The Details Behind Starting an LLC For Your Small Business – Part 1
Did you know that February is National Start a Business Month?
Neither did I.
But, in light of the fact, I decided it might be nice to do a detailed post of some of the benefits behind starting a company and exactly what it entails.
I am a small business owner myself. In fact, I’m the owner of two companies: Flynndustries, which is my company that heads the websites that I create (including this one), and LOLer Apps, which is my iPhone app company. Additionally, I just helped a friend start his own company the other day, so the process is still fresh in my mind. I just wanted to make sure I could share as much as I could remember with you today.
In the past, starting a company was no easy task. Usually involving a lawyer, the process took much longer and was far more expensive. You can still hire a lawyer to setup a business for your today, but luckily for us, there are online services such as LegalZoom that can take care of everything in less than 30 minutes.
Before I go on, I must first write this quick disclaimer: I’m not a lawyer or a certified public accountant of any kind. Nothing I say or write should be held against me or my companies, and this information shouldn’t be taken as legal advice. If you’re looking for professional advice, I recommend consulting with a lawyer or CPA on your own.
Thanks!
Why Would You Want to Start Your Own Company in the First Place?
Great question!
There several different reasons why you might want to create your own business entity. For me, starting a business was a dream of mine ever since I was little, so there was some personal fulfillment involved in my decision, among other things.
Here are some other reasons why you may want to start a company:
- Freedom: Probably the number one reason why people start companies is to break away from the rat race and the 9 to 5 lifestyle. By starting a company, you become your own boss and can finally make your own decisions.
- Professionalism: In my experience, having my own company has made what I do online seem much more professional. It may not make a difference to you or even my customers, but it definitely makes a difference to other companies that I’ve worked and dealt with. Most established companies are far more comfortable and more willing to work with other companies, instead of just individual people.
- Protection: Many people start companies for protection against their personal assets. If a company (not a sole proprietorship or general partnership, which I’ll talk about later), get’s sued or finds itself in debt, the owners’ personal assets would not be liable.
- Tax Advantages: By starting a company, you grant yourself the ability to write off certain business expenses, which can save you a lot of money. As to what exactly you can write off, I recommend discussing this with your CPA / Accountant.
Why Would You NOT Want to Start Your Own Company?
As I always do here on this blog, I try to look at both sides of the equation.
The truth is, starting a business is not for everyone. Some of you may be comfortable in your 9 to 5 jobs, and for others, there are these things to think about:
- It’s ALL You: As cool as it is to be your own boss, there’s a lot more to think about. Working a 9 to 5 job, you just have to worry only about the job you’re assigned to, and that’s it. As a business owner, you have to worry about every single aspect of the company, including financial, legal and all that jazz. For some, this can be too much.
- Schedules are virtually non-existent: As much as I don’t like the 9 to 5 lifestyle, at least you know that by 5pm, you’re done. When you’re your own boss, it’s hard to keep steady hours because it just seems like there’s always more you can do to improve the business. It’s hard to turn off that switch, trust me.
- Benefits: When you start your own company, you don’t automatically have access to a 401k plan, a health or dental insurance plan. You have to figure all of that stuff out on your own, and it sucks! Not only do you see exactly how expensive it is to really get insured (we don’t see really how much our employers are paying for us while at our 9 to 5 jobs), but we get to see exactly how cruddy the whole system is.
That being said, I still don’t ever regret going down the path that I’m on as a small business(es) owner, and if you’re still interested in possibly setting up your own company one day, I invite you to keep reading.
The Different Types of Business Structures
Before you start a business, you must first decide on which type of business structure you would like to form. I’ll briefly summarize the different types for you below, but I definitely recommend reading more about each type here on the IRS website.
Sole Proprietorship
A sole proprietorship is a business that is owned by a single individual, and it’s definitely the easiest and cheapest to create. No paperwork needs to be filed with the state, and all you basically have to do is register for a DBA (which stands for “Doing Business As”) so you can run your business under a name different from your own.
Unfortunately, the major downfall of a sole proprietorship is that the business owner is personally liable for any debts that the business incurs. Additionally, it can be very difficult to get funding (loans from banks or investment capital) as a sole proprietor.
