Today. I want to talk to you about the benefits of starting an LLC for your online business and why I think LLC's are a great choice when you are just getting started.
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As a lawyer, I conduct a lot of legal strategy calls with potential clients, and one of the most common questions I get is how and when someone should start an LLC for their business. Specifically, people want to know what are the benefits of starting an LLC for their business.
So today I want to talk to you about the most frequently cited LLC benefits, and why LLCs are so popular for small businesses and online businesses in particular. Then we will also address how you can set up an LLC quickly and easily if that's the road you should choose to follow.
So let's start by talking about why LLCs are so popular. And as far as I'm concerned, there's four main reasons why LLCs are so popular.
Then, I'm going to talk about the three different ways that you can go about setting up an LLC for your small business.
So let's start with the four main reasons why LLCs are so popular with small businesses, and as I said, online businesses in particular.
The Benefits of Starting an LLC #1 – Easy Setup
The first benefit of starting an LLC is that they're extremely easy to set up. And actually right now I'm working on a spreadsheet that provides state-by-state information on how to set up your LLC quickly and easily. Click here to learn more.
So that is the first reason why they're so popular is they're just very easy to set up. Typically, you have to file what are called articles of organization in the state where you reside. I do recommend that you file the LLC in the state where you reside. I don't recommend filing an LLC in Wyoming if you live in Florida.
It's interesting, as I say that, quick side note, I had a strategy call with a client a couple weeks ago. This is a great case of someone who's trying to do more than is really necessary under the situation. And basically what they're trying to do is they're trying to transfer some assets.
The problem is that they set up an LLC in Wyoming, I believe, to do that. And because of Wyoming's privacy laws, which is why a lot of people want to set up their LLC in Wyoming, they can't actually prove that they own the company. And so they're running into roadblocks in terms of how do they transfer the company they want to transfer into that Wyoming LLC because they can't prove that they actually own the Wyoming LLC!!
It just goes back to what I've said all along on the channel, when you're setting up a business form it in the state where you live.
If you live in Wyoming and you want to set up an LLC in Wyoming, that's fine. But if you live anywhere else, you set up the LLC in the state where you live, it's just the easiest thing to do, and then you don't have to worry about problems like that, I guess, unless you live in Wyoming, in which case you're still going to have those privacy issues.
So that's reason number one benefit of starting an LLC is that they are extremely easy to set up.
Second benefit – LLC's are much more flexible that Corporations
Reason number two is that when you compare an LLC to, let's say, a corporation, which is the other main entity that people would form, an LLC has a lot fewer corporate formalities to ensure that you are able to protect what's called the corporate veil.
So a lot of times when you're setting up a corporation, there's mandatory language in the statutes. Like, you shall do this and you shall do that, so you have to do things a certain way.
And if you don't do things, if you run afoul of the corporate rules in your state, then you run the risk of having that corporate veil pierced, which is where people or creditors or plaintiffs or whoever can get at your personal assets.
With an LLC, the statutes are much more permissive. And by that, I mean that instead of the language shall, which is basically mandatory language, you have to do things that certain way. With the LLCs, a lot of times the statutes say things like ‘may'.
So when you use ‘may' in a statute, it typically indicates it is permissive, means you can do it, you can not do it. It's really up to you. It's not mandatory. Shall is mandatory, may means not mandatory.
So that's way more information than you need to know, but that's number two. That's the second reason is that the statutes are just written in a much more friendly way in terms of what you can do and what you don't need to do when you have your LLC.
Hopefully, that makes sense. So basically you have a lot fewer legal formalities with an LLC than you would have with a corporation. Although, and even though it is not required, I do recommend, highly recommend, you have an operating agreement in place.
LLC's provide Significant Tax Advantages
So the third reason why I typically will recommend LLCs for my small business clients and for my online business clients is just because of the tax flexibility that comes with it. When you set up an LLC, you can elect how you want to be taxed.
So if you want to be taxed as a sole proprietor, you can be taxed as a sole proprietor. If you want to be taxed as a partnership, that's fair game. If you want to elect S corp tax status, you can do that. Or if you want to be a C corporation, not sure why you would do that, but you can do that as well.
