Do I need an LLC, and Why? DO I NEED AN LLC FOR MY ONLINE BUSINESS?
Are you starting a business, a side hustle? Have you considered reselling on Facebook, Ebay, or Amazon and wondered whether you might have liability issues? Maybe you are wondering about things like incorporation or whether you need an LLC. Are you wondering: “Do I need an LLC?”
(Disclaimer: I am an attorney, but I am not your attorney. Nothing in this site creates an attorney-client relationship. This article is for educational purposes only and should not be used as legal advice. Always consult with your own attorney as your own personal circumstances dictate the legal advice that is right for you. Further, this site contains affiliate links from which I may receive a small commission at no extra charge to you if you make a purchase.)
What is an LLC anyway? And, when/why would you need it?
WHAT IS AN LLC?
An LLC is a Limited Liability Company. I know; I know; I used the name in the definition, and it didn’t help!
To clarify, an LLC is a formal business organization that limits all liability of a company to the assets owned by the company. In other words, if you run a business that goes bankrupt, then your personal home or vehicles are not used to satisfy the debts.
Further, if you sell an item in a business formed as an LLC that seriously harms or maims an individual, then only the LLC is subject to the claims of the harmed individual. This protects your personal retirement account or your children’s wedding fund!
HOW DO YOU FORM AN LLC?
But, you can’t simply claim to run an LLC any more than Michael Scott can “declare bankruptcy.”
An LLC is established by state law; your state has its own requirements and parameters. But, the basics mirror each other across the country. Only entities that are registered as an LLC in the state where they do business are eligible to take advantage of the limitation on liability.
If you do not register and meet the minimum state requirements, then you don’t have an LLC. If you do not pay your fees and file your paperwork, then you do not have an LLC.
Honestly, forming and filing an LLC isn’t all that difficult.
To qualify in most states, an LLC must have Articles of Organization, an Operating Agreement, and a statutory compliant name.
A compliant name? The name of your organization must use the designation LLC, Limited Liability Company, or other variations allowed by your state’s law. For example, you might notice here that our LLC is Work. Play. Mommy., LLC. This indicates to users and consumers that my liability is limited only to the value of the assets owned by the LLC…about $0.00!
FUNDING YOUR LLC
Great! You have the paperwork and are a formal LLC. But, does that mean that you truly have liability protection? Maybe not.
One of the most crucial and overlooked steps of forming an LLC is funding. If you use an online legal document generator, funding is an easy step to overlook. Too many times I see people file their Articles of Organization through an online legal portal but never change the titles to their equipment, property, or accounts.
If you form a company but then continue to receive money and pay bills out of your personal account, then you are not protected by limited liability. An LLC only works to protect your personal assets if all business is conducted through the business accounts and all taxes are filed through the business (usually as an S-corp).
I see shortfalls repeatedly with rental properties. If you run a rental business and never change the title of the property into the LLC, then your personal assets might still be recoverable if there is an accident on your rental. Even though the LLC owns an insurance policy, it might not own the rental. Therefore, you might not have the LLC’s liability protection.
I will pause to say it again. If you are going to form an LLC, please work with an attorney to find out whether your properties, accounts, and equipment are properly titled. In some cases, you might also need bills of sales, member resolutions, or purchase and sale agreements. WORK WITH AN ATTORNEY!
WHEN DO YOU NEED AN LLC?
Maybe you read all the requirements and hassle above and think that this whole LLC thing is just not for you. Perhaps you believe that your business is not really that likely to run into liability.
Sadly, some cases have already been filed against resellers for putting faulty products into the chain of commerce. Likewise, renters sometimes fall, and accidents happen everywhere.
Some people might suggest that you do not need an LLC until you have reached a certain revenue stream. Although I would vehemently disagree that needing an LLC is a product of income, it is important to know that setting up an LLC may cost several hundred and maybe even a couple of thousand dollars to set up properly.
The cost depends entirely upon whether this is a new enterprise, the attorney you choose, and any other specific complications of your business. For example, if you have run a successful lawn care company for years, your conversion to an LLC might be more difficult. You likely have multiple employees and tens of thousands of dollars of equipment. Funding your LLC is going to be more complicated than if you were simply starting out today.
If you start today, then you don’t have any titles to transfer or accounts to move. You can simply start off on the right foot for a small state filing fee and a couple of hours of an attorney’s time.
Yes, setting up the LLC will cost some money, but having it in place from the beginning can help you set up good business practices and establish true liability protection. And, I belive, all businesses should have some liability protection in place.
ALTERNATIVES
Now, realize, other options are available that provide liability protection. Much like the LLC is the S-Corp (Corporation). Like the LLC, the S-corp is a pass-through organization, but unlike the LLC, a corporation is ordinarily less flexible in its structure.
Alternatively, a C-Corp is a corporation where the corporation and the shareholders both pay taxes. This results in a sort of double taxation, which is largely unfavorable among small businesses. However, as has been proven time and time again, one of the pitfalls of LLCs and S-Corps is that a business could theoretically pay more tax than earned income. Whether an S-Corp or C-Corp is right for you depends on your personal circumstances. It could depend on the size of the business or the number of shareholders. (TALK TO AN ATTORNEY!)
Again, both of these corporate structures require that you file state-specified forms and fund the corporation properly. Without proper structure, you will, by default, be a sole proprietorship (also known commonly as a DBA). Alternatively, if you work with a partner (or partners), your business is a partnership by default.
UNORTHODOX SOLUTION
Finally, I would be lying if I told you that every person I ever counseled to open an LLC actually listened. Many people straight-up ignore me…par for the course if you are a young female attorney… However, some people leave my office and proceed straight to their local insurance agent for a large umbrella policy. In some specific cases, the umbrella policy might give you the liability peace of mind you want. However, insurance is never a total liability solution.
FIND OUT WHAT IS RIGHT FOR YOU
In short, I recommend that, regardless of your revenue as a business, you consider the types of business structures available to you in your state. Be certain that you properly follow state and federal laws for procedure, requirements, and taxes. And, with the help of your attorney, make certain that you title each portion of your business properly.
Michelle @PurelyPersistent says
So I have an LLC, but after reading your article, I really need to visit with an attorney. Thank you so much for your article!
workplaymommy says
Always! Attorneys are able to provide a different level of analysis for your small business!