General Partnership
A general partnership is basically the same thing as a sole proprietorship, except it involves two or more people. A little bit more work needs to be done as far as dividing who is responsible for what and the percentages of ownership between all of the owners involved, but again – no paperwork needs to be filed with the state.
The scary thing about partnerships is that you are personally liable for any one of your partners’ wrongdoings. If one of your partners decides that it’s a good idea to drink and drive in a company car, if he gets into an accident, you could end up paying for the damages and medical bills that come as a result.
For both sole proprietorships and general partnerships, all income and expenses are simply reported on the individual’s personal tax returns.
Corporations
A corporation is a business entity that is recognized as a totally separate legal entity from its owners. Think of a corporation as a whole different person, with it’s own ability to conduct business, sue or be sued.
Corporations are far more complicated to setup and understand than the previous two business structures. There are shareholders involved, officers, board of directors, etc., most of which is stuff I honestly don’t know much about. There are “C” corporations, “S” corporations, Professional Corporations, and non-Profit corporations to consider, not to mention all of the paperwork that is required.
The primary advantage, again, is the limited liability that the corporation grants it’s members and shareholders. Additionally, a corporation can implement benefit and profit sharing programs for it’s employees.
Lastly, because it is a separate legal entity, it’s taxed as a separate entity as well, which can make things a bit complicated for those of us who are just starting out or doing small time business online.
Limited Liability Company (LLC)
The LLC is a fairly new type of business structure that takes the best of each of the above.
An LLC is not a corporation, but it can still provide that corporate-like protection that is important for many business owners. Also, an LLC can elect to be taxed as a Sole Proprietorship, Partnership, S Corporation or C Corporation, and income and expenses can simply be passed through to the members’ individual tax returns.
All of my companies are LLCs, and there is very little as far as extra paperwork that needs to be done. I’m quite happy with my decision to go with an LLC, however there are a few things to consider:
- Because the LLC is so new, some states may not view a LLC as a separate entity and may end up treating it more like a sole proprietorship or partnership, which defeats the whole purpose of having an LLC in the first place. An owner of an LLC should do everything in his/her power to separate business from personal, especially when it comes to finances, in order to keep that separation and protection as best as possible.
- Many states require a franchise tax in order to have an LLC. This tax is essentially the “fee” the LLC pays for the benefit of limited liability. In California, for example, I owe $800 per LLC each year, and this doesn’t include any taxation on my income.
- Lastly, many investors still have mixed feelings about LLCs, so it may prove to be more difficult to raise any capital investments for your business if you have an LLC. That being said, since we work online, not very much money is needed to do what you want to do. I started my LEED exam website for less than $8 a month (domain and hosting).
Since this post is much longer than I had oroginally anticipated, I’ll be finishing up the details about starting an LLC in my next post. In it, I’ll go over, in detail, the process of setting up an LLC, including what you need to know before you begin, how much it will cost you, and what to expect after you setup your business.
Are any of you thinking about starting your own legal business entities, or have you already? What was your experience like when setting it up, and are you glad you did what you did?
I’d love to hear from you. Cheers!
Posted on : February 17th, 2010
Related posts:
- The Details Behind Starting an LLC For Your Small Business – Part 2
- Why You Need A Business Banking Account, And How To Get One
- Why I Started My Own Company
- Why I Closed My Service Business to Start an Internet-Based Business
- I Guarantee You Will Read This Post, Or Your Money Back! Details about Guarantees Below
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56 Comments (Click Here to Leave a Comment Below)
A very timely post. I’ve been thinking about starting an LLC for the past couple months and started doing some research recently. Thanks for listing some of the negatives and positives surrounding an LLC. My main purpose is protection of personal assets. I wouldn’t be too pleased if I lost my house because of debt or a lawsuit against my business.
I plan on meeting with my CPA in a couple weeks to go over some of the details. I’m very interested in reading your next article on how to setup an LLC. I’ll try to keep you informed on my progress.
Hi Colby, I’m glad I could catch you with these posts as you’re going through the same process. Please do keep me informed of your progress, and hopefully I can shed some more light for you in the next post. Cheers!
As a European, not all of this is useful for me, but the general idea of starting a company is true for anyone with the ambition to start a company (anywhere). I’ve got one question, Pat, what was your motivation for starting two companies? Do you have another business partner for LOLer apps (that being the reason)? Thanks for the great post!
