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When should you create an LLC for your side business?

julian profile image Julian ・3 min read

Hey Developers, Julian from Blook!

A lot of entrepreneurs and small business owners eventually run into the question, at what point should they incorporate their business and form a Limited Liability Company (LLC) or even Corporation (C-Corp). Up until then they are usually classified as Sole Proprietorships, however for some businesses there comes a point where the benefits of a Limited Liability Company (or C-Corp but we’ll skip that for now…) start to be advantageous over staying as a Sole Proprietorship.

So what is an LLC?

The LLC is a business entity that provides the business and its owners with limited liability (similar to a Corporation but the structure is easier to establish and simpler to maintain). LLC Owners are protected from the LLC’s debts and claims (i.e., getting sued, payments, or reimbursements for losses) should something happen to the company.

It also provides the business with pass-through treatment of income for tax purposes, similar to that of a Sole Proprietorship or a partnership.

When should I start an LLC for my side hustle / side project / small business / freelancing?

This is usually specific to the small business / side hustle, but a good checkpoint is when you are generating meaningful revenue and want to protect yourself from liability while also separating your business finances from your personal finances.

Additionally, some say the best time to incorporate your company is in the beginning of the year vs the end of the year to avoid paying double the yearly fees. (Since you have to pay for that respective year even if you incorporated on December 30th!)

Advantages of an LLC over a Sole Proprietorship

There are many benefits of being classified as a Sole Proprietorship when starting out your business (ease of setup and year tax filings) however incorporating and becoming an LLC is usually the next step for growing businesses. Here are some of the main advantages of setting up the LLC:

Reduce your Liability and Protect your Personal Assets - Even if you get sued or debt collectors come calling, they will have to sue or collect from the LLC entity, and not your personal assets. Bringing on Additional Owners - While you can hire employees and bring on partners for your Sole Proprietorship (which becomes then can become a Partnership entity) there is always a risk. With the LLC, you can write out clear provisions and terms for approaching situations like adding a new member, removing a member, ownership and responsibilities, etc.
More Credibility - Forming your business as a limited liability company brings added credibility and recognition. An LLC is recognized as a more formal business structure than a sole proprietorship or partnership and having the LLC in your business name can help potential customers know you are a credible business.

How long does it take to setup an LLC?

The length varies state to state, but the standard processing time is usually 10-15 business days from when you send the filing. Some states offer the option to expedite the LLC formation for an additional fee.

What about the Taxes, how does it work?

One of the best benefits of setting up the LLC is that, similar to a Sole Proprietorship, you can do the pass-through option for filing your taxes as a business owner. “Pass-through” essentially means that all of your business income and expenses are reported with your personal taxes. This helps owners avoid being taxed on the business level AND personal level. (An issue that comes up if you choose to incorporate as a C-Corporation) Additionally, The LLC entity allows business owners to choose whether to be taxed as a C-Corp or S-Corp, but a majority end up opting for the simpler pass-through taxation.

Do I need a lawyer to form an LLC?

No, you do not need a Lawyer to form an LLC! While it's always helpful to consult with a Lawyer regarding business specifics, you can work with service providers to help set up the LLC and it will be less expensive.

Discussion (1)

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steelwolf180 profile image
Max Ong Zong Bao • Edited

I think it might be best that you could state the country and the state you are in for it when offering this advice.

Since different country operates slightly differently in laws for both tax and company laws related to forming, maintaining and closing of the company despite the concept might be the same with what you had stated.

Therefore it's always best to seek advice from both lawyer and accountant that specialises in taxes in their own country.

Lastly, there are service providers like LegalZoom & Zegal to set up companies without much hassle at a fraction of hiring an actual lawyer.