Thinking about starting an LLC for your online business? Here are four reasons you may need one.
Hi, my name is Jim Hart. I'm the founding attorney here at Hawthorne Law. I'm also the creator of the Lock It Down Legal Protection System, where we turn worried entrepreneurs into legally legit CEOs.
LLCs are one of the most popular business entities in the United States today. Hundreds of thousands, if not millions, of new LLCs are started each and every year in the United States.
But the question really is why? Why is an LLC so popular for an online business?
You've got a bunch of other options. You can be a sole proprietor. You could be a partnership. Or you could form a corporation, which is actually what I did for my law firm when I was first getting started. Or you've got this sexy new little number called the LLC.
Well, if you're a business owner, particularly a course creator, a coach, maybe you're running an affiliate website or a blog or something like that, or maybe you're on social media. Then you probably want to make sure that all of your personal assets are protected from your business debts.
Related Resource: If you need a contract for your online business, check out our legal templates here.
And not only that, you probably also want to make sure that all of your business stuff is protected from your personal debts. Last but not least, you probably also want to make sure that you're paying the least amount that you're legally required to pay in taxes each year.
And not only that, but you probably also want to make sure whatever business you're running is easy to run and easy to maintain, and that you're not going to have any issues moving forward into the future with corporate formalities and things of that sort.
Am I right about all those things? Does that make sense?
An LLC can help you accomplish all four of those things and I'm about to tell you why.
Now, as I started talking about before, whether you're forming an LLC or a corporation or a sole proprietorship or a partnership, all of these business entities have their own benefits and drawbacks that are frankly beyond the scope of this post.
But what I do want to share with you today are those four things that I just mentioned in terms of the main benefits of forming an LLC and how they're going to apply to you and your online business.
How Does an LLC Protect Your Personal Assets?
Let's start with how an LLC protects your personal assets. Basically the way it does that is that when you form that LLC, you get the protection of what is called the Corporate Veil. It's kind of like a bubble that sits over all of your personal assets and everything that's going on within the business kind of stays within that bubble.
Anything going on outside the bubble is what's going on in your personal life. You can do it vice versa. If you want to have your personal life in the bubble, that's fine, do that. If you want to have the business life outside the bubble, that's cool, too.
What's important to know about this is that there's this veil of protection that separates your business from your personal and nothing is getting through that.
And the nice thing about an LLC is that you can do this with very little formality. As long as you don't make some serious mistakes in the formation of your LLC and in how you run the LLC, then you can keep up that Corporate Veil.
That means if your business gets sued, if somebody gets hurt by one of your products, or you commit some sort of malpractice and somebody wants to sue your business, then they're not going to get your personal assets, which could include your bank accounts, include your house, it could include your car or any other real estate you might own or investments you might own or anything like that.
Nobody's going to be able to get at that stuff because of what is called the Corporate Veil.
Now, why is this important? It's important because if you've set up your business and you stay a partnership or a sole proprietorship, which are the default entities if you don't do anything else, you do not get the benefit of that limited liability protection.
Related Resource: Not sure which entity to choose for your business? Read this post.
That's why I tell so many people who come to me wanting to set up their LLC and they say, “Should I set up an LLC?”
The first question I ask them is, “Well, do you have stuff to protect because if you don't have anything to protect then maybe a sole proprietorship or a partnership is going to be easier and better for you, at least initially.”
You can always set up an LLC later. But if you do have assets to protect, then an LLC is going to be an ideal choice for that reason.
An LLC Protects Your Business from Your Personal Debts
So, let's say, you get into trouble and you get a lot of credit card debt in your personal life. Or let's say, you're riding down the road and you hit somebody with your car and you get sued for that. And somebody gets injured and they come after you and they want to sue you personally.
Or let's say, somebody comes over to your house and you didn't properly clear the walk. They slipped and fell on a bunch of ice and they got injured and they want to sue you under your homeowners policy.
In any of those type of situations, if you, for some reason, were to get sued on a personal level, because businesses aren't the only things that get sued in this world, people do get sued as well, then your business is actually protected from those personal debts.
That's a really important thing to understand. There are some exceptions to this that are kind of beyond the scope of this post, but I think it's important to understand that that is one thing that an LLC will give you. It will give you that protection, where, if you get sued, personally, people are not going to be able to get at your business assets.
Related Resource: If you need advice from a lawyer, book your strategy call now!
All they can get is what is called a Charging Order. And it's different in every state. The way it's applied is different in every state. And so you need to check the rules in the state where you form your LLC, which typically should be the state that you live in and are operating your business from, but that's a whole other issue as well. But check and see how they apply the Charging Order.
Now, what that means is the only way people will be able to get assets from the LLC is if you take money out of the LLC and put it into your personal accounts. That's what the Charging Order is, but they can't force you to do that. In that regard, they can't take over your membership interest in the business and then liquidate the LLC.
Obviously we already know that's not going to be the case if you have a sole proprietorship or a partnership, because your personal assets and your business assets, there really is no difference between the two.
If you have a corporation and somebody sues to get at your corporate assets, they can take what are called the stock in the corporation. Then they can become a controlling member and then they could liquidate your corporation if you have a corporation, which is different than the way it could be handled if you are an LLC.
Related Resource: If you want to know more about the difference between a corporation and an LLC, read this post.
Anyway, that's a pretty cool little benefit of forming an LLC for an online business that a lot of people are not aware of.
The Tax Savings
The third major benefit of forming an LLC for your online business is the tax savings.
This is probably the biggest reason to set up an LLC if you don't have any other assets to protect. And that is that you can have tremendous tax savings with an LLC. When you form an LLC, you can make what is called an S Corp election that I've talked about in other videos.
You cannot make that S Corp election if you are a sole proprietorship, but you can, if you're an LLC or a corporation. You can elect to be taxed as S Corporation. That can save you literally thousands of dollars on your taxes each year, assuming you pay yourself a reasonable salary and you set everything up correctly.
An LLC is Incredibly Easy to Run and Operate
You need to have a valid operating agreement.
As long as you have a valid operating agreement, you keep your business assets and accounts separate and apart from your personal assets, and you keep your business expenses in the business accounts, and you keep your personal assets and expenses in the personal accounts, you don't co-mingle.
Follow all those formalities, you file your paperwork every year, then you should be okay and you're not going to have any problems. And you're not going to run the risk that somebody could pierce that Corporate Veil.
Now I've done other videos on the major mistakes that I see people make running their LLCs. And if you'd like to learn more about those mistakes, I'm going to put a video right there. Make sure you check it out