Registering an LLC
Tip It!As I’ve mentioned in the past, my wife and I are in the process of separating our business and personal finances. When I talk about “business,” I am (of course) talking about income from online publishing (including this site). Well, last week we took what is perhaps the biggest step toward creating a separate business identity — we registered a Limited Liability Company.
Although the process varies from state to state, forming an LLC is typically pretty easy. In our case, we were able to register online through our state’s website for just $100, and we had an official (albeit electronic) copy of our Articles of Organization in our hot little hands just a day later.
In most cases, there’s no real reason to use one of the many online business registration services. In fact, if you’re worried about making sure that everything is in order, I’d suggest that you spend a few bucks on a consultation with a local attorney that specializes in business law rather than settling for a cookie-cutter solution.
So why did we decide to form an LLC when we could’ve simply continued handled things as a sole proprietorship? The main reason is that we want to draw a clear line between our business and personal lives. In the event that we ever run into any legal issues, we’d like to insulate our personal assets from our professional liabilities. Given the relative ease with which you can establish an official business presence, it’s a no-brainer.
Published on December 27th, 2006 - 11 Comments
Filed under: Self Employment
About the author: Nickel is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!
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December 27th, 2006 at 8:42 am
That is also something that I will probably look into, but I am not making enough yet to really justify it.
Once I start trying to sell something then I will most likely register an LLC.
December 27th, 2006 at 1:50 pm
How much business/online income do you think is enough to justify separating it from your personal income? Just curious as to what others think on this.
December 27th, 2006 at 2:10 pm
I don’t think there is a clearly defined dollar amount that could justify whether or not to create a business entity. What it really comes down to is if you can afford the cost to do so (which as was highlighted is generally very small) and you plan on being in “business” for a while.
It doesn’t take much income (or expenses) for that matter to make creating a business worthwhile. If you have costs associated with your website or business and if you do or plan on receiving income from it it may make sense to do so sooner than later.
The biggest reason is from a liability standpoint. There are clearly reasons to separate yourself from your business dealings.
One of the big advantages of creating something such as an LLC is that of accounting and taxes, which is where it may make sense to meet some sort of predetermined dollar threshold before creating one. But when you can completely separate your business transactions from your personal finances and then simply use a tax form to pass the taxable losses or gains to your personal income taxes, that is a nice benefit.
So I’d generally say if you are just starting something that is more or less a hobby and you’re testing the waters to see if it can become a business, it may not make sense to create an LLC or other business. But when you reach a point where you have a plan for your venture and realize it could work and have the intentions of making money from it you may consider setting one up.
December 28th, 2006 at 9:05 am
If you have either substantial income or net worth, or both, I would suggest an LLC from the start. Although it is definitely a bit of a hassle up front versus a sole proprietorship, it protects your personal life/assets from your professional life. My attorney told me to be safe I needed to set up a completely separate checking/savings account. Generally to do that you will need to 1) register an LLC with your Secretary of State (easy) 2) get the articles of incorporation from your SoS (easy in most states) 3) file a form with the IRS and get an EIN (a.k.a. TIN). You should always bill/invoive clients or customers as Me LLC, never as your name, which implies sole proprietorship.
If you go the LLC route and someone in this sue-happy country sues you, all that is at risk is your LLC and its assets. If you don’t, your personal assets could also be at risk. Don’t forget about possible attorney fees and other court costs. In the former LLC scenario, worst case you close shop. I fear the in the latter S.P. scenario it could be much uglier.
The other possible way to go if you want to remain sole proprietor is to get a personal liability umbrella policy, and probably other policies such as E&O to cover yourself. I thought about going this route but the complexity and expense steered me to an LLC.
December 28th, 2006 at 9:12 am
You can actually get an EIN over the phone (and instantly) from the IRS. Basically they walk you through the form over the phone, tell you your EIN, and then mail you the resulting paperwork. Details to follow.
December 28th, 2006 at 11:08 am
You can even get your EIN instantly from the IRS website as well. It will pre-populate a PDF form for you even. Very easy.
December 28th, 2006 at 3:45 pm
Just to play devil’s advocate…
We’ve filed our own LLCs in the past, but I’m using an online service from now on. Why? To remain anonymous from prying eyes. Yes, this can be done by using a registered agent (which we do use), but there’s also a line on our State Articles of Incorporation for who is causing delivery.
If you’re worried about litigation (these LLCs are for our real estate investments), then you might want to consider using a business registration service.
December 28th, 2006 at 7:37 pm
I really enjoy all the information you provide in your blog! I will be back regularly to visit and learn more….
December 29th, 2006 at 12:53 pm
Sorry, I just got lazy. Yes, you can get an EIN from irs.gov, or via telephone. I ended up having to do it via phone, and it took a while. I used “LTD.” (there are several options) in my legal business name for my LLC because it flowed better than LLC with the rest of the name. This caused some confusion both with the IRS’ web form, and with the person I first spoke with on the phone. They had to get a supervisor to do an over ride or something. Anyway, word to the wise–if you don’t really care about the name, use the “LLC” ending!
December 29th, 2006 at 12:58 pm
Luckylily,
In real estate it is common to open an LLC for each owned property for a single-asset LLC.
Using an LLC registration service as your statutory agent DOES allow you to “hide” your ownership/interest in the LLC from all but the most dedicated searchers. Doing this DOES NOT increase your protection from liability, however. Not separating your personal from your LLC finances, however, CAN potentially increase your liability via a claim that you are comingling and thus operating as a sole proprietor.
December 29th, 2006 at 2:50 pm
ntguru911, yes I’m well aware and agree with your comments. I’ve had multiple LLCs and S-corps for many number of years, (yes, all with separate accounts and proper paperwork).
I didn’t mean to suggest that using a registered agent or business formation service would thwart litigation, just that it may add an extra layer of privacy. Personally, I would rather not have my name and address in public records associated with my companies, especially if I were in a business with a high likelihood of being sued.
Nickel’s post stated there is “no real reason” for using a business registration service, and I just wanted to point out why someone might want to do just that. For $25 + registered agent service ($99), I find it’s worth it.