There was one question in particular that plagued me in 2017 when I created my online business: Do I need an LLC?
The great thing about the internet is there’s tons of information about everything. The bad thing? There’s tons of information about everything. Instead of pointing you to a gazillion links, I’m going to walk you through finding concrete answers for the same questions I had, and spare you the hours of frustration you might otherwise feel. Questions like:
An LLC, or Limited Liability Company, is the most simple business structure for solopreneurs and small online businesses. Taxation is much less complex than a corporation, but you get a lot of the legal benefits, which we’ll discuss in this article.
For years, I never thought about looking into becoming anything more than a sole proprietorship without an LLC because I was primarily “only” doing freelance writing and editing. Was this wise? Eh, I just didn’t know any better. A sole proprietor was easy, the path of least resistance. Then my freelancing business evolved beyond merely freelancing.
I began taking on one-on-one clients. I grew an email list. I created and sold my own online course. Overall my business was rapidly moving in a direction that I could only describe as “official business-y business stuff,” and I started to wonder if I should be doing something a bit more … business-like.
Should I form an LLC?
We’ll get into why, but you should consider creating an LLC if you:
- Have gotten your business off the ground and have found your first paying customer
- Want to avoid putting your personal assets at risk
- Have multiple owners and/or partners in the business
We do recommend filing for an LLC if you meet the above criteria, but we also highly recommend that you talk to a business lawyer and/or accountant to decide whether a single-member LLC or another entity type is best for you. Then when you’re ready to file for an LLC, check out our other article on LLC tax filing.
In 2018, I ended up forming an LLC because My Fancy Business Name, LLC has a nicer official ring to it, doesn’t it? (Just kidding … sort of.)
But mostly I decided that I wanted to mitigate risks and to protect myself, my precious video game collection, and my other personal assets.
If you have your own money-making side hustle, you should strongly consider forming an LLC, especially if you sell or plan to sell information products, because…
“How much risk does my businss REALLY face”?
It’s not a matter of asking yourself Do I need an LLC?
“In fact, it’s probably more about risk and how you want to be taxed. You’d want to form an LLC when you believe there is a medium to high chance that your business may possibly be entangled in a lawsuit or bankruptcy case. Generally, if your revenue is going up, it probably means your business is interacting with the world, which would ultimately mean that your chances of being sued increases,” said Dennis Duong, a certified public accountant based in California.
Note that you don’t need an LLC to start or run your online business. You can form one at any time or not at all, but forming an LLC would just be smarter risk management once you’re up and running.
There are a few points of confusion around LLCs. Let’s clear them up one by one.
What an LLC actually protects
Forming an LLC means that, in the eyes of the law, your business is a separate entity that can do things people can do: open and maintain bank accounts, own property, sue, and, of course, be sued. In the event that someone feels particularly litigious, they would sue the LLC, not you.
And if you have business partners or employees, you wouldn’t be personally liable for the reckless things they do (or might do). If — heaven forbid — your delivery driver gets drunk and causes a car accident, and the injured party takes legal action, they can only go after those assets you’ve invested in the business. But your personal assets, such as your personal bank and any investment accounts, home, car, pets, etc., are protected. You can still personally responsible for your own actions in certain cases (such as if you were drunkenly driving the delivery truck yourself), however.
For example, you can STILL be held liable if you default on a loan under your name, even if it’s used for your business; you’ve injured someone with or on your personally owned property; you don’t pay taxes or withhold taxes from employee wages (if you have partners or employees); or you are doing shady, illegal things. As always for specific questions around your situation, please consult a lawyer.
These are the benefits of an LLC, but the asset protection isn’t a complete safeguard against any wrongdoing or negligence, and an LLC needs to be in place BEFORE bad things happen.
Think of an LLC as an additional layer of protection, rather than a mighty shield from all potential risks to your business and personal assets. Other ways to protect yourself are to get the appropriate liability insurance for your business. For example, as a freelance writer and service-based business, an insurance option for me would be general liability insurance (here’s some helpful information on that).
What an LLC allows you to do
The benefit of an LLC is that you get personal liability protection, but also you give yourself a more formal business structure, which can be especially helpful if you have business partners.
This added framework allows you to figure out potentially sticky details, like what happens when people join or leave the business and how to pay out profits to partners and employees. LLCs can also be taxed as corporations, which means that the LLC’s profit can potentially be taxed twice — once at the corporate level and again at the individual’s level, Dennis explains.
Taxation can get complicated and is beyond the scope of what we discuss here, so it’s best that you speak with an accountant about what’s best for you and your business.
Forming an LLC doesn’t cost you that much
But the actual amount you pay depends on the state in which your business will “physically” operate (yes, even if it’s online). For example, in California, I pay about $800 plus a few other service fees, though I know other states are less expensive. You can look up your state’s filing fee online.
Forming an LLC is simple
There are a number of get-it-done-for-you services that you can find online — LegalZoom being one. I had my accountant do this for me to save me from the mind-numbing options. If you opt for the DIY route, you can look into specific instructions from your state’s official site (e.g., this is what California’s looks like).
The more overwhelming part of the process is perhaps learning to run your LLC as a separate business entity. This means deliberately separating company and personal bank accounts, credit cards, and general finances. Since I’d been a sole proprietor for so long, this took me a while to get the hang of (and I’m still learning!). Here’s a handy article to check out.
Filing an LLC for your side business as a full-time employee
Even if you’re a full-time employee, you can still form an LLC, but LLC formation is subject to the regulations of the state you’re in. But according to LegalZoom, whether you have an employer at the time you start your business doesn’t matter.
The real concern is whether starting your business can potentially violate your employee contract, and this is something you’ll have to talk to your boss and human resources department about.
“Filing an LLC is too expensive.”
If your primary resistance to filing an LLC is the cost, maybe the REAL question you should be asking yourself isn’t “do I need an LLC?” but “how do I get more customers?”
And to get more customers and grow your online business, you must create content.
But we’re not talking about a “Top 10 list” or a nice-looking infographic. We’re talking about crafting content that finishes your readers’ sentences and shows that you TRULY understand and care about them.
Too many online businesses skip over these details and focus only on churning out information. More articles! More infographics! More emails!
They simply don’t understand that real success in online business comes from sharing ideas that resonate with your customers.
And that starts with positioning your business the CORRECT way.
Instead of guessing what your followers want (or worse, assuming what they want), spend the time to go deep and learn their exact hopes, fears, obstacles, and emotions. Email them. Talk to them. What are they afraid to admit? What’s the language they say to themselves?
By doing your homework, you’ll know exactly how to create a brand that speaks to your customers — and you’ll create a mob of followers who can’t wait to buy what you have to offer.
To help you start connecting with your audience so you can correctly position your online business, we’ve put together this free guide on “Positioning Breakthroughs.”
What you’ll learn:
- How to create an irresistible offer that your market can’t wait to buy
- The one thing you can do to guarantee customers for life (Hint: we do this all the time)
- How to build a brand that instantly connects with your customers on an emotional level