One of the most common questions I get from part-time entrepreneurs is whether they should form an LLC for their online business. I went through this decision myself in the early days of my internet marketing career, and what I found surprised me. The most popular reason people form LLCs, liability protection, may not work the way you think it does for solo entrepreneurs.
Important disclaimer: I am not an attorney, and nothing in this post constitutes legal advice. Laws vary by state and country, and they change over time. Consult a qualified attorney and tax professional before making any legal or tax decisions for your business.
The Three Reasons People Consider an LLC
When most people think about forming an LLC for their online business, they have three reasons in mind.
Liability protection. If something goes wrong, you want to protect your personal assets, your house, your car, your savings, from business-related claims.
Tax benefits. Many people have heard that an LLC taxed as an S-Corp can reduce self-employment taxes once your business reaches a certain income level.
Credibility. Having “LLC” after your business name can make your operation feel more professional and established.
The Liability Protection Myth for Solo Entrepreneurs
Here is what my research uncovered, and what multiple attorneys confirmed. If you are a single-member LLC where you are the only person taking actions on behalf of the company, the liability protection may be limited.
The reason is straightforward. When someone sues a company, they also sue the individuals responsible for the actions that caused the harm. If you are the only person in your company, every action the company takes is an action you personally took. You cannot hide behind a company name for your own actions.
Consider an example. A solo blogger writes something that defames someone, and that person sues. They will sue both the LLC and the individual blogger. Since the blogger is the only person who could have written the post, the LLC provides no meaningful shield for personal assets in that scenario.
Where an LLC does provide meaningful protection is when you have employees or partners. If an employee takes an action that creates liability, the LLC structure can protect the other members' personal assets from that employee's actions.
Bottom line: you are responsible for your own actions. You cannot hide behind a company name, and frankly, that is how it should be.
When an LLC Does Make Sense
Even though liability protection may be limited for solo entrepreneurs, there are legitimate reasons to form an LLC.
Tax planning. Once your online business generates significant income, an LLC taxed as an S-Corp can reduce your self-employment tax burden. The threshold varies, but many accountants suggest considering this structure once you are consistently earning $40,000 to $50,000 or more in annual profit. Talk to a CPA who specializes in small business taxation to see if this makes sense for your situation.
Business banking and credit. An LLC makes it easier to open a business bank account, apply for business credit, and keep your personal and business finances cleanly separated. This separation is good practice regardless of your business structure.
Professional credibility. Depending on your niche, having a formal business entity can improve how partners, clients, and vendors perceive your operation.
Future growth. If you plan to bring on employees, partners, or investors, having an LLC already in place simplifies the process.
How to Form an LLC in 2026
The process has gotten simpler and cheaper over the years. You can form an LLC through your state's Secretary of State website directly, often for under $100 in filing fees. Online legal services can handle the paperwork for you if you prefer, typically for a few hundred dollars including the filing fees.
After forming the LLC, you will need to get an EIN (Employer Identification Number) from the IRS, which is free and takes about five minutes online. You will also want to set up a separate business bank account and, depending on your state, may need to file an annual report and pay a small annual fee to maintain the LLC.
My Recommendation
If you are just starting your online business and making little or no revenue, do not let the LLC question slow you down. Focus on building the business first. You can always form an LLC later when the revenue justifies the cost and complexity.
If your business is already generating meaningful income, talk to a CPA about whether an LLC with S-Corp election makes sense for your tax situation. And regardless of your business structure, carry appropriate insurance, maintain good business practices, and understand that no legal structure absolves you of personal responsibility for your own actions.
Mark,
In your search, did you find any ways to protect yourself financially? Obviously to comply with all laws and provide great customer service, but we do live in a time where people seem to like to sue.
I am looking forward to reading why you decided to form an LLC anyway. I realize that perception is a great reason, but I’m sure you can shed some light on other good ones.
Yes — the answer is Liability Insurance. And that will be another post (when I get it all wrapped up).
