Today I'm going to help you decide whether or not you need to start an LLC for your online business.
Spoiler alert. While I do think that starting an LLC is the right decision for MOST online businesses, there is one reason that I think that you should not start an LLC for your business and make sure you stay to the end of today's video.
I'm going to share with you that exact reason.
I want to talk to you about why I love LLCs for online business. Why I think that most online businesses should have an LLC. And how my thoughts on this issue have actually changed quite a bit over the course of the last several years.
So if you look back through the videos on my Youtube channel, what you'll see is that when I was talking about LLCs maybe a year or two ago, I used to tell people when they were just getting started with their online business, that they really didn't need an LLC.
At least they didn't need an LLC until they had some revenue and they certainly didn't need an LLC if they didn't have assets that they needed to protect. Because the whole point of starting an LLC is because you need that limited liability that an LLC provides.
It's called a limited liability company for a reason.
So if you don't have any assets and you don't have any revenue and you don't have anything to protect, and you're not in a high risk business, then you probably didn't need an LLC. At least that was my rationale when I was explaining this to people a year or two ago.
I don't necessarily agree with my own advice from a year or two ago anymore. I don't think that's right.
My perspective on this has changed obviously quite a bit. I think now, I believe now that having an LLC is one of the most important first steps that somebody can make when they're starting their business. And there are a couple of reasons why I feel this way.
Starting an LLC When You're Just Getting Started is Easier
The number one reason is that it is easier to start an LLC when you're just getting started with your online business than if you've been in business for nine months or a year.
Because see what happens over the course of that first nine months or a year, you might not have any revenue when you're first starting out. But after nine months, a year, 15 months, hopefully by then your business will have some revenue and will have some assets and you'll have some clients maybe, and you'll have contracts in place and different things like that.
Related Resource: Speaking of contracts, if you need one for your online business. Click here.
And if you wait to set up your LLC until a year from now, when you've got, like I said, contracts, bank accounts, money coming in, clients that you're dealing with, all those types of things, it is a lot harder to unravel all that and transfer it over into an LLC than it is if you just start the LLC now at the very beginning.
I can tell you this from personal experience, because just to give you some context into what I mean by this.
So I've got my law firm. I've had my law firm for 10 years. My law firm is my main business entity. It's actually a professional association, which is a type of corporation.
As the law firm grew, I started to build Hawthorn Law as a DBA, as part of the law firm. And it was really meant to be a separate practice area really.
I started Hawthorn Law, we were going to be a brand trademark slash law firm where we were going to be doing trademarks for people, outsource general counsel for people, maybe setting up LLCs in North Carolina only for people.
So Hawthorn Law was intended to serve online businesses as legal counsel. It was not intended to be an online business in and of itself. And what happened is Hawthorn Law became an online business and now I'm in a place right now where as of the end of this year, I will be forming a separate LLC for Hawthorn Law.
But it's a complete and total pain because I've got to unravel a lot of things to do that. And so that's why I'm waiting to do it as of the end of the year because there are taxes involved. There's contracts involved. And there's websites that need to be updated.
There's all sorts of things, tax ID numbers that are going to be updated. There's a lot of stuff that goes into making that transition that I'm having to deal with.
So my point to you is if you're just getting started, the number one thing is go ahead and set that LLC up now (affiliate link). Don't wait because it's just going to get more and more complicated. Your business and your life is going to get more and more complicated the more successful you become.
The thought of forming that LLC a year from now or a year and a half from now when you do have more money in the bank, yes. But your business is going to be that much more complicated. Maybe you've got employees. Maybe you've got contractors.
It's just a pain. So you don't want to have to deal with that.
So that's the number one reason why I would say you need to get that LLC formed now if you're just getting started.
Setting Up an LLC will Change Your Perspective
Now, that being said, the second reason I think you need to form that LLC is not just because it's going to protect your personal assets and get you more legitimate and do all these things, which it will, of course.
But there's a second reason that I think is even more important as to why you need to set up that LLC.
That's the mental shift that happens when you go from being a sole proprietor, which is the default, that's what happens when you're just getting started in business.
If you do nothing else, you're a sole proprietor. If you have a business partner that you work with, then you're a partnership. That's just the default. That's what happens.
Related Resource: If you need help setting up your LLC, click here (affiliate link).
But when you go from that to actually filing that document with the Secretary of State's office and forming LLC and getting your EIN number and setting up your bank account and doing all those things, getting your contracts in place.
There's a mental shift that happens that is just going to change your entire life perspective because now it's no longer you just doing a side hustle that's making a little bit of money on the side.
Now it's you that are actually an owner of a company that you're looking to build and grow and take to the next level. And whenever I think about again, just to give you a little context here. Whenever I think about what I'm doing with my business, I think about it from the perspective of a business owner.
I think about it from a perspective of, if I were a business owner of a company who was making a million dollars a year, $10 million a year, $100 million a year in revenue, how would I handle that company?
Related Resource: To sign up with a payroll service I use and love, click here (affiliate link).
And setting up an LLC would be a no brainer. It'd be like, yeah, go do that.
That's what we're going to do. That's what happens. When you're a sole proprietor, that mental shift hasn't happened yet. And I think that that happens when you set up that LLC, because now you're dealing with something much bigger than you. If that makes sense.
Honestly, it doesn't matter if you're not making money yet. It doesn't matter if you have any assets to protect or not, because you will have assets to protect and you will make money and setting that LLC up is the first step to turning your business into something that's going to be much more successful than you could ever have hoped and dreamed.
That's the transformation that's going to take place.
Why You Should Not Start an LLC
That being said, I told you at the beginning I was going to share with you the one instance where I would hold off in forming your LLC.
We're going to be into the fourth quarter of the year. Hard to believe that, right? Well, there's something weird that happens in the fourth quarter of the year.
You can still go ahead and set up your LLC. That's fine if you want to do it and you're helping on doing it. That's fine. Go ahead and do that. If you want to.
There are certain situations, however, and it really depends on what state you're in, what state you're going to file your LLC in. And my point is this. If you file that LLC right now, then it's effective in 2021 as soon as you file the paperwork.
On the fourth quarter of the year, for a lot of states, you can go ahead and make that LLC effective January 1st of next year.
Now, why would you want to do that is the question.
Well, the reason you would want to do that is if you are in a state where there is a large annual reporting fee that's due or franchise tax that's due in March or April of next year, that's going to come due in March of April of next year, if you form your LLC now.
But if you change that filing date and the effective date of your LLC to January 1st of next year, then you're pushing off that filing fee for another year.
Related Resource: If you need to get a hold of me, you can schedule a call using this link.
So if you are just starting out and you're not quite ready to take that step with your LLC or maybe you don't have a lot of revenue coming in from your business just yet and the thought of paying a three or $400 annual reporting fee next March or April, or if you're in a state like California where the fee is $800, then the thought of maybe pushing that out a year is not such a bad idea because that's going to save you some capital that you can use to reinvest into your business.
And so if you find yourself in one of those situations, then maybe you might want to think about pushing that LLC and filing it.
Well, you can file it this year, but you can have the effective date be January 1st of next year. That way you don't have to worry about paying that filing fee for the annual report next spring.
Now make sure you check with the rules in your specific state to make sure that this is a strategy that will actually work for you because some states maybe won't let you push that filing date out to January 1st. Others will. It just depends.
But check and see with your state and see if that's something that you can actually do. If you've got questions about that, I do have a startup LLC course. And it gives you all the information on all 50 states in terms of what the rules are for setting up your LLC. So make sure you check that out.
And make sure you check out this video right here that's going to talk about some of the things that you need to do after you set up that LLC to make sure you're set up for success.