So there's a lot of flexibility in what you can do in terms of your taxes with an LLC.
Related Resource: Here is a video I made on how to file taxes as a Single Member LLC.
LLC's are easy to maintain
And then the fourth reason why I typically recommend LLCs is that LLCs in general are just very easy to maintain. Typically, you're going to file an annual report with the state where you live with a filing fee. That's pretty much it.
In most states, you are not required to have an annual meeting. Although, if it's in your operating agreement, you should. There's no requirement that you keep corporate minutes. Although again, if it's in your operating agreement, you need to follow what's in the operating agreement, but you can tailor that to what you want to do and what is best for your particular situation.
For all of these reasons, LLCs are in most situations going to be preferable for your online business.
How do you set up an LLC?
This is, again, going back to the very beginning, this is another question that a lot of people ask me is, “How do I set up an LLC? What do I need to do to make sure my business is legally protected?” And there's really three different ways that you can set up an LLC.
The first option is that you can do it yourself. I call that the DIY method. Makes sense, you're doing it yourself. That's fine. You can do that. There's pros and cons to that. We're going to talk about that here in a second.
The second method is that you can use a service. There are lots of companies out there that will set up an LLC for you for a fee. And we'll talk about the pros and cons of that.
Then the third method is to actually hire a lawyer to do it for you. And we'll talk about that as well.
How to Set up an LLC: DIY LLC
So let's start with the DIY method and who should and shouldn't do the DIY method. Now, the DIY method is obviously going to be the most cost-effective, well, depending on how you define cost. There is a time cost involved in doing it yourself.
Related resource: Click here to set up an LLC with Hawthorn Law
Even though you don't have to pay somebody else to do it for you, you're saving that money, you do have to go about educating yourself as to the rules of your state, you'll still have to pay a filing fee in your state, and you've got to make sure you fill out all the paperwork correctly, do a name search correctly and all those type of things.
You have to do all that on your own. Is it a lot of work?
No, but there is some time invested. It's probably going to take you maybe an afternoon to get it all done from start to finish, and that's if you don't mess anything up along the way.
Some states are really easy. It's as simple as going online, filling out some forms online, assuming you fill them out correctly, and submitting the forms and paying a fee, and you're good. Other states are a little bit more cumbersome.
I was researching Alabama this morning, and I noticed that in Alabama, you have to reserve the name before you file the LLC paperwork. So there's a whole process involved. It just is going to depend on your state and where you live and how complex the rules.
Other states like New York, actually, you have to publish in a newspaper that the articles of organization have been filed, and so you have to put a publication out there. That's expensive.
Again, can you do it yourself? Yes, you can do it yourself, but there are issues that come along with that. And regardless of whether or not you're going to do it yourself or not, I still do recommend for most online businesses that you do set up a corporate registered agent. So even if you do it yourself, you're going to have that fee associated with setting it all up.
How to Set up an LLC: Using a Service
The second option is that you can use a service. And by using a service, this is the link of the service that I recommend. And it's really nice because they have a package where they will set up your entire LLC for you for free. There's no fee to do it. And they'll actually include the first year of registered agent.
So when using a service, like I recommend, it's going to be much easier. You're going to fill out some information online. There's typically going to be tutorials and instructions on what you need to do and what you need to provide.
And if, for example, you choose a name that's already taken, then they'll let you know that so that you don't run the risk of filing something and then finding out later on down the road that your LLC is invalid. Now, like I said, they're going to charge you a fee for the service. Typically, it's not a whole lot.
As I mentioned with the program that I recommend, there's actually, one of their packages is zero fees. And they will include the first year of registered agent for you. And so that is something that you can do. That is a choice.
Frankly, if it's between doing it yourself and using a service, as long as you're careful about the upsells, which is where a lot of these services will get you, they assume that there's going to be a certain number of people that are going to go through and use their free package, but then they also know that there's some people that are going to go through and they're going to upsell to the most expensive.
And before you know it, you're going to be paying like a thousand dollars just to set up your LLC. As long as you're careful about the upsells and making sure that you're not purchasing something that you don't actually need, then one of these services actually might be a great deal for you.
