉That’s because you might need to form an LLC for your business. Forming a limited liability company (LLC) can bring on a ton of benefits for your business, but this step isn’t exactly right for everyone. At what point do you actually need an LLC for your business? That’s exactly what we’re going to discuss in this post. Grab some cold brew and read on to get in the know.

Not everyone is a world-changing business owner slash creative slash coach, but you are. And we’re here for it. More specifically, The Legal Godfairy is here to help you level up your online business. Learn more about our services.

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Limited Liability Companies for Small Businesses

A limited liability company is a type of business that limits the liability of its owners. It’s a fairly simple concept, and it’s one that can be enormously helpful to all kinds of business owners who have something to lose. 

If you form an LLC for your small business, you can protect your personal assets from any legal liability associated with your business. A sole proprietorship, on the other hand, leaves your personal assets open to liability from lawsuits against your business. Yikes. 

Certain kinds of businesses, such as insurance companies and banks, can’t form LLCs, but that’s not you. If your business sounds like any of the following, you may want to consider an LLC: 

  • Coaches. Whether you’re a life coach or a financial coach, you’re giving your clients actionable, helpful advice and (hopefully) getting paid handsomely for it. If one of your clients turns around and wants to take legal action against your business, an LLC can protect your home and other assets from liability.
  • Consultants. Consulting with any type of business can be extremely profitable, and it sets you up as an expert thought leader in your field. An LLC can help protect what you’ve built.
  • Creative businesses. Designers, developers, decorators, textile artists, musicians, photographers and similar creatives may not love the business side of things, but you probably love the freedom of running your own business. Protecting it with an LLC can help ensure you get to keep doing what you love for a long, long time.
  • Agencies. If you’re at the agency level, kudos to you. You’ve made it to the top of your field. But consider this: agencies involve more people than just you. So, even if you’re relatively certain you won’t do anything that will put you in the crosshairs of a civil lawsuit, you can’t be so sure that those you work with are on such solid footing. An LLC can help you remove a lot of that worrying from your to-do list.
  • Freelance individuals. The gig economy and the pandemic came together in a way no one really expected and started the freelance revolution. Whether you’re a part of the movement or have been doing this for a long time, you may be ready to leave your sole proprietor days behind you and graduate to LLC-level business ownership.

Do I Need an LLC for my Online Business?

You don’t have to have an LLC to legally run an online business. But you still might need one. From the very moment you started your online business, you were facing real legal risks — whether you knew it or not, sis. 

First and foremost, the law views you and your business as one and the same if you are running a sole proprietorship. Here’s what that means for you: if your business gets sued, you get sued. Not good. If you own an LLC and your business gets sued, it’s still tough, but your bank account, home and car are all protected in most cases. 

Should I Form an LLC?

If you have your own business and want to protect your personal assets from liability, you should consider forming an LLC. If you decide you want to move forward, here are some of the criteria for forming an LLC:

  • A name for your business. You probably already have a name for your business, but when you form your LLC, that name will have to be unique and include “limited liability company” or “LLC” in it. You also can’t use names that include words like “insurance,” “trust” or “bank.” These requirements can vary slightly from state to state.
  • Permits and licenses. Not all online businesses will have to obtain permits and licenses to operate, but some will. Whether you have additional licensing or permitting requirements to take care of will depend on your state’s laws and the type of work you do. 
  • An operating agreement. Certain states don’t require an operating agreement before you can form an LLC but we strongly recommend you have one, especially if you’re going into business with a partner. Your operating agreement can cover how you will divide the profits, who can invest capital in the business, what happens if one of you leaves the business and other structural features.
  • Articles of organization. Most states require you to fill out articles of organization, although they may call it something else, such as a certificate of formation or certificate of organization. This document will cover many of the same items the operating agreement will cover, but it’s for the state.
  • A registered agent. In some states, you will have to designate a registered agent when you form your LLC. This is simply the point of contact for official paperwork and legal documents on behalf of your LLC. They don’t have to own or work for your LLC, but they must be located in the state where you register.
  • A statement of information. A statement of information will include the name of your company, your company’s address, the members and similar basic information. Some states require this document, but many don’t.

