The Limited Liability Company: You Can Register One Yourself
It’s easy to go from Sole Prop to LLC, and you don’t need a lawyer to do it for you.
(You may need a few tissues though… breaking up is always hard to do.)
Once you know you’re going to be in business for a while, it’s time to think about upgrading to a legal business structure that separates “personal you” from “business you.”
After all, as a Sole Proprietorship, there is absolutely nothing separating you from your business.
You are the business.
And that means you’re exposed to creditors who might try to come after your personal assets, including your home and investments, to force you to “pay up.”
Typically, online entrepreneurs upgrade to a Limited Liability Company, or LLC. The laws regulating LLCs differ from state to state, but not by much. Generally speaking an LLC is considered to be a hybrid business structure that combines the convenience of a Sole Proprietorship with the stronger legal protections and tax benefits that you’d expect with an S-Corporation structure.
The first major benefit is that an LLC separates you from the business. There’s a virtual wall that is built that separates your personal assets from your business assets, but only so long as you actually keep them separate.
BENEFIT #1: NO DOUBLE TAXATION
With an LLC you would file an individual tax return as the sole “member” or owner of the LLC. Here’s where the benefit comes in when you compare an LLC to a typical C-type corporation: The LLC itself is not taxed. Although you will be required to pay self-employment tax on any income you receive from the LLC (which will require you to make quarterly estimated payments to the IRS) the company is not taxes separately.
BENEFIT #2: YOU PROTECT YOUR PERSONAL ASSETS
THIS IS REALLY IMPORTANT: An LLC creates what’s called a “corporate veil” that essentially separates you from your business. It’s not so easy for creditors to come after you to pay the debts of the business. However, pay attention here: You risk losing your protection from liability if you pierce the corporate veil, and like any veil, it’s very susceptible to tears, rips, snags, and piercing! Single member LLCs must take extreme measures to show the IRS that they’re operating real companies and are not just trying to dupe the system. You could say that the IRS is watching LLC more closely because they know there are unscrupulous types who use the LLC entity as a way to pay less in taxes.
CAN I REGISTER AN LLC MYSELF?
Absolutely! One of the advantages of an LLC is that it’s easy to form on your own. An S-Corp, however, is a more complicated structure. Forming an S-Corp is one area where I always recommend that you seek the advice and services of an attorney familiar with the laws in your jurisdiction.
As for trading in your Sole Prop for an LLC… you can do that yourself. Check out my DIY Legal Toolkit Product Suite. It includes a DIY LLC Formation tool that is easy to follow. It includes instructions on how to check your own state law requirements.