A lot of times, they may throw in an operating agreement template, which that's usually going to be an additional fee on top of everything else. They may provide you with your EIN number. Although, again, this is something that if you really truly are a DIYer, that's something that you can do on your own for free. It doesn't take too much time.
Although, I will say I helped a client walk through this a couple of weeks ago. There's a lot of questions and some of them can be a little tricky.
Set up an LLC Using a Lawyer
The third option is that you can actually use a lawyer. And the benefit of using a lawyer is you've got somebody you can talk to, you can ask them questions, you can make sure that an LLC is actually appropriate in your situation. You can ask them legal advice.
If you're hiring a lawyer to do this, they should be able to give you legal advice about you do and don't need to do with regards to your LLC. When people hire me to do this, I give them a four or five-page letter that gives them a list of all the things they need to do to make sure that they are not running afoul of any rules and that they're setting up their business the right way from the very beginning, so there's little things like that that can be thrown in.
Now, when you're hiring a lawyer, you have to understand what you're hiring them to do. Are they just setting up the LLC for you, or are you hiring them for more substantive legal advice?
If you're hiring them for more substantive legal advice, the fees can get expensive pretty quickly. So if they're drafting a custom operating agreement, for example, that's going to be substantially more expensive than if they're giving you a template, an operating agreement.
If you are purchasing an annual maintenance plan, it's going to be more expensive than if they're just setting up the LLC for you. So those are things that you need to watch out for.
The nice thing about hiring a lawyer is you know it's going to get done the right way. If there are any mistakes and they do something wrong along the way, then they're presumably going to fix it for you because as lawyers, that's kind of the duty that we're held to.
If we make a mistake, we've got to own up to that and fix it for our clients.
Now, one thing you need to watch out with with lawyers is a lot of lawyers are only able to serve as a registered agent in the state where the lawyer has their office and where they're licensed. Like my office, for example, I have an arrangement with a third party where I can serve as a registered agent in all 50 states.
So that's a special arrangement. A lot of lawyers don't have that arrangement in place, so you do need to ask about that, especially if you're from out of state. Some lawyers are able to do out-of-state LLCs, like we are able to do out-of-state LLCs. Some lawyers are not.
The other thing about that is a lawyer can't give advice on any state where they're not licensed. So for example, if somebody hires my firm to do an LLC and they're out of state, I can't give any legal advice on the state where they live if I'm not licensed there.
I can set up an LLC, but I can't give legal advice. And so that's something that's important to understand. If you need state-specific legal advice in the state where you live, you need to make sure you talk to a lawyer in that jurisdiction and get advice from a lawyer where you live.
Which Method I Would Recommend
I did not explain to you what choice I would use. So I think it's important to understand your choices. You can do it yourself, you can hire a service, or you can go to a lawyer.
I will be honest, if I was doing this myself, (and I am very competent, I can do these things in my sleep). I would probably go with a service like Incfile that I talked about today. And the reason why I wouldn't do it myself and instead I would go to a service like Incfile is because all they're charging you for is that filing fee for the state where you're in.
They're going to file everything the right way, and you're going to get your articles of organization filed, and they're going to provide that registered agent service for the first year for free. So that's really saving you probably 100, 150 bucks right off the bat there.
You're saving that money off the first year of service for the registered agent. So it is actually really a great deal. You're going to need to get your own operating agreement and your EIN number and different things like that, but honestly, you could upgrade to their gold package for $149 and they're going to give you all that stuff too.
So in terms of which service I would use, I would probably do it with a service. Now, if you need more hand-holding and you're not comfortable doing it yourself, and you need more advice, then you might want to go with hiring a lawyer to do this for you because you can ask them a lot of questions
But if you're competent and you think you know what you're doing, and that you are good to set this up on your own, and you've got to look at doing a DIY versus like an Incfile, I would definitely go with Incfile. If you sign up through my affiliate link, I'll get a commission off that. I think it's a no-brainer, honestly, and I wouldn't recommend it if I didn't think it was a good deal.
If you like what I'm talking about here, here's another video I did that talks about more of the differences between LLCs and corporations.