Does Your Side-Project Need an LLC?
The short answer is “no,” you do not actually need to register your side business as an LLC. That being said, while it may not be necessary for you to form an LLC, there are many potential benefits to doing so. Forming an LLC rarely has negative effects, but before forming one, you need to figure out what direction your business is going.
Small businesses have the option of being organized as limited liability companies, or LLCs. An LLC offers most of the same liability protection that a corporation offers, with the added benefit of a less rigid structure and fewer administrative requirements.
But what's right for one business isn't necessarily right for another. Some businesses are fine with a sole proprietorship, while others will benefit by incorporating. Here are some basics to help you understand which structure makes sense for you.
What Will an LLC Do for Me?
By forming an LLC, you are creating a separate legal entity that can own money and property, open a bank account, make legally binding agreements, and file lawsuits or be sued.
Because of this, you are protected from your business's creditors. Your family home, personal bank account, and other individual assets are safe, no matter what happens to the business.
By contrast, if you operate a sole proprietorship or general partnership, you and the business are legally inseparable, and everything that you own is potentially at risk.
LLCs have these other advantages as well:
- LLCs protect you in another way from personal liability in case your co-owners or employees want to take action against you.
- An LLC helps give you more structure for operating your particular business, including how to make decisions, how you should divide profits and losses, and even dealing with new owners throughout the lifetime of the business.
- LLCs also offer taxation options. The majority of LLCs are taxed as sole proprietorships or partnerships, but as an LLC, you can also choose to file as an S corporation or C corporation. Tax benefits, however, don’t really come into play unless your business is generating $40k or more a year.
Here's What an LLC Can't Do
Let’s look at some things an LLC can't do. Unlike a corporation, an LLC can't issue stock. This complicates matters if you want to take on investors, who often prefer corporations over LLCs.
You are still responsible for your actions in an LLC. If a member of the general public is harmed by your negligence or wrongdoing, they can sue you personally. If you have personally guaranteed a contract or loan, you are responsible for repaying it even if the LLC cannot cover it. And most states don't protect the business itself from lawsuits, or from loss due to fire, flood, or other disasters—even if you have insurance.
As you can see, these limitations mean that an LLC should never be your very first line of defense against inevitable business issues. Insurance will help to protect you and your LLC against these kinds of unexpected events. As a second defense, an LLC adds helps then protect your personal from potential litigation or disputes with creditors.
Who Benefits the Most from an LLC?
Your business is most likely to benefit from being an LLC if either of these is true:
- You have co-owners or employees. Without an LLC or other business entity, your personal assets are at risk if your business is sued for something a co-owner or employee does. An LLC's operating structure also helps to avoid conflict and misunderstandings between you and your business partners.
- Your business has significant risks. Some types of businesses are at high risk for failure. Others have both financial and liability risks. For example, multiple LLCs are a common strategy for rental property owners to ensure that financial problems with one rental don't jeopardize the others—or your own life savings.
How to Choose if an LLC is Right for You?
Forming a business entity like an LLC or corporation is almost never a bad idea, but it isn't always an absolute necessity for solo business owners.
To decide whether you need an LLC, consider:
- Whether you plan to have partners, employees, or outside investors.
- Whether you have significant contracts or creditors that might lead to financial problems or lawsuits. For example, an unpaid creditor or court judgment could easily cause personal financial trouble if you own commercial real estate, but that's much less likely for most consultants or Etsy sellers.
- Whether you want to have the additional expenses and obligations of forming and running an LLC. There's a fee to form an LLC, and in most states, you must file annual reports and pay an annual fee. You will also need a separate LLC bank account.
If you're trying to limit your business liability, make sure you have adequate business insurance. If you have business partners, employees, or significant risks, an LLC can provide another important layer of protection.
Form Your LLC With BetterLegal
BetterLegal has made it easy for you to create an LLC! BetterLegal offers all of the upfront services needed to form an LLC at the low cost of $299, plus your state’s filing fee. Included with that fee is filing type, an Employer Identification Number (Tax ID), Operating Agreement, Banking Resolution and Other Helpful Docs, Website, Business Checking, Tax Analysis, Insurance Evaluation, Payroll, Benefits, and HR platform. Let us make forming an LLC an easy and economical business decision!