This is what my CPA has been telling me for years and for years I’ve been hearing from others that he is wrong. So it’s good to hear 😉
I don’t think you discussed the tax issues did you? He tells me I wouldn’t benefit from an LLC in regards to taxes either. But I’m sure that depends on the person, company and other factors.
I plan on discussing taxes in another post — not done researching that one yet. Another issue is insurance. I’ll be working on that one as well.
Mark, I’m no attorney either, but I discussed moving to an LLC with a good CPA a few years ago, and the tax benefits were definitely not worth the costs (both financial and time) of starting and maintaining the LLC. And we never even discussed the liability issues such as the ones you mention (I wonder if he even knew about them).
I look forward to your follow up on the tax issue. Thanks for the info.
I am not surprised — so that is what I expect to hear from my tax atty. My big question will be “why or why not.”
I seem to remember the LLC liability issue being a disconcerting sticking point during a SBA-sponsored business seminar that I attended.
I remember it being laid out as you described it here and there were many in the class who were NOT happy.
It can raise all kinds of concerns for everyone from libelous scribes to drop-ship specialists who are suddenly caught in the middle of a product recall.
sba.gov has a wealth of resources to pour through before consulting a professional on how best to incorporate.
Question – Is LegalZoom the one that was co-founded by Robert Shapiro?
I’m looking forward to your follow-up posts.
Yep — that’s the one (although I did not even know that until you asked).
http://www.legalzoom.com/about-us/management-team.html#robertshapiro
Mark, good insight and agree wholeheartedly with your assessment of LLC and liability. While I’m not an attorney, I have been in a sole proprietorship, corporations of various configurations, and running buck naked as I am today. If you’re running solo, an LLC is pretty much the equivalent of a sole proprietorship in terms of liability.
Your article has prompted me to consult an attorney sooner rather than later to get my business structured to meet my needs and objectives.
Thanks!
Bill
Excellent — you should also consult your attorney about running naked – there are some public indecency ordinances that you probably need to consider….LOL
Rather a surprise on the legal issue Mark -that’s surprise spelled N-A-S-T-Y .
Caveats noted, but it seems that Branding and Taxes may be good reasons to incorporate but legal protection is not?
Totally agree — the liability protection (or lack thereof) really surprised me. Thus the article.
As for branding — I totally agree. This was my primary motivation (will discuss in a future article).
With regard to taxes — I am told by many that LLCs are not much tax help for individuals. But I have not gotten feedback from my tax pro about my situation. So, we shall see.
Thank you, Mark, for your LegalZoom testimonial. I appreciate you taking the time to create such a worthwhile post. Would you mind telling which package you purchased? Standard? Express Gold?
Your post is the first exploration of LLCs I have ever read in the many years of reading about LLCs that not once mentions the word “privacy”. You did mention “other reasons”. I’m wondering if your LLC is based in your neighboring State. 😉
Thanks again, Mark. Have a Great Day.
Patrick — my LLC is formed in Texas. I tool the standard package and added the option to have LZ get my EIN for me, and to be the official registrar for me. I did the latter to protect my home address (which is very easy to find in any case).
Great blog that you have here love the design and layout.
The quality of your information is second to none.
I will be back again soon
Mark McCulloch
Thanks, Mark. I appreciate the kind words.
Mark,
Thanks for the information on LLC’s. I’ve thought about forming one off and on for years but never have done it yet. Sounds to me like I don’t really need one based on your findings. I use very little money to run my business and if it won’t protect me in a lawsuit then no need. However, I am interested in hearing your findings on the tax side of things. Although sounds like Josh has gotten some advice on that and it wouldn’t help there either. Anyway, I appreciate it. Saved me some time and effort.
Trent
Just to be clear — I am not offering advice — your situation could be much different. However, given the information that I have, your decision sounds reasonable to me.
One thing that bugs me about this is that lawyers make money selling LLC setups. They are bound by a code of ethics, but it is still a conflict of interest. Since they are the only ones that really understand them, I find it hard to get an unbiased opinion on whether or not you need one.