Hi Bart – yeah I realize the particular rules involved here are for US only, however the motivation behind going through the process should be the same worldwide.
The second company started because I did have a partner on board with me, and we wanted it to be specific to iPhone apps. Yep!
Thanks Bart!
In the UK It’s pretty easy to set up a limited company. Having done so on a few occassions you can either buy a ready made one off the shelf (already named xyz Ltd for example but just dormant) or incorporate your own.
Keeping on top of the accounts and taxes is soooooo important, trust me
Robert
Hey Pat,
Is it better for somebody just start his/her own online business first, after then they go incorporate a company?
Or you suggest to do it concurrently?
Great question Daniel. I think it depends on personal preference, because some may not want to become an entity until they know they have something good going, especially with how people tend to “test” different ideas and niches online. However, having the company structure may lead to faster and better results because of professionalism and being able to get capital if needed.
Yes I totally agreed to what you have mention. If anybody are serious about making money online, with proper structured business like model, the success rate tend to be higher as it is a business to them.
Brilliant tut. Pat! I think an llc is literally one of the easiest things one can do a iit reaps so many rewards. However, too many entrepreneurs simply overlook this whole concept so I think, as you mentioned, they lose credibility and professionalism.
I’m in the process of a c Corp. Which is more challenging than llc but it’s more appropriate for my non profit. Another tip is to have $1,000 for funding in this process… Fees and hiring pros add up quickly so you don’t want find yourself stuck so early in the game!
Hi Jeff, a C corp is definitely much more appropriate for your situation, in my opinion. Great tip! Thanks!
Hi Pat,
My wife and I have been thinking about starting an LLC company soon. She has an emerging photography business and we feel we would be much more professional if we are a legal entity. I also would love to host one or two websites under the umbrella of an LLC. You may cover this in your future post on the subject, but is it possible to handle multiple income streams under the same LLC umbrella or do you have to create separate LLC’s for each income stream you have.
Great info. as always!
Hi DJ, you can have multiple income streams under one umbrella, but records must be kept organized, and you run the risk of having all of your income streams affected if one of them gets sued, for example.
Hey Pat,
Thanks for the info. I really appreciate that you make a conscious effort to answer everyone’s questions. It keeps me coming back every day!
One caveat I found out about LLCs is that if the business is still essentially “you” (similar to a sole proprietorship) the protection it provides may not be all that much. That’s where insurance comes in…
However I went ahead and formed an LLC anyway, both because I hope for it to grow and possibly have employees, and because it makes it possible for the company to live on in the event of my death and for membership to be transferred relatively easily. That was important to me since some of the income is residual.
Indeed, you’re absolutely right, Jackie. Hopefully that will change, but i think again the reason is because LLCs are still fairly new, so regulating them is still new as well. If you do get employees, like you said, then it becomes a whole different ballgame. Thanks for the great comment!
Pat,
How did you decide when you needed an LLC? Before the first product?
Also, why keep the website and iPhone app companies as separate LLCs? Wouldn’t it have been easier to manage one LLC?
Thanks
I decided I needed an LLC after my first product, actually. When I started seeing big numbers come in, I decided it might be a good idea.
For your second question, I could manage just one LLC, but the other one involves a partner and I don’t want the Flynndustries brand to be associated with that particular business. Plus, we got to use another company name, and could sell just that one part if we wanted to much easier.
I should dig up the details for setting up a business in Canada and see how close it resembles the American method. As far as I can tell, there are a number of similarities.
I have a photographer friend who runs his own business and has been pushing me to do my own thin “on the side” since the perks heavily outweigh the downsides. Mind you, he’s quite the hustler – always working, always looking for good opportunities. But I admire guys like him (and you) for putting in the work, and getting the good returns.
I have no idea how it’s done in other countries, but I wouldn’t mind some guest posts here about that, or maybe at least some links to include in this post.
Your friends sounds pretty cool – it’s all about hustling and getting things done!
Thanks Drezz!
This is something I definitely need to think about, as this is the route I want to take in the future. Why can’t it be the near future?
Thanks Pat, for all the information.
Indeed, why can’t it be the near future
Great post, as always, Pat!
Interesting first piece, Pat.
