When Should YOu form an llc (in the US)?
When should you form a Limited Liability Company (LLC) in the US? 🤔
My lawyer response, would be to form an LLC right away to get that personal liability protection.
But, a more realistic response is that it depends.
It depends on your personal circumstances, so I would ask yourself these questions to see if it makes sense for YOU to start an LLC:
Initial & Ongoing Costs: What is the cost to start and operate an LLC in your state? Look at the initial filing fees and mandatory annual reporting fees to keep your LLC in good standing. Then, look to see if your state has any minimum annual taxes or franchise tax. Based on the start up costs, annual reporting fees to maintain the LLC, and franchise tax, determine if it makes economic sense for you to form it now or later. If the cost to start and operate an LLC are low, then it might make more sense to start it now to get that personal liability protection.
Tax Considerations (S-Corp Election): Are you making over $100K USD net profits? If you are earning around $100,000 USD net profits (gross profits minus business deductions), then it might make sense to elect to be taxed as a S-Corp, and being an LLC will help you do that. Remember, that an S-Corp is not a separate business entity, but instead is a tax election available to LLCs and Corporations. If you make over $100K net profits, then you should consider speaking with a CPA/tax professional to see if the costs of maintaining an S-Corp (like, setting up payroll) makes sense based on the offset tax savings.
Privacy Considerations: Do you want to hide your legal name? When you operate as an individual (a sole proprietorship/sole trader), you’ll be using your legal name as your business name. If you’d like to hide your legal name or to not put a spotlight on it, then you can do so by creating this separate business entity so that you can use the LLC’s business name instead of your own on your website policies, email disclaimers, etc.
Commitment Level: How committed are you to this business? Once you've closed the back door and gone all-in on your online business, you're less likely to question the investments in it, including setting up an LLC and taking care of the legal aspects. It's a mindset shift from seeing these costs as expenses to viewing them as essential investments in the future and security of your business. So, consider your commitment level carefully when deciding on the right time to form an LLC.
Ultimately, the decision on whether to form an LLC will largely depend on your own personal circumstances.
But, the MOST important thing to consider is having terms and conditions at checkout (if you sell digital products) or a solid legal contract in place (if you sell content or your services) from the very beginning, regardless if you get an LLC or not - that way you can also limit your liability and reduce the potential risk of litigation from the person you are working with and from third-parties.
Contracts (for selling content/services) and Terms & Conditions (for digital products) can be your legal shield one done properly.
