When I started my first online business, it never crossed my mind that I might need an LLC.
I was far too busy designing the website, ordering my products and planning where to spend my inevitable riches…
However, as a more experienced (more cynical) entrepreneur, I would highly recommend taking a more methodical approach.
If you’re starting up a new business venture, stop to consider: Do I Need An LLC For My Online Business?
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Do I Need An LLC For My Online Business?
Answer: You probably do.
An LLC helps to mitigate risk, shielding you from personal liability. There are also significant tax and employment benefits.
However, they are not all good. It’s therefore essential to understand LLC’s in more detail before pulling the trigger.
Luckily, I’m here to give you the important details. Keep reading…
What Is An LLC And Why Do I Need One?
Welcome to the age of the side hustle.
Online business is no longer reserved for the giant corporations or tech-savvy rich kids.
Most people you know have probably started their own online business in recent years.
And it’s time for you to join them!
Whether you want to write blogs, make YouTube videos, stream video games, sell on Shopify or invest in crypto, having at least one side hustle is a smart and effective way to work towards financial independence.
What many people fail to understand though is that a “side hustle” is still a genuine business. You’re governed by the same business laws and regulations as any other online company. So make sure you don’t end up in hot water with your local government, tax officials, or regulatory boards!
One of the most important legal structures for you to be aware of when starting your online business (regardless of industry or offering) is the LLC, or Limited Liability Company.
What Is A Limited Liability Company (LLC)?
In other words, an LLC is the opposite of a sole proprietorship, or SP. In an SP, it is your name attached to the company. This means that any debts, liabilities, lawsuits, or other repayments are your responsibility; and you can be held personally responsible for this.
Why Do I Need An LLC For My Online Business?
Unlike a sole proprietorship, an LLC protects you (the owner) from the above liabilities.
Imagine you sold an item to a customer and unfortunately it causes them an injury. They decide to take your to court for damages. An LLC should mean that your company is sued, rather than yourself.
This limits your personal liability meaning that they can only sue for assets in the company. They therefore can’t come after your house/cars/Pokemon collection.
This means that whilst the lawsuit could be damaging to your online business, personally you should be ok. Note: you should still also consider product insurance when selling physical items that could cause injury.
When Should I Become A Limited Company?
You can decide to opt for an LLC at any time.
Whether you need one in the early stages of your online business is debatable. The paperwork alone could be an unnecessary distraction when you’re just starting out.
If however the below applies to you, you should certainly consider forming an LLC:
- Your online business has several owners/partners.
- You are concerned about protecting your personal assets and reducing risk
- Your online business is taking paying customers – therefore already functioning as a business.
What If My Business Isn't New?
If you’ve already been running the business for some time – don’t panic!
It’s not too late to form an LLC for your online business. The sensible option at this stage would be to discuss your options with a certified accountant or lawyer. They’ll be best placed to advise whether a single-member LLC is your best option.
Your Company Image Matters
Another reason you might need an LLC for your online business – it just sounds better.
Fire The Boss™ LLC definitely has a certain ring to it!
But it’s not just about sounding better. You may find that suppliers or customers are more likely to trust your business when you’re an LLC. It tells them that they’re dealing with a professional, not just an individual.
When considering “do I need an LLC for my online business?” – consider your goals.
If you plan to expand your side hustle into a profitable business, cultivating a trusted professional image is key.
Your Online Business Risk Analysis
To answer your question (Do I Need An LLC For My Online Business?) we first need to consider your risk.
After all, risk mitigation is one of the main reasons to consider forming an LLC.
The problem here is that all business types come with risk. Even those not selling a product, but selling information (like starting a wordpress blog).
In a world full of litigation, almost every business is at risk of being sued. As your reach and turnover expands, so too does your risk. One could therefore make the argument that every online business owner should make efforts to protect themselves.
What Does An LLC Protect You From?
As we discussed, an LLC legally separates your online business from yourself (the owner).
Should a disgruntled customer decide to open a lawsuit, they’d be suing the company, not you. Your precious video game/baseball cap/stamp collection is safe!
Additionally, forming a Limited Company shields you from any misguided choices your business partner may make. They are not your personal liability. Of course, you’re still responsible for your own behavior. An LLC is not a license to act crazy! Loans taken out for the business, in your own name, may still default to you.
Forming an LLC for your online business does not equate to invincibility. As discussed previously, always consider liability insurance.
If in doubt, consult your trusty lawyer.
