How do you know when to form an LLC? This article is about to give you all the answers.
You want to know something I probably shouldn’t tell you as someone who’s an “expert” in this field?
I waited WAY too long to form an LLC for my business.
I started my company as we all do, in a whirlwind of ideas and social media marketing, trying to figure out how to create a website and attract clients.
And once everything was up & running, I was also up. And RUNNING.
There always seemed to be 7,000 things that needed to get squeezed into those 2-hour windows I had to work on my business in the evenings after my 9-to-5. I had too much to do (you feel me) and not enough time (preach).
And when it came down to it, the most pressing projects were always for my clients. Or marketing. Or connecting with you all.
Quite simply, it was hard trying to be the queen bee running the hive and the worker bee out getting the honey all at the same time.
In the midst of all that busywork, I had a brief lightbulb moment reminding me that I needed to start running my business like a business.
And first on my to-do list was to register as an LLC.
WHAT IS AN LLC?
The term LLC stands for Limited Liability Company and is one of the business entity types recognized by the US government.
You can form a single member LLC (meaning you are the sole owner of the business) or multi-member LLC if you have a partner(s).
(Fun Fact: The IRS does not recognize LLCs for tax purposes, so you must elect to either be taxed as a partnership – which is where most LLCs start unless you elect otherwise – or a corporation.)
WHAT ARE THE ADVANTAGES & DISADVANTAGES OF AN LLC?
This is the #1 reason why you should register your business as an LLC.
If you operate as a sole proprietor (which is what you are if you haven’t registered your business as anything else) and a client sues you, they could not only go after the assets in your business but also your personal ones – like your home, car, savings account, etc.
An LLC will protect your personal assets, meaning that they could only go after the assets in your business. Not a big deal until you get sued, and the person who is the bane of your existence is moving into your house.
EASE OF SET-UP
Because there are little paperwork requirements, setting up an LLC is fairly painless and can be done without the help of a lawyer. I set mine up online, which took less time than a Parks & Rec episode (which I was also doing…at the same time).
LOW REGISTRATION COST
If done without the aid of a lawyer, you can get your LLC registered for right around $100. This fee is determined by the state you file in, so this may differ somewhat state-to-state but still should be within that range.
POTENTIAL ADDITIONAL TAXES/FEES
Depending on the state you live in, registering for an LLC could also enroll you for additional state business taxes. Make sure you check on this before registering and know that YOU DON’T HAVE TO FILE IN THE STATE YOU LIVE IN.
WHEN SHOULD I FORM AN LLC?
The best choice for any entrepreneur would be to file for your LLC the moment you start your business.
But we all don’t live in a perfect world, so here’s the real truth:
If you are in highly liable industry (like healthcare, financial services, or anything to do with someone’s wedding) where the value of your service is subjective and/or could be deemed as harmful, you need to form an LLC ASAP. No ifs, ands, or buts.
For the rest of you, I would opt to file for your LLC whenever you start servicing clients, whether you have a full-time business or side hustle, especially if there are no additional taxes placed on them in the state you wish to file.
(And if you’re already past that point, don’t worry – I was behind in the game, too. )
However, whether you’re in a highly liable industry or not or have extra taxes placed on your or not, whenever you have significant personal net worth (this is subjective, but I’d say $25K or more), you want to form an LLC in order to protect anyone from taking those assets from you.
HOW DO I FORM AN LLC?
Forming an LLC can be done in 4 easy steps:
Verify in which state you want to register your LLC
Again, you’ll want to look for a state that is tax advantageous.
Typically, I suggest filing in your home state.
However, if that’s going to cost you an arm & a leg in annual taxes, look into a state like Delaware, which is one of the most notorious states for being business-friendly (and why Lil Dicky raps about it in his song “Save Dat Money.” You know you love it just as much as I do.)
Note, though, if you’re filing out of state, you may be required to have a registered agent within the state you are filing to act on your behalf if any issue were to come up.
This will be an extra fee you have to pay to your registered agent each year, but typically low-dollar in comparison to the potential tax liability in your home state.
Determine if your business name is available in that state
Go to your filing state’s website and search to ensure that the name of your business is available. You may have to tweak what you officially want to name your business if someone else has already claimed that name.
File for a FEIN
Just like every individual needs a social security number, every registered business needs an FEIN.
FEIN stands for Federal Employer Identification Number, and you can file for this at the link below. Bonus: It’s 100% free.
Register your business with the state
Once you’ve received your FEIN, you’ll want to register with your filing state.
Go back to your state’s online website, and ensure that you have your FEIN, name & address of your registered agent (which can be you – I’m the registered agent for my business), and payment method handy.
Once all of that is ready, you can follow the (hopefully – not all states may offer this and I’ll be honest, I haven’t checked) online process to get yourself registered.
Want someone to hold your hand through the process? Girl, mine is warm and waiting.
I offer this as part of my hourly consulting services, so if you need help, click the button below and let me know!
Now here’s to us, protecting our money and running our businesses like businesses, in true entrepreneur-style.
Until next time,