If you’re starting a small business, generally the first step is setting up the legal structure of your business. There are several options, even if you’re running a solo operation, which can get confusing. Generally, a sole proprietorship (meaning a company owned by just one person who does all or most of the work on the business) will choose between remaining a sole proprietorship, which requires no paperwork at all, and an LLC.
But is it worth it to create an LLC? Do you have to? Let’s talk about what an LLC does and whether it’s worth filing the paperwork. (And paying the fees!)
What is an LLC, and what are its benefits?
LLC stands for “limited liability company,” which is a business structure that combines the pass-through taxation of a sole protectorship with the limited liability of a corporation. It’s a popular choice for small business structures because it provides some protection without the complexities of a full corporation.
The main benefits of creating an LLC include:
- Liability protection: An LLC protects your personal assets by separating your business and personal assets. For example, if your business is sued, your personal savings wouldn’t be impacted. Also, if you take on business debt through a business loan or credit card, you won’t be held personally liable for those debts.
- Tax flexibility: By default, LLCs are considered “pass-through entities,” which means profits and losses are reported on your personal income tax form. However, they can also be taxed as an S corporation or C corporation, which can help reduce self-employment taxes.
- Credibility: For clients and customers, doing business with a company with “LLC” after the name might signal that you’re a legitimate, established company. If most of your competitors are also LLCs, it may help you land more contracts.
If you plan to scale your business and bring on partners later, those steps are easier if your business is an LLC. LLCs’ flexible structure allows you to issue shares of ownership to investors or partners. (Note: you cannot issue shares or stocks as an LLC.)
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When is creating an LLC not worth it?
While there are plenty of advantages to creating an LLC, they aren’t the right fit for every business. If your company is low-risk, it might not be worth the paperwork. For example, I’ve never set up an LLC for my business as a writer and content marketer. My company is just my computer and me — I don’t have many overhead costs, and I don’t have a physical business location where someone might trip and fall.
While the decision to create an LLC is a personal one, here are a few signs sticking to a sole proprietorship might make more sense:
- Your business is low-risk: If there is little chance of legal action, debt, or accidents, the cost and effort of setting up an LLC might not be worth it. If you don’t have a physical location or sell products, a sole proprietorship may be sufficient.
- You want to minimize paperwork: The process to set up an LLC varies by state, but it does require creating the LLC and filing annual reports. You may also need to pay a fee and set up a separate business checking account.
- Your customers don’t care: If your customers don’t care or want the LLC, it might not be worth the effort. Most of my customers want to work one on one with writers. Setting up an LLC would likely hurt my business because they would assume I am an agency that farms my work out to other writers.
Sole proprietorship vs. LLC: Which is right for you?
The decision to form an LLC is a personal one that depends on your business goals, overall risk level, and the amount of time you’re willing to invest in your business.
In general, if you are a freelancer or digital content creator without a physical location and primarily work alone, you may not need the protection of an LLC. If you have a side hustle, it also might make more sense to stick with sole proprietorship, at least for now. If you are concerned about liability, consider purchasing business insurance to cover any legal actions against your business.
If your business involves selling physical products, operating a physical location, or hiring employees, creating an LLC might make more sense. You’re more likely to want legal protection, and having an LLC shows professionalism.
Before deciding if an LLC is right for you, think about your business’s overall setup, long-term goals, and how much time and money you’re willing to invest in legal structure. Still not sure? Consider setting up a consultation with a business or financial advisor for more advice.
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