If you are already running an online business, or maybe you're thinking about running an online business, then a frequent issue that comes up this time of year that you might not even be aware of, is whether you should file your LLC now, or you should wait until January 2021.
This is an issue that I am dealing with right now personally, in my business.
Today, I'm going to talk with you about what I decided to do and why I decided to do it, and walk you through all the things that I considered in making my decision, step-by-step.
Ready? Let's do this.
So, if you're running an online business or you're thinking about starting an online business, then there's a lot of things that you probably want out of your business, and specifically with regard to the legal protections for your business.
You want to make sure that your personal assets are protected. You want to save as much as you possibly can in taxes at the end of the year. And you probably want to build a business that can stand alone on its own, without you running the day-to-day operations.
Am I right about some of those? At least I hope.
A great way to accomplish all three of those things is to start with the foundational element that is forming an LLC.
And in case you're wondering, I do recommend for almost every single one of my clients or people that call me to schedule a strategy call, I pretty much recommend an LLC in almost all situations.
There's a couple exceptions where maybe I'll say, “Well, let's hold off. You don't need an LLC right now.” But for the most part, an LLC is definitely the way to go.
But that's not to say that LLCs aren't without their drawbacks. And some of them, depending on the state that you live in, can be expensive. And that is something that you need to consider.
The expense associated with forming that LLC is one of the big reasons why a lot of people will give some serious pause to whether or not they need to set up their LLC now, or wait until January and file it in the following year.
Do You Really Need an LLC Right NOW?
There's a couple things that you need to be thinking about here when you're making this decision. The first is, you need an LLC, but do you really need an LLC?
And what do I mean by that?
Basically what I mean by that, is you've been operating your business as a sole proprietor, or maybe as a partnership with somebody else that you're doing business with, without that LLC in place for almost the entire year.
Depending on where you're at with your business, depending on how much revenue you've generated, depending on how complicated your business structure is, how many programs and software and product and different things like that that you've invested in, now might be a good time to form an LLC.
Or maybe it makes sense to wait until January.
But the other thing is, if you're at that point where you've done a lot with your business right now, and it's almost the end of the year, then what's another two weeks going to hurt to wait and file it in January?
And the reason I say that, well, we're going to get into some of the other reasons, but just so that's the first thing is, you need an LLC. But do you really need an LLC right now, like today?
Cost of Forming an LLC Now vs in January
Which leads us to the second issue, which is what is it going to cost to form that LLC today versus waiting to form that LLC in January?
And a lot of you might think, well, it probably isn't going to cost any different at all. Why would there be a difference in cost? Well, let me explain to you what I mean by that.
The big issue that you're going to need to contend with is the annual report, and different states, depending on where you live and where you're operating, will treat the annual report differently. And here are some of the ways that you might see an annual report treated in your state.
The first is, some states, they don't have an annual report at all. That's great. You don't have an annual report. You don't even have a fee that you have to pay. There's only a few states that do that.
If you live in one of those states, great. It probably doesn't make a difference whether you file your LLC now or wait until January.
But there are some other considerations which you're going to get to in a minute, but that'd be great. You don't have an annual report, nothing to worry about there.
Other states will make your annual report due as of the anniversary date that you filed your LLC. So, usually they make it a window. Sometimes it's a three-month window, sometimes it's a one-month window, sometimes it's a six-month window.
It just depends on the state you live in. And basically they say, okay, well you file your annual report basically in the month that you filed your LLC, the anniversary of that month, every single year ongoing.
So, if you were to file your LLC in November this year, then your next annual report would be due in November of next year.
Again, if you're in that type of situation, you still have the annual report fee that you're probably going to have to pay, but you're putting it off. And you're going to have to pay it after 12 months, regardless of whether you file your LLC today or in January.
The third type of situation that you might find yourself in with an LLC, is that you're going to have to pay some sort of information fee, or some sort of reporting fee, within 90 to 120 days of setting up that LLC.
Now the most notable of these is California, which used to impose a four-month annual franchise tax that would be due four months after you filed your LLC. And it's substantial, it's $800.
They recently changed the law because of COVID, and you've got a couple year reprieve from that requirement. But they still have the annual reporting fee that's going to be due in April.
But we're going to talk about that in a minute.
So, if you live in one of those states, New York is another one where you have to publish, then you have to file a publication notice within the newspaper, within, I believe, 90 days of when you file your LLC.
If you're in one of those states where you have some sort of requirement that's going to come due within 90 days. Now this might be in addition to your annual report, or this might be just in lieu of an annual report for your first year. It just really depends on the state and the rules where you live.
But that is another consideration. Again, if you're in one of those states, does it matter that you file your LLC now, or does it matter that you wait until next year?
It might not be that big of a difference, but that's another thing that you need to consider. And then, you get to what the majority of the states are, and that is that they ask for an annual report at the same time every single year. ‘
So, if you file your LLC in November of this year or December of this year, an annual reporting fee is going to be due next let's say January, February, March, or April. Sometime within that first four-month window of the year.
Different states have different requirements, but that's pretty typical because it coincides when people do their taxes, it makes a lot of sense, it's easy for people to remember.
Like where I live in North Carolina, I believe the annual reporting fee is due in either March or April. And so, if I file my LLC this year, then the annual reporting fee is due in April of next year.
So, that's the first thing you just need to be aware of, is if you were to file your LLC today, will that trigger an annual reporting fee in April, March, whenever of next year? And for me, for my personal situation, it would.
So the difference between setting that LLC up today, or waiting and having the LLC become effective on January 1st of next year, is the fact that I would not need to file an annual report for 2022 if I make the LLC effective on January 1st, 2022.
