Whether you’re in the beginning stages of launching a new startup, getting your freelance side hustle off the ground, or just have a hobby project you think you’ll make a little money from, you may be asking yourself if and when you need to put your stake in the ground as an official business.
Creating an LLC, or limited liability company, is the most common first step in formalizing a small business or side gig. But why would you want to take this step? And when is the right time to do it?
To answer those questions and more, Polywork chatted with Brittany Ratelle, the lawyer for creatives, about the advice she gives her clients around LLC formation for all of their various projects.
When do I need an LLC?
Let’s get one common misconception out of the way: You do not need an LLC to be considered a business from a tax perspective.
“The IRS says, if you’re making more than 600 bucks, you’re a business—congratulations! That’s a pretty low threshold,” explains Ratelle. At that point, you’ll be expected to file a Schedule C to report your business income, required to pay taxes on that income, and be able to write off business expenses. But you can do all of that as a sole proprietorship, without any sort of legal business structure in place.
If you think you’re going to make some money this year and think you’re going to keep going for more than a year, I think you should set up an LLC.
The question is more about when you want an LLC—and the protections it offers you. LLCs are less about tax benefits and more about legal ones. “An LLC saves liability. It’s the first and most important step in asset protection,” says Ratelle. “It gives you that fence between your business money and your personal money.”
Given that, the quick answer to the question “do I need an LLC?” is probably yes, and sooner than you think. “I usually recommend setting up an LLC pretty early. If you think you’re going to make some money this year and think you’re going to keep going for more than a year, I think you should set up an LLC,” says Ratelle, adding that—if you haven’t set up an LLC by the time you’re making around $1,000 a month from this project—that’s a good time to make it happen.
What are the pros and cons of an LLC?
As mentioned above, the biggest benefit of having an LLC is the legal protections it provides. “Not that a lot of online businesses, especially tech jobs, are really risky, but if something unexpected happens—a litigation, a judgment, a debt against you—the worst that can happen is it sinks the LLC,” Ratelle explains.
She likes to describe an LLC like a panic room: Once the walls go up, only what’s inside that room can be affected, and everything else (like your personal checking account, retirement or investment accounts, any assets you may own), are off the table. All that’s at stake are any assets your business may own (inventory, equipment, real estate) and the money in your business bank account. (And, as an LLC owner, you can move money from your business account to your personal account anytime you’d like.) “I think for that peace of mind, it’s worth it,” she adds.
Ratelle also feels like people who formalize under a business structure like an LLC gain a little more swagger and confidence in their operations, seeing what they’re doing as more of a real business even if it is a side hustle.
Really the only con of creating an LLC is the cost of doing it, and it’s not all that much. Each state will have different filing fees for setting up an LLC (anywhere from $40-$500, with most on the lower end of that range), and some require an annual fee to continue your registration—but all of those are business expenses that you can write off on your taxes.
You also are typically required to put in a physical address (not a P.O. box) for your LLC, which can turn some people off if they work from home and don’t want their address publicly available. As a way around this, Ratelle suggests looking into Commercial Registered Agent services or getting a coworking membership where you can receive mail.
How do I form an LLC?
The process for LLC registration will also vary state to state, but it’s generally pretty easy and Ratelle feels most people can do it themselves instead of paying extra for a lawyer or filing service to help. “Most states try to make it really simple and do it online,” she explains, adding that—contrary to popular belief—there’s really no benefit to forming your LLC in a different state from where you live, and that it often makes things more complicated. A good place to start when registering an LLC is your local Secretary of State website.
Then, you’ll want to do a few more things to ensure maximum liability protection:
- Get your EIN: An employer identification number is a tax ID given to your business, and allows you to stop sharing your social security number with every client that needs you to fill out a W-9.
- Set up a business bank account: Ratelle emphasizes how important it is to keep your finances separate to have that firewall between your assets in place.
- Ensure any contracts and agreements are with your LLC, not you as an individual: Ratelle says to check the first paragraph and the signing page of every contract to be sure it’s addressed to your LLC (not just you as an individual), and you are signing as the CEO, owner, or founder of that LLC.
Do I need a new LLC for each side project?
If you have multiple side gigs or projects, there are two ways of going about it: You could either create a separate LLC for each one or have an umbrella LLC and then file a DBA (“doing business as”) for each unique brand, project, or storefront under it.
When deciding the best path for you, Ratelle says to remember that “if it shares an LLC, it shares liability.” Meaning, if one business goes down, it could take the rest down with it if they’re all under one LLC. So, some questions to consider include:
- Do these share the same level of risk? “It’s a very different risk category of running a bachelorette rock climbing business versus an online food blog, so it may not make sense for those to be housed under the same LLC,” explains Ratelle.
- Is one business going to make a lot more than another, have more assets, or take out a loan? If so, you may want these to be separate LLCs.
- Will one business have a partner? If so, you definitely want to separate that as its own LLC so your partner can’t try to claim ownership of your other hustle.
- What is your exit plan for each of these businesses? “If you think that you might want to sell one or more of these businesses someday, I highly recommend that they be siloed in their own separate LLC,” advises Ratelle.
On the flip side, if your side projects are fairly related, it could be fine to keep them all under one business roof.