Celebration time! You are about to book your first paying client.
But wait, then the question pops into your head - do you need to have a registered business entity prior to getting your first client?
Can you take clients without being a *formal* business? Do you need to have a registered business entity prior to getting your first client?
What comes first, the chicken or the egg?
The simple answer to this question is: YES...BUT.
You do not need to file with your state as a business in order to take clients. Once you take on a client, sign a contract (YOU DO NEED THIS FOR YOUR FIRST CLIENT), take money, and give services, you are in business. Congrats!
You are what is known as a sole-proprietor.
You could go on your merry way for quite a while but here’s the BUT - in this case, you are your business and have no legal protection.
A Corporation and Limited Liability Company (LLC) are legal entities that have certain protections and benefits under the law. A sole proprietorship is also a business entity but does not have the same protections.
Technically “incorporating” means the act of creating a corporation under the laws of state; however, the term is now used interchangeably with forming a business, whether it be a corporation or LLC.
While forming a sole proprietorship (or a partnership) are options, one of the main reasons to incorporate is to protect the owner from personal liability, which are benefits of a corporation and an LLC.
This means *if* something goes wrong, your personal assets are separated from your biz assets and if you do lose, it doesn’t mean you lose your shirt, literally.
Other benefits of an LLC include not having to use your own social security number for your Federal Tax ID number (EIN) and utilizing your LLC to open a business banking account.
If you are not making any money yet or are not worried about being held personally liable for any mishaps, is it necessary?
On the other hand, what if your business goes from zero sales to 5K in a month and you are left without the necessary documents, bank accounts, etc. in place?
In the online world, going viral can happen at the drop of a hat – better to be ready than wishing you had taken the necessary preparations earlier!
I usually tell people to incorporate ASAP. It usually is not that expensive (ranging from $100-1000 depending on the state) and you can register a very broad business (e.g., ‘for any purpose a corporation may operate as’) so that even if you change course, you can still keep the same LLC. I also suggest to incorporate under either your name or a fairly generic name in case you do slightly change businesses.
So, while you don’t absolutely need to have an LLC before your first client, the sooner you get your legal foundations in place, the better!