Types of LLCs

If you’re at the point where you believe you need an LLC for your business, you still have to decide which type of LLC you’ll need. You have a few main options:

Single-Member LLCs

When you’re talking about LLCs, the owners are called “members.” So, if you have a single-member LLC, there’s only one owner: you. 

This is the go-to type of LLC for individual freelancers. If you’re thinking that this doesn’t sound any different from what you’re currently doing as a freelancer or contractor, remember that the main benefit of an LLC is that it protects your personal assets from liability.

Multi-Member LLCs

You can probably guess the main idea behind a multi-member LLC. This is the type of LLC you’ll have if your business is going to have multiple owners.

The same liability protection still applies, but keep in mind that having partners or co-owners can trigger a number of complicated factors that you will have to discuss and account for in your LLC documents, such as management structure and rules about leaving the company.

Member-Managed LLCs

Who is going to run things in your business? If it’s you, then you will probably need to have a member-managed LLC. This simply means that the owners of the company manage the company’s daily operations.

Manager-Managed LLCs

If you’re more interested in the high-level details of owning businesses but want the management left to someone else, a manager-managed LLC may be just the ticket. This simply means you delegate management to someone who doesn’t own the business.

LLC Benefits for Small Business Owners

We’ve talked about a few of the most important benefits of an LLC for your business, but let’s take a closer look.

Protect Personal Assets

This is worth repeating: if you don’t have an LLC and your business gets into legal trouble, you — and your bank account, car and home — are on the hook for liability. Again, yikes. An LLC offsets this burden by setting your business up as an entity that is completely separate from you.

Establish a Structure

By setting up an LLC for your business, you’re setting up a structure that can allow for real growth. As an LLC, your business can get employee identification numbers (EINs) to allow you to hire employees. You can even bring on a board of directors and shareholders if you opt for an S corporation or C corporation, but keep in mind that this involves a different process from forming an LLC.

Tax Breaks

Forming an LLC for your business can be a big deal for your bottom line. That’s because you can get a lot of tax breaks. To start, you can choose whether the IRS taxes you as if you are a sole proprietorship or corporation, and you can qualify for all kinds of tax deductions. Here are some examples of the tax deductions for LLCs:

  • The costs of any goods your business sells
  • Property your business purchases within the tax year
  • The cost of renting office space
  • Insurance related to your business
  • Licensing, continuing education and other professional expenses
  • Entertainment and meals related to the business

Potential Drawbacks to an LLC

Let’s not paint too rosy a picture here — there are a few potential drawbacks of an LLC for your business. The main issues you might face involve taxes and disbursement schedules.

While taxes can often be an upside of an LLC, you might find yourself on the hook for more taxes than you would if you owned a corporation. Specifically, the profits and salaries of an LLC can be subject to Medicare and Social Security taxes.

Unlike a corporation, an LLC has to distribute profits to all shareholders immediately. That means that all the profits are a part of your income, and you have to be taxed on them. Corporations, on the other hand, can sometimes withhold profit disbursement, and that can lower the tax burden of the shareholders.

How to Form an LLC

Forming an LLC can look different from state to state, but the basic steps are usually similar. Here are the 10 basic steps for forming an LLC:

  1. Choose the state in which you want to form your LLC.
  2. Pick a name for your LLC.
  3. File your articles of organization.
  4. Select a registered agent.
  5. Decide who’s going to manage the company — members or managers.
  6. Write your operating agreement. 
  7. Get an EIN (if your LLC has multiple owners or any employees).
  8. Ensure you have all the proper licenses and permits to operate your business.
  9. Register with your state taxing body (if applicable in your state).
  10. Keep growing your business.
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Ready to legally level up? The Legal Godfairy Can Help

We’re just going to say it: forming an LLC for your business is fun. That may be the legal nerd in us coming out, but it’s true. You’ve come this far, and an LLC may be the perfect next step in building your empire and protecting your legacy.💫

The Legal Godfairy is all about you and your business. We’re here to handle the legal details of your LLC journey so you can worry about the parts of your business that are most important. Whether you need some expert business guidance as you step into your CEO shoes or want legally bulletproof business contracts and agreements, The Legal Godfairy is your go-to resource.✨

*Disclaimer: This blog post has been prepared solely for general information and educational purposes. It is not intended to provide, nor should it be relied on for, legal advice. Should you require advice regarding a specific matter, appropriate legal or other professional advice should be obtained.

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