More Benefits Of An LLC For Your Online Business
There are other reasons you may need an LLC for your online business.
- Potential for tax savings and benefits.
- It’s easier to formalise business structure. This includes business partners and employees. If your business becomes big enough, you can offer employee benefits and pension funds.
- Can make it easier to exit the business – sell shares or handover complete control.
- Purchase assets through the company using company profits – such as computer equipment or investments.
We could talk forever about the complex taxation system for LLC’s. (Actually we couldn’t – we’re not trained accountants). Perhaps we’ll discuss this in another article but if you have questions then it’s worth booking some time with a tax expert.
How Much Does It Cost To Become An LLC?
The cost shouldn’t be the decisive factor when considering Do I Need An LLC For My Online Business?
Forming an LLC actually costs much less than you might expect.
The main fees are the state filing fees which ranges from $40-$500.
The costs after this vary based on whether you do the bulk of the paperwork yourself or use an LLC formation service.
The Disadvantages Of An LLC
One of the downsides to having an LLC is that it costs more money to set up (with fees ranging from one state to another), and it takes more time to set up. This is because the setup of an LLC requires articles of organization.
Articles of organization are simply legal documents submitted to the state government that are used to establish the LLC, including its name, address, directors, and other key information. We’ll discuss this more below when explaining how to register an LLC.
In addition to these articles, you also have to submit LLC operating agreement to the state (although it is not always required). This simply spells out the financial and management requirements and rights of each member of the LLC.
Once you’ve done all of that, it’s time to market and grow your LLC business.
Do You Need An LLC For ALL Side Hustles?
We’ve discussed the question: Do I Need An LLC For My Online Business?
But what about the side hustles that aren’t online.
Many of our readers are dog walkers, gardeners and freelance teachers in their spare time.
It’s important to note that not all side hustles will require an LLC. In fact, your side hustle may never explicitly require an LLC. Ever.
However, there are some key points in time where you should transition your side hustle from an SP (sole proprieter) to an LLC.
- You start making more money with your side hustle. A rule of thumb is that when your side hustle makes as much as your full-time job, it’s time to become an LLC!
- You are taking on more risk with your side hustle. This could be when you need waivers or liability forms or NDAs for clients.
- You plan on growing your side hustle into a business. This will save you a lot of tax, financial, and organizational pain down the road.
- If you are having to take out loans or collateral on business loans. An LLC will protect you and your personal assets.
- You hire staff. You can acquire an Employer Identification Number (EIN), hire staff, and deal with the IRS much easier as an LLC.
At this stage, your side hustle is likely becoming more than just a side hustle and is blooming into a profitable and successful business. Hooray!
How To Register An LLC: 5 Simple Steps
So you’ve decided that you do need an LLC for your online business…
Let’s talk about how to setup your new company.
1. Choose Your Online Business Name
Your name needs to not only be succinct and appropriate to your business model, it also needs to comply with the state law requirements. This means avoiding names that are the same or similar to existing businesses.
You can check the LLC name requirements for your state by visiting your states business filings website (often the Secretary Of State is the responsible agent).
2. Allocate A Registered Agent
A registered agent is the person responsible for receiving the official legal documentation for your LLC. They will then forward these to you.
This doesn’t need to be a professional registered agent (though these services exist), in fact you can name yourself. However you need to be contactable at a set address within the state during the working day.
3. File The Articles Of Organization
File the Articles Of Organization, AKA the certificate of formation.
The form differs between states. To find the form, head over to the same website used to check your LLC name.
The forms can be fairly lengthy but only require basic information such as business name, address and contact details.
Again, you can always use an LLC formation service to save time at this stage.
4. Create An Operating Agreement
This is a legal document outlining the rights of each owner. This reduces the risk of any future uncertainty about the financial or managerial ownership of the company.
This is super important and should be done even if you’re a solopreneur.
You can make simple operating agreements yourself or again, hire someone to help.
5. Request An Employer Identification Number (EIN)
This is issued by the IRS (Internal Revenue System) and is needed for tax reporting. It’s basically the same as a social security number – except it’s specific to your LLC.
This will allow you to open up your LLC bank accounts, file taxes and employ staff.
Hopefully we’ve answered your original question: Do I Need An LLC For My Online Business?
Remember, according to most government and online sources, an LLC is never explicitly required.
However, most business owners will likely tell you that the relatively small filing and LLC fees are well worth the savings and benefits down the road.
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