Hi Mark
It seems to me (from a commonsense point of view) that there should be a difference between liability for actions connected with the company operations and those that are personal in nature (like insulting someone). I would expect that the limited liability would cover you if it were suggested that a product of yours had lost someone money.
Not sure if commonsense and the law often agree though!
Right — you are saying exactly what I thought. My understanding is that your common sense assumptions are incorrect.
Bottom line as I understand it — if your company harms someone and you are the only person in the company, it really means that you did the harm yourself. That means that you will be named in the suit, and the protection of your personal assets will be broken (easily as I understand it).
Mark,
Very interesting info and I’m looking forward to reading more about this topic in your blog.
I’m not an attorney nor am I am a CPA, but I do pay a tax attorney to do my taxes. Per my tax attorney, I need to make $10,000 per year or more from by business to realize any true tax savings by forming a LLC. Again, ask YOUR tax person for advice on your specific situation, but this is what I was told last year at tax time.
Also, a sole proprietor can apply for an EIN online. It’s very simple and only takes a few minutes.
Thanks again for the great info and a great blog.
-dc
Interesting — that is the first time that I have ever heard that number. Thanks for sharing that experience. Will be anxious to see what my tax guy (she is actually a gal) says.
The biggest reason I am thinking of forming an LLC is in order to get a Employee Identification Number. I want to join some affiliate programs but don’t like the idea of giving them my social security number. I would give them my company name and EIN.
Steve
Steve, I am pretty sure that it is possible to obtain an EIN as a sole proprietor. You might ask your Tax guy (maybe you did that already).
Thx for reply Mark. I didn’t know that. I will do some checking.
Steve
While I know this article means well, I think there are some misunderstandings about the roles and functions of insurance and corporations/LLCs. It’s a bit of a hot-button issue for me, and I started to put everything in a comment, but quickly rattled on so long that it became a blog article for me. You can find my article here:
http://www.peakpersonalfinance.com/llc-corporation-better-than-insurance/
Regards,
Rob
Rob — great article. Thanks for the comments — I really appreciate you taking the time to write an excellent response.
A few things — you are right, I do mean well. 🙂
Second, if I understand your point correctly, you are basically making the argument that since the LLC will provide some protection of personal assets in some situations, that there is no reason not to have one.
I agree.
My point here is that many people believe that if they form an LLC, that their assets are “protected” — and this is simply not the case. I think we agree on that.
The approach you recommend — LLC + Insurance — is exactly what I am doing, for exactly the reasons you state.
For the record, I have had a couple of lawyers that set up LLCs on a regular basis tell me that in my particular case (solo entrepreneur worried about blog-related damages) that LLC protection would be almost useless.
Thanks,
Mark
Hi Mark,
Yes, nothing can provide 100% protection all of the time, so LLC+Insurance is a good way to go.
While I can understand why some lawyers might feel that an LLC might not provide much protection for you. There is certainly less exposure for a blog about internet marketing that is mostly monetized with e-books, software and hosting services than with some other niches. However, the exposure that you might have may not be covered by most insurance policies either — so it’s good to look at those carefully.
However, how much an LLC can benefit an internet marketer really can depend on the web properties that a marketer/blogger owns. A blogger who sells their own “hard” products has more liability exposure than one who writes about fitness and occasionally links to fitness products — but both could get sued by someone injured by one of those products.
While you can’t avoid getting sued, if you could successfully have a court limit the suit to the LLC, that could also possibly prevent a lien going on your personal property during the time the litigation is pending (usually years) that could prevent you from selling your property or borrowing against it. And, for those who still have day jobs, being able to limit suits to the LLC can keep all of those distracting court filings from popping up when a prospective employer Googles your name. These aspects are usually overlooked by CPAs when they recommend against an LLC.
Kind of like insurance or a gun or a fire extinguisher — a person really doesn’t need corporate/LLC protection until they NEED it (and then you REALLY need it). And you may end up being surprised at how and why you get sued. In modern business times, anyone who really does any substantial business can plan on getting sued at least once.