Actually, if you could, I’d like to know how people outside of the US could set up an LLC. I’ve been thinking of looking into this.
As someone living outside the US but wanting to do more business online, this is an interesting topic.
Any ideas / feedback…..?
Where do you live, Chris?
I’m based in the Philippines, Pat. I own and operate an outsourcing company here…
Hi Chris and Pat,
In Washington state, I believe you can do that. You will need to provide the name and address of an local agent. I believe you should be able to find lawyers offices and others who are willing to act as your agent, for a fee. LegalZoom may also offer that service.
Here’s the text from the state’s form: “All Limited Liability Companies must have a registered agent in Washington State. The registered agent may be an individual who is a resident of Washington State, or a business entity registered with the Secretary of State’s office. The agent must have a physical address in Washington State where they can be located. An alternative mailing address may be used in addition to the physical address. The mailing address must also be in Washington State. The registered agent must print their name and sign the consent to serve as registered agent”.
I have looked into starting an LLC. It is actually easy to form an LLC, at least here in Missouri. You only have to fill out a one page form and it can be done online. I can’t yet justify the fees though since my business income is so small.
Hey Andy, it is very very simple to setup an LLC, like you said, which I’ll talk about in my next piece. Wishing you the best so that your business income will give you enough motivation to start that LLC you want to start
Morning Pat!
I set up a corporation on my own a few years ago because I’m one of those people who thinks he can do everything. I found out it was much harder than I expected, and probably wasn’t the best option for my one man company. I closed it a year later. I’m now operating a sole-proprietorship again, and have been doing so for years. However, I plan on doing a LLC in the near future. I think I have lost a few of the bigger contracts because running a sole-proprietorship looks amateur.
best,
Thanks for sharing Wesley, and I’m sorry to hear that you had to close your corporation. I did hear the same thing, that it’s a lot harder to manage than something like an LLC. Wishing you all the best! Thanks Wesley!
Hi Pat,
Another good reason to have a legally formalized business (I’m in Canada – I don’t think we have LLC but there are good options) is that there are certain expenses that can be picked up by the company (and tax deductible by the company). With some of the expenses or at least a good percentage of those expenses being picked up by your company, you do not need to pay yourself as high a “salary” so now you are in a lower income tax bracket … every situation may be different and should be discussed with your tax accountant, but as my accountant says: “… it is the government’s responsibility to get as much in taxes as it can; it is your responsibility to legally keep as much of your income as you can…”
Love love love that last quote, Valentina. I think your accountant definitely knows what he/she is doing. Thanks for the great comment!
Being an LLC does lend a bit of professionalism and pride.
Hehe, as you obviously know! Cheers!
Pat,
This is great timing! I’ve been thinking lately about starting an LLC for my online ventures. Looking forward to the next post.
-Travis
Thanks Travis! I’m glad I could catch you at the right time. Cheers!
Pat,
I agree with Travis on the timing part, it could not have been better for me. I started my first LLC about 2 days ago. I will admit I was kind of scared to start it but I figured if I want to start something new, I better get rid of that fear and just do it.
You have an amazing blog here Pat. I never really had the confidence in me to start my own business. But thanks to this blog, it all changed for me. I am very grateful to you.
Please keep posting ‘hot’ and ‘cool’ material!
Thanks,
Ricardo
Going to be going through something like this very soon. Great timing
Decided to meet with a lawyer though because of complexities of financial consulting. But still a great refresher for the basics.
Most US States have a Secretary of State office where you can get info on starting a LLC.
IMHO, I would not waste money by going through a company on the internet like L*g*l Z**m. They may speed it up, that’s all.
All I did was fill in the form and mail a check (NC $125). Just make sure you file your annual report (for NC $200) to keep in good standing. Getting a Federal Tax ID took minutes on-line.
Always check with your attorney or accountant first
Pat – What timing! I just received an email yesterday letting me know the Secretary of State has approved my LLC and they will be sending my paperwork in the next few days! I didn’t even know it was start a business month.
BTW – Thanks for the posts from last year about starting an LLC using Legal Zoom. They took all the hassle out of the setup.
I was exploring the options between LLC and C Corporation, but figured I’d focus on more important stuffs such as producing good content and building relationships, rather than the legal issues for now. There’s also some legal complexity involved which stops me from going into business myself.
