LLCs are only for the big guys, right?
Often creative business owners think LLCs aren’t necessary. They think that because they are starting out and not making much money that they don’t need one.
But business revenue is only one small piece of the puzzle in making the decision to create an LLC.
Why form an LLC?
One of the most common ways to limit your business liability is creating an LLC or corporation.
I like to describe the legal concept of limited liability as a fence. This fence separates your business and personal lives.
When you start your business, you are operating as either a:
- sole proprietorship (if you are going at it alone)
- partnership (if you are going at it with one or more partners)
And when you are either of these, the law doesn’t see a difference between your life and your business.
So while you make a distinction between things you own and things your business owns, the law doesn’t. (Or hopefully, you do!)
Say, for example, you get sick. And after doctor and hospital bills, you owe thousands of dollars. So you pay everything you can afford from your personal savings account. But you still owe more money.
If you are a sole proprietorship or partnership, it doesn’t end there. You’ll have to pay the rest out of your business savings account.
But if you are an LLC or corporation, it does end there. You can’t be forced to use anything your business owns to pay your medical bills.
The reverse is also true if something goes wrong in your business. Like if:
- someone slips and falls during your open studio
- your relationship with your employee goes sour
- your client doesn’t think you delivered on what you promised in your contract
The reason it ends there is that you’ve built that fence. And once you do, the law treats them as their own things. The fence assures that anything that goes wrong stays on that side of the fence. And you only need to use things on that side of the fence.
This is why the answer to “Why form an LLC?” is “To build a fence.”
And because you are creating an LLC to build a fence, business revenue is only a small part of the equation.
So how do you decide if it’s time to become an LLC?
I’ve found the easiest way to help my clients decide is by walking them through 10 questions.
And after talking them through, we are able to come to a decision about if it’s time to make the switch.
Want to see all 10 questions? Read them here.
All 10 questions should play into your decision, but here are the five that often tip the scales.
Personal Assets
First up, you’ll want to think about what personal assets you might want to protect. You’ll think about:
- Do you own your home?
- Do you have any retirement savings?
- What’s your average bank account balances each month?
- What’s your net worth?
If you are married, then you’ll think about not only the things you own but also anything you jointly own with your spouse.
If you are married and are in a community property state, then it gets even more complicated. The complication comes from the fact that in those states spouses share everything earned during the marriage.
(Community property states are: Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.)
So, if you are married in a community property state, you’ll also want to answer:
- Have you and your spouse bought a home since you’ve been married?
- What’s your average joint bank account balances each month?
- How much does your spouse earn from his/her job each month?
- Does your spouse have any retirement savings through his/her employer?
If you’ve got assets that you want to safeguard, then an LLC might be a good choice for your business.
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Deciding if an LLC is right for your creative business is just one of the action items I help you complete as part of the Legal Roadmap. It’s a straightforward strategy to get all your legal ducks in a row.
When you buy the Legal Roadmap, you’ll get the easiest way to build your business on a solid legal foundation.
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Financing
Next up, you’ll want to think about how you plan on financing your business.
- Will you be using funds you have?
- Will you be getting a loan or line of credit?
- Will your family/friends be investing in your business?
If you will be getting money from anyone else, then you are probably better off being an LLC.
Lawsuits
Some businesses are more likely to be sued than other businesses.
Own a brick and mortar or can the public come to your studio? Your risk is higher because someone could slip and fall while in your space.
Make cosmetics? Then you have a higher risk because someone could have an allergic reaction to your product.
Give business advice? Then your risk is higher because a business could claim they failed due to your advice.
But the big biggest risk of all is hiring employees. Your risk of a lawsuit goes up as soon as you hire your first employee. And even more so, once you have to fire an employee.
In addition to your risk, you should think about your own comfortability with risk.
- Do you like to play it safe?
- Or do you live on the edge?
An LLC might be a good fit when your business’ risk of being sued is greater than you are comfortable with.
Your future role
As a small business owner, I sometimes have a hard time separating my personal life from my business. But you need to think about the long-term future of your business.
- Do you see the business only working if you leading it?
- Do you want it to continue to operate after you leave?
If you want the later, then the only way to make this happen is to set up the business as an entity. This means that an LLC might be a good choice.
Taxes
Self-employment taxes suck.
But one way to make this less painful is by opting for S corporation status with the IRS. Both LLCs and corporations can make this choice.
The decision to have the IRS treat your business as an s-corp is a tax one, not a legal one.
Because it’s a tax decision, you’ll dig into things with your bookkeeper/accountant. And she can help you to decide if you would have tax savings by electing for this status with the IRS.
And if an s-corp makes sense, then the only way to elect this status is by becoming an LLC (or corporation).
TL;DR
Creating an LLC isn’t only for businesses with lots of revenue.
Because building a fence is the answer to, “Why form an LLC?”
And you might want a fence before your business is making lots of money.
Are you overwhelmed by the legal jargon associated with creating an LLC for your creative business?
Do you wish you had a straightforward roadmap to feel confident that you created your LLC right (and know the expectations to keep it legit)? Then this is the book for you!
When you buy LLC for Your Creative Business, you’ll get my step-by-step guidance through the process of creating and maintaining an LLC for your creative business without all the legal confusion.
(If you use the above Amazon affiliate link, I’ll make a small commission, but it doesn’t change the price you pay.)
Hi! I’m Kiff! I’m your friendly legal eagle (and licensed attorney).
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