Should I Start an LLC?
When starting a business, one question is bound to come up: “Should I start an LLC?” There are several advantages to setting up a business as an LLC (limited liability company), but it’s not the best move for every freelancer or entrepreneur. You must consider legal liability, ownership structure, potential tax advantages, and more.
LLC stands for limited liability company. It’s the most common and streamlined business structure for those transitioning from sole proprietorship or general partnership.
There are several legal and financial benefits to organizing your business as an LLC. At the same time, there is more paperwork and administrative expenses to remain compliant with, making an LLC impractical for many freelancers and those only earning a side income.
Below are some top reasons to register your business as an LLC instead of a sole proprietorship.
For many, the most compelling reason to form an LLC is the enhanced legal protection to cover accidents, injuries, and financial hardship. In most disputes, being an LLC removes personal liability from lawsuits and financial hardships as only business assets are accessible.
If you do business as a sole proprietor or a general partnership, courts and creditors have a greater ability to come after your personal assets when there are insufficient business assets.
An LLC is particularly valuable if you work in a risky industry, have a lot of foot traffic, or own many business assets. For example, if you’re a wedding photographer who travels to different venues, you could become involved in an on-site accident or get sued if the newlyweds are unsatisfied with the final product.
Consider the following points to avoid financial surprises:
It can be easier to qualify for business loans, small business credit cards, or open a business checking account as an LLC. The primary reason is that it’s easier for lenders to confirm your business revenue history and current assets.
Further, having an LLC or a corporation designation adds authenticity to your brand with vendors and clients. For example, I once promoted products for a company that refused to work with sole proprietors.
Additionally, you may need to be an organized business for at least six to 12 months before you have sufficient business history to apply for financing.
The LLC formation process involves drafting an operating agreement defining each co-owner’s roles and responsibilities. While these rules reduce flexibility in running a business, they can also prevent conflict that can threaten its success.
In this situation, you will form a multi-member LLC instead of a single-member LLC.
Registering as an LLC can be worthwhile if you decide to hire employees. Additionally, the IRS will require you to apply for an employer identification number (EIN) to add employees to the payroll. Business formation services such as Northwest Registered Agent can help you apply for this, although you can easily apply for free through the IRS.
Contrary to popular belief, an LLC formation doesn’t automatically improve your tax treatment versus a sole proprietorship. Your organization functions as a pass-through entity when paying yourself as an LLC and you’re taxed within your personal income tax bracket.
However, an LLC has tax flexibility by filing as a corporation, allowing the business to pay a portion of the Medicare and Social Security taxes. Generally, this tax move makes sense when you earn at least $100,000. If that’s you, it’s worth consulting with your tax accountant to assess your situation.
There are tradeoffs for the potential legal and financial LLC benefits. You should weigh the following drawbacks before deciding whether to start an LLC.
Each state has unique LLC filing fees and documentation requirements. In most states, the filing fee is between $50 and $100, but it can be as high as $500 in some. Additional fees can also apply.
An LLC can be expensive when starting or earning an irregular income. You may also have to apply for an LLC in each state you physically operate.
Related: How Much Does It Cost to Start an LLC?
To comply with state LLC requirements, you must submit certain documents each year. A business formation service like Northwest Registered Agent can assist with filing deadlines and updating the required documents.
Additionally, you need a registered agent to receive official correspondence and legal notices during regular business hours at a physical address. It’s possible to serve as your own registered agent, but many business owners outsource this task out of convenience and to protect their personal privacy.
Not every freelancer, gig economy worker, or partnership benefits from the costs and paperwork requirements. Remaining a sole proprietor is better for simplifying your business model and enjoying fewer administrative burdens.
For instance, you may work online in a low-risk industry where LLC legal protection offers minimal benefits. However, it’s still worth carrying business insurance in many cases.
Becoming an LLC is not the only big decision you’ll need to make when you’re self-employed. Our ultimate freelancers guide shows you how to make money and set up a successful business.
Depending on the industry and your anticipated revenue, you may decide to organize an LLC as soon as you start a business. The peace of mind can be worth the expense and time commitment.
Here are some ways to know when it’s the right time:
Select a business name that you will use on all business-related documents. It must be available in your state, so have alternatives ready if your first pick is unavailable. Your business name should be unique to avoid a rejected application if it sounds too similar to existing organizations.
Northwest Registered Agent provides state-specific help during the LLC application process, including a business name search. You pay an affordable $39 plus your state’s filing fees. Further, Northwest offers 12 months of free registered agent service after successfully filing.
Next, send your business Articles of Organization to your secretary of state to register your business. This document includes pertinent details, such as:
Your state may require additional documents or fees due now or shortly after application approval. For example, California requires you to pay an $800 franchise tax within the first four months and 15 days.
Your state government may not require you to have an operating agreement on file in their archives, but this is a necessary document to keep in your internal files. The Articles of Organization lay out the precise drafting and storage procedures.
This document specifies the responsibilities of each business owner, financial procedures, voting rights, and other vital details. In addition to adding credibility, a valid operating agreement helps provide legal protection.
Getting an EIN is inexpensive and prevents putting your individual Social Security number (SSN) on sensitive documents. An EIN, designating a registered agent, and using a virtual mailbox are three of the best ways to protect your personal identity.
You will also have an easier time getting a business bank account or applying for credit cards and loans. Be sure to exclusively use this account to receive all payments or pay expenses to uphold legal liability protection.
Annual filings are due each year to renew your LLC status. Your registered agent is responsible for filing any necessary compliance documents. Their reminders can help you avoid late fees.
Related: Northwest Registered Agent Review
The best time to start an LLC will differ for every business, but it’s a wise decision for anyone who needs legal protection or to comply with state business regulations. An LLC also adds credibility when qualifying for business financing.
That said, not every freelancer or solopreneur needs to become an LLC. If you primarily perform weekend side hustles, you likely won’t benefit from the increased legal protection or tax flexibility.
Source: The College Investor FloatMe is a fintech app that offers $50 cash advances between paychecks. While there is a monthly...
In talking with RIA owners and particularly RIA operations professionals, the topic of fees often comes up. “What is your...
In 2023’s The New Wealth Agenda, we called on leaders across the nation to join us in pursuing an ambitious...