The time will come for me to have my own company, just that it’s not the time yet. Flynndustries is a good name! =D
Pat, I’m excited to hear the rest of this. I’m most likely getting my LLC this month. I was wondering about just filling out the form from the IRS myself and saving about $100. In Texas it’s $300 to file for an LLC. (legal zoom is around 400-500) I did this for a band I was in and it seemed to work perfectly fine, but I wonder if going through Legal Zoom would be a better choice this time around. I would also love to hear about legal consultants that specifically deal with e-commerce laws and ebook stuff…Any recommendations?
Interesting!
As I’m from Sweden, not a lot of this applies to me. But I have been curious about the taxings in the US.
For example: If I start a company in Sweden I will have to pay a whole bunch of taxes and fee’s on the income that I’m making. It totals up to perhaps around 20-25% of the income. On top of that, If I want to actually withdraw some money from the company I will have to pay income taxes. That totals up to about 50% or more in taxes. So if I want to have $100 in my pocket I would have to charge at least $200.
Now for my question: Are your tax regulation about the same, or are we Swedes crazy?
the tax structure sounds the same, but its a little less…for now.
however the swede building code is better.
A soul proprietor is not as bad as it’s often made out to be. I started a different home based business last year and was able to write off a lot on my taxes. I will do the same for this years taxes. Eventually I will go the way of an LLC but for now until I’m making really good money or having a lot of liability then a sole proprietor is fine.
Hi Pat,
Thanks for writing up this post for me. It’s rare to find a fellow blogger who actually listens to his readers. Just another reason you ROCK!
Josh
[...] I was pleasantly surprised when while doing my blog rounds I read this post on Pat’s Smart Passive Income blog. The article is on whether you should form an LLC for your business. You will notice [...]
[...] part to my two post series about starting an LLC. In part 1, I talked about the pros and cons of starting your own business. Part 2 will walk you through exactly what you need to know before you [...]
Admittedly I only read Colby’s comment before scrolling sown here; it really hit home. I too am wanting to LLC for myself and am hitting many blocks in info on the net…really looking forward to more in this series.
Hi Pat – your story is very inspiring, so this site is a wonderful help for those of us who want to learn to do likewise.
I applied for my LLC today, and I have a great idea for an e-book I wanted to write and sell online. But – do we also need some sort of “seller’s” business license – to collect sales tax, and all that yucky stuff – if we sell an e-book on the internet? Thanks!
In Ont you can incorporate for as low as 600$…that’s if you are willing to do all the work yourself
I came across your blog today. It nice blog and good for a new blogger like me. Will be stopping by your blog from time to time for some inpiring post.
Hey Pat,
Wow yea gotta say great timing on this post. I have just decided to start my own LLC with a friend of mine. To be honest very nervous because it’s my first time but he has had a business before so that gives me some confidence. I hope you keep on giving some great content about starting your own business. We haven’t hired yet and we haven’t advertise yet either, we are running a commercial cleaning business. Hope I can get some good tips on what I should do first.
Great article Pat! Really straightforward info.
When I did this, I found that choosing between the different business structures can be tricky. Inspired by your article here, I just posted a flowchart that walks through this selection process in an ehow article “How to Choose a Business Structure”. It doesn’t cover everything, but I think it can help to narrow the options quickly.
Note: ehow seems to have a few technical problems. The table that’s labeled as a flowchart is a flowchart. Just right click and open it in a new browser window. Hopefully that will fix itself, or I may try uploading again.
Love the post! I set up as an LLC last year. After discussing with my attorney I decided it would be the best set up for me at this time. I do agree it adds a bit of professionalism. It was not hard to do the paperwork being able to talk to an attorney and have them review the paperwork before I send it in made me confident in doing it. This year I added a DBA. My CPA would like me to change to a s-corp( she said it would easier to take advantage of more of the small business tax deductions).
in Indiana it cost 90$ to LLC and its on a single sheet of paper…no lawyer needed….if you just go to you secretary of state office, usually you can do all the paperwork for free,,,without a lawyer and ask some questions. If I want to switch to s-corp, I can pay a 30 dollar fee. On an LLC I file a 1040 with a schedule C….I think i want to switch to a s-corp so i can file a 1120–a corp. tax return.