Welcome to the Simplifying Legal podcast, brought to you by Businessese. I’m your host, Danielle Liss.
Many years ago, someone told me I was the least lawyer-y lawyer she’d ever met because I helped make legal easier to understand. To this day, it’s one of the best compliments I’ve received in my professional life.
If you’ve ever felt legal was too scary, too overwhelming, too complicated, or just plain incomprehensible, you’re not alone. The Simplifying Legal podcast was created to help.
In each episode, we’ll do a deep dive into a legal topic and give you concrete next steps so you can apply it to your business.
My goal is for you to walk away from each episode thinking, oh, that was easier than I thought it would be.
Let’s get started.
Welcome to the third episode of the Simplifying Legal Podcast! Thanks so much for joining me. Today, we’re going to talk about whether you need an LLC for your small business.
In late 2016, I wrote a post on the Businessese blog called Is an LLC Right for your Blog. After more than 4 years, that is still the most popular post on the site and gets way more love from Google than I ever expected.
Now, Businessese is not focused solely on bloggers and influencers anymore, but the topic of LLC formation is something that most online and service-based business owners consider, so I wanted to revisit the topic for all small business owners to consider.
Disclaimer: As always, before we get into today’s topic, a quick disclaimer. This podcast is meant to provide you with legal information only. It’s not legal advice and does not create any type of attorney-client relationship between us. Please don’t take any action without consulting your lawyer first.
Okay, now that I’m done with my legal stuff, let’s talk a bit more about whether or not you need an LLC.
First, we’re going to do a quick overview of the three most common business types, which, of course, include the LLC.
First, there’s sole proprietorship.
You don’t have to file any paperwork with the Secretary of State to be a sole proprietor in most cases. But, if you are a sole proprietor, check your local laws for business licensing requirements. You might also be impacted if you are using a business name that isn’t your individual name since some locales will also require you to file for a dba or fictitious business name.
As a sole proprietor, you and your business are one and the same, which means you are completely responsible for your business. No need for a management plan or to file annual paperwork. This seems easy, right? Why wouldn’t everyone just be a sole proprietor?
The most important distinction between a sole proprietor and an LLC or corporation is that you, as the business owner, are personally liable for all assets and liabilities of your business. This means that, if you were sued or had a large debt that the business couldn’t pay for, you would be responsible.
Avoiding this personal liability is one of the main reasons many small businesses decide to form a business entity. The most common types are corporations and limited liability companies.
Now, let’s talk about corporations, which are formed when you follow certain steps and file certain paperwork with the Secretary of State. Corporations are generally owned by shareholders and are run by officers and directors. Typically, shareholders vote for the board of directors and the directors appoint the officers, which usually includes the president, treasurer, and secretary. Since the business is distinct from the ownership, there is no personal liability.
If it isn’t already clear, corporations are far more complicated than a sole proprietorship. They are highly regulated and may require a number of formalities, such as annual meetings and keeping minutes for those meetings.
Corporations are still widely used and they may be the right fit for you. Many companies favor corporations if they want to be able to issue stock, which is often preferred when bringing on investors. For some companies, being taxed as a corporation may be a good option, but this is something you should discuss with your accountant too.
Limited Liability Company
This brings us to the last, and biggest piece of our discussion, the limited liability company, more commonly known as an LLC.
For many, an LLC is an easier step between a corporation and a sole proprietorship. They are different in a lot of ways, but I understand where people are coming from when they say this.
An LLC is owned by members. It can have one or more members. The members are protected from personal liability if they follow the appropriate corporate formalities, which means filing the appropriate paperwork to keep the LLC up to date and ensuring that they treat the LLC as a separate entity, not something that is just an extension of their personal accounts. Please note, there are other rules like you can’t use the LLC to do something illegal and then expect to be protected, but generally speaking, members are not subject to personal liability for the acts of the LLC.
An LLC makes a lot of sense for many small business owners.
Most importantly, as I just mentioned, there is no personal liability for the members. This means that you, as an individual, generally won’t be responsible for the debts and liabilities of your LLC. This is often one of the primary reasons why people want to form an entity for their business.
Next, the default is pass-through taxation, which means that profits and losses flow through to your personal tax returns, like a Schedule C, rather than filing a separate return. There is also some flexibility and you can elect to be taxed as an s-corp or corporation, but this is definitely something to discuss with your CPA.
Additionally, LLCs tend to be easier to manage than corporations. The filings and formalities are less cumbersome. There is no issuance of stock or election of board members.
Considering an LLC for Your Business
Now, for the big question, do you need an LLC? The answer is maybe. I’m shocked we got to episode three before I had to give you the most lawyer-y answer ever.
Whether or not to create an entity for your business might not be a decision that you question at all. You may say yes, absolutely, and do it before you do anything else. That’s how I am, but I am also super risk-averse and the vague idea of personal liability is terrifying to me.
The action step for this episode is to consider the following questions if you are thinking about whether an LLC is right for you.
Here are some questions to consider:
- Do you want to protect yourself from liability? To me, this is one of the biggest factors to consider. If you want to protect yourself, it’s definitely best to consider an entity.
- What type of business are you in? Very simply, some businesses are probably way more likely to put you at risk of personal liability than others. As a licensed professional, I would never do anything without an LLC or some other form of protection. But, as I said, I am extremely risk-averse. Some people are willing to try things for a bit to see if it is going to be successful prior to setting up the LLC.
- Do you want an official business name? Many people want the LLC because it makes them feel like their business is more official.
- Do you want to separate your personal assets and your business assets? I’ve talked a lot about personal liability, but to maintain your limited liability, you have to keep your business assets separate from your personal assets. If you want to be able to easily mix everything, then an LLC might not be right for you.
- What is the process to set up an LLC for where you live?
- One important thing to note is that you can file an LLC in any state, but for most small businesses, it can make the most sense to file where you live since you may also need to file as a foreign entity doing business in the state where you live. However, if you are location-independent or move around frequently, like a military spouse, it may make sense to look at another location.
- Next, is the process something you are comfortable handling yourself or would you hire a filing service or lawyer to complete?
- For example, the filing process in New York tends to be a bit trickier than in other states since they have a publication requirement. This is something a lot of people do not want to handle, so they turn it over to their attorney or an LLC filing service.
- What are the fees associated with the setup?
- For some people, this is a big one. They want to wait until they are making enough to cover the cost of filing the LLC, but this is completely up to you.
- Depending on where you live, it can be expensive. For example, forming an LLC in California is relatively inexpensive; however, there is an annual tax of $800 in addition to those filing fees.
- Do you have employees? This may be a nudge in the direction of forming an LLC to reduce your potential liability.
- Creating an LLC can give you some additional brand protection. It’s not the same as a trademark, but once you form your LLC, no one in your state can use the identical name.
Based on these questions, are you able to make the decision for you and your business? As you consider, if you still aren’t sure, this is the best time to consult with your lawyer or CPA. They will be able to provide you with the customized guidance you need to make the decision.
This wraps up our discussion of LLCs for today.
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