Many business owners, especially ones just getting started, typically choose a sole proprietorship, instead of an LLC (limited liability company). It makes sense. A sole proprietorship enables them to have complete control over their company, doesn't come with too many hurdles, and is often the least expensive option to legitimize your business in the eyes of Uncle Sam.
But soon enough, you're going to need more help than a sole-prop can provide... especially if you're a creative entrepreneur. I'll save insurance stuff for another day. But today, let's look at your legal structure.
I know. It's not sexy. Still, it's important. Choosing the right legal structure for your business can protect both you and your business in a variety of ways.
If something happens, you are personally responsible if you have a sole proprietorship. When I had a candlemaking company, the last thing I wanted was someone suing me for burning down their house because they left a burning candle unattended. Thankfully, that never happened. Still, an LLC kept my personal assets separate from those of the business.
So let's take a look at how an LLC could save you some headaches as your business grows. Oh, keep in mind, I'm NOT an attorney or tax pro. This is general information, and it's up to you (as always) to do your homework before deciding how to structure your business.
If you've got staff, investors, or other stakeholders in your company, an LLC can help you avoid double taxation. The LLC is a hybrid structure that can give you the benefits of a sole prop and a corporation without the hassles of filing the corporate paperwork with the government.
In this case, your company is taxed like a sole proprietorship. In the early startup phases of a company, the LLC gives you more flexibility. You can always change your taxation status later on as the business grows so that you can take advantage of the benefits of being a corporation once you've got more revenue.
If everything is structured the right way, an LLC may prevent business creditors from taking your personal assets, such as your car, house, or even personal bank account. It can even save you from some legal claims. A post at ZenBusiness explains forming an LLC in New York. While each state has different requirements, it still must be done properly to avoid risking your personal assets in a law suit. But there may still be cases when an LLC won't protect your personal assets - like liability for personal services. In those cases, your insurance may be of help.
An LLC can also be helpful when it comes to your personal estate planning. It's not the same as a trust, but it has similar advantages for your business if you plan to pass it on to someone else at your death.
You can be protected not only from creditors but from court expenses and probate solicitors as well. Assets in the LLC belong to the LLC, not to you personally. That allows you to skip probate in most cases, so long as the LLC has an owner other than you when you die.
As I mentioned earlier, an LLC can be more flexible than a traditional corporate structure. Regulations for LLCs are different. For instance, LLCs are not obligated to have a shareholder meeting or to restore a board of directors. Furthermore, LLCs can create written operating contracts, and you can make changes more easily than you can in a corporate structure. That's partly because fewer people are required to form an LLC than a corporation. An LLC only requires one member, a corporation needs a board of directors.
You may have seen "Delaware companies" that are physically located in other states. That's in part because Delaware has (as of this writing) set up their business filing fee structure to be relatively low compared to other states. But an LLC can be formed anywhere. I held my LLC in Michigan when I moved to Nashville a few years ago.
There are also plenty of online services that can help you register your LLC. Your total registration costs will vary from state to state. No matter what location you choose, however, be sure you're talking with a professional who can give you proper legal advice. And remember that whatever state you register in, you'll still need to pay taxes in the state of registration. That's one reason why most folks just register in their home state!
If you're following the Profit First approach that I recommend, you're doing quarterly profit-sharing distributions. LLCs are quite flexible when it comes to the distribution of profits to the owners. Plus, you don't have to distribute them equally if you've decided to split profit sharing differently amongst the members of the LLC.
One colleague of mine made her business manager into a partner in the business. They agreed to a profit-sharing distribution where my colleague got significantly more than her partner because of the years she'd put into the business previously. If she'd had a corporate structure, profit-sharing would have to be paid equally.
An LLC isn't right for everyone, and it may or may not be right for you. Still, it's worth considering as your business evolves. Take the free Fix This Next Assessment to get clarity on your next steps in growing your business. You'll get clarity around what your business needs next - including looking at your income goals and business structure. Armed with this information, you'll be able to make an informed decision about what the right next step is for you and your business.