LIMITED LIABILITY COMPANIES
As a new business owner, one of the earliest (and most important) questions you’ll be faced with is whether or not you need an LLC, or a sole proprietorship.
What is an LLC
A limited liability company (LLC) is a business entity that provides enhanced liability protection for the business owner, and the tax benefit of a partnership. Your LLC is created and governed by your specific state’s law, and it can have one owner, or multiple owners.
LLC’s have many advantages over other business formations: Unlike corporations, LLCs don’t have annual-meeting and record-keeping requirements, and LLC’s can elect how they are taxed (if as a partnership, or an SCorp, business profits and losses “pass through” to each owner’s individual tax return).
Above all, there is one specific reason why an LLC is the most popular business entity for creatives: an LLC separates your personal assets from your business assets. If there isn’t any separation and you’re sued for anything involving your business, a court could allocate your personal assets to pay damages. Meaning, you could have to sell your house and car to pay the judgment.
For example, say you are a calligrapher and you start selling prints with one of your favorite artist’s song lyrics. The print is a hit, and it becomes the best seller in your shop. One day, you receive a cease and desist letter from the recording artist’s attorney, demanding that you stop selling the print and pay a fine for infringing upon the artist’s intellectual property rights. If you wind up in litigation over the dispute and you are operating as a sole proprietor, your car or your house could be used to help pay damages. If, on the other hand, you have an LLC and your business is separate from your personal assets, meaning the court can only pull from business bank accounts to pay for legal damages. The key is that you need to have the LLC formed before the dispute arises. If you wait until you’re sued, you’ll miss out on the protection an LLC offers.
After hearing this example, most clients tell me that they have a DBA and liability insurance, so they don’t need to file an LLC. Wouldn’t this provide the same protection? It’s a great question, and there is a straightforward answer: your insurance is nothing more than a contract between you and the insurance company. It won’t protect you from every random claim, and it likely won’t protect you from anything you did on purpose. In the example above, it wouldn’t offer any protection. Once you plan on providing products or services for clients, it’s time to form an LLC.
So, what do I need to know about setting up an LLC?
First, no matter how expensive it is to file an LLC in your state, you will be hard-pressed to find a scenario where I would say an LLC isn’t appropriate.
Aside from that, many times when clients ask me about the LLC process, I tell them the honest truth: you can do a lot of it on your own.
No really, you can. You can pay an attorney to help you, but you are capable of doing a good portion of it. My business coach probably won’t love that I’m saying that, but it’s always best to be honest, right?
Let’s break the process into 3 steps: 2 that I’d argue you can do yourself, the last you do need a lawyer’s help with.
Step #1: File with your Secretary of State
The first step in filing your LLC is to go to your secretary of state’s website and make sure that your name is available. From there, you can complete the entire process online. You will need to fill out a series of questions, which is actually your Articles of Organization- aka, document #1 of the 2 documents you’ll need. Generally speaking, your Articles of Organization will require: your name, your business name, your business; effective date, your registered agent and their address, and your business’ registered address. All in all, pretty simple. You’ll then need to pay the filing fee, and you’re on your way.
Step #2: File for your EIN with the IRS.
Your Employer Identification Number (EIN) is another name for your federal tax ID. Once your business begins selling any goods or services, you need one (even if you do not have any employees). Before you can file your federal taxes, have a partner, operate as a corporation, hire any employees, open a bank account, or get any necessary licenses or permits, you must get an EIN. An EIN doesn’t cost any money to obtain and is an incredibly quick and easy process. Go to the IRS business page in your state, and you will be walked through the steps. Be ready to provide your DBA (if applicable), your name, your SSN, and your address.
Step #3: Get an operating agreement from an attorney.
This is the last step in the process, and the only one where I do want you to get a lawyer involved. The operating agreement is the contract that governs your LLC, and will need to complete scenarios that lawyers are trained to think of; many more than you initially think of when forming an LLC. You can find the operating agreement I use in my own LLCs in the Creative Law Shop today!
That’s it! Three simple steps to forming your LLC. After you do so, you’ll want to open a business bank account- never mix your personal and business funds together! Forming your LLC and opening that bank account are the most important foundational steps you can take in starting your business- that, paired with contracts that will actually protect your business are everything you need to educate yourself on when starting your business.