Forming An LLC for Your Online Business

Are you thinking about forming an LLC for your online business? Today, I want to share with you the story of an online entrepreneur and we're going to just call him, Joe. Maybe you can relate?

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Why Joe needed to Form an LLC…

Joe had a nice little business. He was selling products as an affiliate. Many of you can probably relate to what Joe was doing. He was operating as a sole proprietor but as the business continued to grow, he decided to bite the bullet and form his LLC. The reason Joe did this was because he wanted to protect his business in the event that he might get sued for something. He felt like an LLC was the best way to do that.

So how many of you can relate so far to what I'm talking about? Hands up, anyone? Joe was a pretty smart guy. He kind of knew intuitively what he needed to do to protect his business, not like the rest of us.

Joe decided that he didn't really need to talk to a lawyer because, to be honest, there's a lot of free information out there on the internet. He figured, well, might as well save a couple of hundred bucks and just file the LLC myself. Why not? So, that's what Joe did. He went to a secretary of state's website, he downloaded some forms and he filled them out on his own. He re-uploaded them, paid the filing fees and filed his LLC on his own.

Great job, right?

Now, while Joe was off trying to play lawyer for his own business, his business was actually doing quite well, it was continuing to grow, bringing in revenue, bring him money, his client base and customer base was growing.

I mean, things are going pretty good for Joe. He was pretty excited about the future of his newly formed company. Who knew that making money online can be so easy as an affiliate? But unbeknownst to Joe, some of the products that he was pushing as an affiliate, were actually tainted.

One of the products that Joe was promoting were nutritional supplements. Some of the people that have bought products through Joe's website, were actually getting pretty sick because they were using these products. Now, this wasn't initially a problem for Joe, but it did become a problem for Joe because enough people got sick and the lawyers got involved and a class-action lawsuit was actually filed.

Those lawyers that were representing the plaintiffs in that class-action lawsuit decided that they wanted to sue anyone and everyone that had anything to do with those products. Guess who that included? Our hero, Joe. This was a problem for Joe.

Starting an LLC on Your Own Might Be Problematic

You see, Joe was on vacation in Florida, enjoying frosty adult beverages on the beach when this lawsuit got filed. When he filed his LLC paperwork, he actually never filed a proper registered agent. So he listed himself as the registered agent at his home address. Since he was in Florida, he never got served the papers.

Actually, that's not true. He did finally find out about the lawsuit and that was when the mailman delivered the default judgment against him a couple months later.

In addition to this, Joe never completed an operating agreement for the business. So with this judgment in hand, the lawyers for the plaintiffs started digging around and asking about Joe's personal assets. Eventually they were able to do what's called piercing the corporate veil and actually get at Joe's financial assets, including his bank accounts, car, home, financial accounts, all that kind of stuff.

Funny, you should mention bank accounts. You see that was another problem for Joe. He never set up his business bank account. All the transactions having to do with his business were actually being done through Joe's personal bank account. That means the money that came in from his affiliates, all the vendors he was paying, all that type of stuff was done with personal funds.

So again, this wasn't initially a problem. It was actually really easy for Joe, but it did become a problem because now that Joe was in the public eye as a result of this lawsuit, his name caught the attention of the IRS. So as I was saying, the IRS got involved, decided they wanted to go back and audit some of Joe's prior tax returns. Meaningless to say because of all this co-mingling of funds, that was a big problem for Joe. They disallowed a lot of his deductions. This caused additional taxes, interest penalties and all sorts of problems for Joe.

So now Joe's out of business, homeless, running out of money. So, he did what anyone would do in that situation. He's a consummate entrepreneur. He decided to start over.

Forming an LLC the Right Way

But this time Joe did it the smart way. He decided he wanted to start a consulting business to teach other entrepreneurs about the problems that he had had and the mistakes he had made when he first started his own online business. This time Joe got a lawyer involved early in the process. He scheduled a consult with a lawyer to ask questions, to figure out what he needed to do to make sure his business was not only legally protected, but he also wanted to make sure that this, what had happened to him previously, would never happen to him ever again.

Not only this make Joe feel more legitimate as an entrepreneur, but it also took his business to an entirely new level because now he just felt more professional and more established as a business.

So here's what Joe did. He used a lawyer to help get his LLC, get Proper EIN number, set up his business bank accounts, get insurance and do everything else you need to do to make sure that his business was actually legally protected. He filed trademarks to protect his brand and make sure nobody could steal his intellectual property.

This also gave an added sense of value to the business because now as he continued to grow his business, he could license his intellectual property to other entrepreneurs so they could use it to help spread his message to even more people. He purchased liability insurance to protect him from lawsuits. He used a lawyer to draw up contracts that he could use with independent contractors, clients and other vendors, in case he needed them.

Honestly, Joe was on his way. A few years later, Joe was back on top of the world. A larger company approached him. They wanted to purchase his new enterprise, which he sold for a nice payout. This was made possible in part because of the structures and systems and legal protections that Joe had put in place from the very beginning with his business.

So what's the moral of this story?

The moral of the story is that when you're just getting started as an online business, it's really easy to sweep all these legal issues under the rug.

To say, “I don't need a lawyer.”

“I don't need to worry about this.”

“I can do it myself, no problems.”

But what you forget about is that someday you're going to grow and assuming you're successful, continue to build your business. The more you grow, the more important it is that you have these legal protections in place. If you don't protect yourself from the very beginning, it becomes much easier to just ignore these things for as long as you're doing business. Because if you ignore them at the beginning, things get easy. You start to grow, you get busy with other things and you just continue to neglect all these legal issues.

So don't be like Joe, talk to a lawyer about the things you need to do to protect your business from the very beginning as you start up your own online business. If you're interested in learning more about LLCs and other things you need to do is your starting up your business. Here's another video right here that can teach you more.

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LEGAL DISCLAIMERS

Hawthorn Law is a Document Filing Service and CANNOT provide you with any legal or financial advice. The information provided on this website is designed to provide information in regards to the legal aspects of online business. However, it is presented with the understanding that Hawthorn Law is not engaged in rendering legal, accounting or other professional services. If legal advice or other professional assistance is required, the services of a licensed attorney, tax professional or financial advisor should be sought.