So people have to talk with both attorneys and CPAs and then do their own risk-reward analysis. In many states, LLCs are cheap to form and require only a 1-2 page form to get started — an require much less paperwork than an S-corp or C-corp. In others, there can be a minimum yearly fee (some around $500, check with your State). Still, if a person is making any kind of real money online, that is a small price to pay for the extra protections and peace of mind.
Best,
Rob
just went to Irs.Gov and got an EIN issued in 5 minutes via the web site. Modern technology.
Steve
Now that is very cool!
Great detail, thanks Mark.
The laws “as I know them” are very similar in Australia. There are hefty fees involved in setting up a company here and the ongoing paperwork and level of information to be submitted regularly is significant.
Looking forward to what you find out regarding insurance.
I love the logo. 🙂
G’day Mark and all,
Like Michelle, I am an Aussie doing business on the internet, and I have been bombarded with well-meaning advice that I NEED to set up an LLC or Inc. in the US to protect myself and my assets from the possibility of legal action. I was, in fact, planning to do so in a couple of weeks, but now you are saying that as a sole employee of my company that I would not be covered from legal action anyway. That is scary!
As Michelle said, setting up company status in both countries is fairly expensive and time-consuming, so if there aren’t any real benefits to being an LLC then I might have to re-think the whole thing. Thanks for the info, Mark and Josh!
Terry
G’day again, Mark,
Just a quick heads-up to let you and the readers who are non-US citizens know that your affiliate link for LegalZoom won’t work outside the US. I keep getting an error message telling me that the offer is ‘not available in my area’.
Terry
Thanks — sorry about that. Not sure what the equivalent is in Oz.
I was told if you get sued and have an LLC, they can only take the money in the LLC. Thus you keep your LLC business account at a minimum at all times. I wish I knew if this was true or not but that is what I do.
Here is a message from Shawn Williamson via email
I’m at work, stucky behind a proxy server, so I wasn’t allowed to submit my comment to your discussion on forming an LLC.
Here was my comment:
– – –
I used to study real estate investing. I attended several presentations (some by lawyers, some not) on why to form an LLC. The more I found out, the more I learned you really need a good lawyer as soon as you can afford it.
Here’s two (of many) reasons:
How to protect your business from something you do outside of your business. Lets say you back into an nice old lady in a parking lot and she sues you for everything you have and wins. If you are the only “member” of your LLC, she can eventually “foreclose” on your membership interest and take over the company and everything it owns. The advice I got was to have a 2nd member in the company, even they only have a 1% interest. Why? Because if you own the whole company, you don’t need anyone else’s agreement to sell the company. If another person has to approve it, then sale is prevented. (Again, talk to an attorney, or hang out in real estate investor forums so you can be thoroughly confused).
As far as tax savings are concerned, unless you make a lot of money, there are no tax savings. The subchapter S tax method, for instance, saves you some taxes if you make more than what you (and the IRS) decide is a fair salary. (For example, you pay yourself as CEO of your company, $60,000 a year, but the company made $100,000. Subchapter S can help tax that extra $40,000 differently to save on self employment taxes.)
Dear Mark,
You are correct! Having an LLC at the end of your business name does make your business look a lot more impressive.
I run a single proprietor business right now. Am not sure if LLC’s apply here in the Philippines. But your post on LLC is very informative, at the least.
Jaime
I am not sure about PI, either. But, I am sure there is something similar available. Thanks for the comment.
Mark great post.. Have been thinking about setting up a LLC just for little extra peace of mind.. Your psot def gav me the kick to do it.
How was the process with Zoom?
Very very easy. The feature that I like was that they use a “setup wizard” approach to fill out your forms. As you answer, you can see how others have answered in the past.
Note that if you have them be the official document handler for your business (to avoid revealing your home address) that this will result in an extra fee. I did not think they did a good job of expaining that option (or the fee). So watch for that.
Otherwise, two thumbs up.
Very cool,, Thanks for the heads up Mark.
Thanks, for this nice post.