But if I file the LLC and have it effective in 2021, then I do need to pay that annual report next year.
So that's a big difference and potentially could save you several hundred dollars, depending on what the annual reporting fee is in your state.
Which leads us to the next issue.
What exactly is the annual report fee in your state? And I just pulled up, I've got a spreadsheet of the requirements for every single state.
You can actually purchase this if you become a member of our OB Foundation's membership community. This actually is part of the Lock it Down legal protection system. And I include this spreadsheet as part of that course.
Filing Fees for Some States
So I have a link to all the state filing fees, and just in general, the filing fees vary from the highest is obviously going to be California.
- California – $800
- Massachusetts – $500
- Delaware – $300
- Nevada – $350
- Maryland – $300
- Utah – $20
- Wisconsin – $25
In New Mexico, no annual report at all is due. I don't believe Ohio is also no annual report is due at all.
So it really depends on the state.
There's a huge range in what you might pay for an annual report fee, and if you have to file that annual report at all. So you really need to check the rules in your state.
Again, here is the link to get access to the membership community, if that's something that you'd be interested in joining. And you'll get access to this spreadsheet.
Tax Benefits of Filing
Which leads us to the fourth major consideration, and that is the tax benefits of filing.
So do you need to set up that S corporation for 2021?
If you do need to set up an S corporation for 2021, and you're going to need to pay yourself a payroll this year, then you need to get that LLC filed.
Hindsight's 20/20, but honestly, you probably should have filed your LLC way earlier in the year if you're going to do that S corporation filing now.
We're going to talk about S corporations again next week, because this is about the time of year when you really need to start thinking about whether or not you need that S corp for the year. Because you can't retroactively pay yourself a payroll for the year.
You need to get that done before December 31st, and you need to have that S corp filed before you can run the payroll.
Related Resource: To sign up with a payroll service I use and love, click here (affiliate link).
So this is a really important thing that you need to consider, and it could potentially cost you many thousands of dollars in taxes next year. Well, the taxes would be due for 2021, but you pay them in 2022.
So if you're in a situation where maybe you can delay some of your income till 2022, it's harder to do with an online business if you're in a service-based business where people give you checks or you can say, listen, can you hold off and pay me in January instead of now.
That makes it a little bit easier.
But for online business where you're selling something online and it's evergreen and people can just they pay you when they pay you, it's harder to kind of stagger that income.
However, it is possible.
And one of the ways to do that is you could delay a launch. You could offer a free trial to a membership or something like that, where people sign up now, but they don't pay till January.
All right. So my situation, a lot of people don't know this, but I'm actually running three businesses right now.
I have my law firm, which is exactly what it sounds like. It's a law firm. We help online businesses get their legal house in order, and we do all sorts of things for them.
So that's the second business I'm running, and then the third business I'm running is my courses and my membership. Where we offer a monthly membership or an annual membership, if you want to save some money. So I've got all three of these businesses, and they're being run under the corporate umbrella of my law firm.
I had talked to my accountant about this and what we should be doing in terms of splitting these other businesses off.
I mean, when I started the law firm, I had no idea that I was going to be running a template store and an online membership and different things like that. That wasn't on the radar.
So everything was started under my umbrella of the corporate entity.
In 2020, when the pandemic hit, that was when things started to really cook, if you will, for the other businesses. That's when things started to get going.
I originally started with a course, The Online Business Legal Toolkit, and then started building some templates that I sold on my website. Then the template store was launched this past September. And now we've transitioned all the courses and the membership over to OB Foundations. And it's become much more than just legal training.
Now it's online-business training as well. And so these other business are really starting to take on a life of their own, and it's really time to pull them out and set them up as separate LLCs.
I thought about doing this in the middle of the year, and that's something we had talked about, like I said, with my accountant, doing it in the middle of the year, but ultimately his advice was to do it as of September 30th.
I wasn't really comfortable with that. And the reason for that, the big reason, was because it's going to make everything confusing if we switch everything over in the middle of the year, for income, for taxes, for all that kind of stuff.
Because now all of a sudden we're going to be filing two separate tax returns for these businesses, one that would be through January through September 30th and then another LLC return for the rest of the year. It was just going to get confusing. I wasn't quite sure about that.
We're also talking about switching the S corporation status from having an S corp for the law firm and then also having an S corp for the other LLC, and a lot of tax returns. I live in a state where we also have to file a state tax return.
If you consider all those things, then you also consider the fact that if, since we're within 90 days to the end of the year in North Carolina, what you can do is you can file the LLC right now.
Related Resource: To start your own LLC, click here (affiliate link).
You can make it effective January 1st, and then you don't have to pay that annual reporting fee next April.
What is my ultimate decision? What did I decide? Well, if it isn't already crystal clear to you, I decided that I'm going to hold off, and I'm going to file the LLC and have it become effective on January 1st.
I'm going to start with a separate LLC for the template store and the membership and courses. And that's all going to be under one LLC. And then we've got the law firm separate. That makes it nice and easy.
We've got two businesses, one for non-legal stuff, and one for legal advice and guidance. So one's going to be a professional corporation, and one is going to be just a regular LLC. But we probably will make that S corp election as well.
Different things like that are all going to need to be changed over to the new LLC, and we'll do that all as of midnight on December 31st. God, it's going to be a pain in the butt.
This is what I tell people: if you're going to file an LLC, you might as well do it early. I wish I'd done it before, but it's too late now.
So anyway, if you would like to learn more about how to set up an LLC the right way, click right here. There's another video I did on how to set up your LLC property.