We’re going to tackle the topic of whether or not you should form an LLC. We’re going to come at this from the non-legal business owner’s perspective and cut out all the mumbo-jumbo.
Today, I wanted to tackle one of the big questions that I get from people all the time:
I’m a solo entrepreneur. I’ve got my own little business and I am wondering if I should form a limited liability corporation (LLC).
Basically, the intent of an LLC, as you can tell from the name, is that it gives you the advantages of being a corporation, whatever those are. The idea is that you’re trying to separate your personal finances from this corporation. And the question is, why would you want to do that or not want to do that?
“I want an LLC so that if someone sues me, they’ll be suing my company and not me”.
Indeed, it is true that one of the purposes of a limited liability corporation is to manage your risk around topics such as unpaid debts, legal judgments, other legal obligations of your business, liability for negligence, etc. but unlike what people think, an LLC does not magically protect you. You turn the shields on and all of a sudden the phasers can’t get you — that’s not how it works. If you do something yourself, when your company gets sued, you will also be named in the lawsuit.
An LLC does protect you better if you weren’t personally negligent so you do enjoy some protection from the LLC, but if you wrote a blog post and you defamed somebody, for example, then you get sued for that personally even though you wrote it as your company.
“An LLC will help me pay fewer taxes”.
LLCs that are owned by a single person are usually taxed the same as a sole proprietorship. When you are running the business as a single person, the LLC is treated as a disregarded entity. Your income is taxed as income.
There are options that having an LLC gives you, such as being taxed as a regular CRS corporation, but there’s not a lot of tax benefit until the company gets bigger.
These are the two main reasons that people get into forming an LLC and if you’re a solopreneur thinking about forming an LLC, why should you do it as there’s cost associated with it? And depending on where you form your LLC, those costs can be significant. There’s paperwork and you will have to pay a franchise fee every year to keep the LLC maintained and on top of that, there may be state income tax implications.
Before you go to the trouble of forming an LLC, make sure you understand the cost.
But, there is an increasing number of situations, particularly in online business, where LLCs will help.
An example would be my personal venture of expanding our dropshipping business to walmart.com. Unlike Amazon, walmart.com will not accept you as a seller unless you are an actual corporation. It’s their way of saying that they only want to mess with serious people, and one way we can judge whether or not people are serious is whether or not they’ve actually formed a real company.
This might not always be the case but this is a perception that you generate whenever you have an LLC, and this can be useful when you’re doing business with other people.
Another intangible benefit is that it can also help with self-esteem as people feel better talking about the fact that they’re a legit corporation. They could say, I own this company versus just having a side hustle.
A technical benefit of an LLC that you should ask your tax provider about is the 20% pass-through deduction which, under certain conditions, when you have an LLC, you can qualify for. It allows you to deduct, for income tax purposes, 20% of the net income of your business.
Another advantage of an LLC is the infrastructure it gives you to manage employees and payroll.
If all this LLC stuff seems foreign to you because you don’t even know where to start, I’ve created a free video resource for you here: http://latenightim.com/explain. In several short videos, I explain to you what internet marketing and what online business is all about, and the different options that you have for starting an online business.
Links Mentioned In This Episode
- Tom and Jason’s Facebook Drop Shipping Course
- The Basics Of Online Business – Free Video Mini-Course
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