What’s the best business entity for your business?
LLC - Partnership - S-Corp - C-Corp say WHAT?!?!
I know, it’s confusing. I get questions all the time about LLCs, what they are, and whether or not you really need one (yes, eventually it’s a good idea).
Here’s the bottom line, a Corporation (S-Corp or C-Corp) and Limited Liability Company (LLC) are legal entities that have certain protections and BENEFITS under the law.
A sole proprietorship and partnership are also business entities but do not have the same protections. If you start a business and make money - you are a sole proprietorship.
Technically “incorporating” means the act of creating a corporation under the laws of a 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 is different from getting a business license - which you may or may not need depending on your state and the type of business you are in, google your state + business license requirements to learn more!
An LLC is a Limited Liability Company.
It’s my fav business entity for new coaches and online biz owners.
There are several advantages to an LLC, especially for smaller businesses. One of the main draws of this type of legal entity (versus a sole proprietorship or partnership) is an LLC offers protection for personal assets in the event of a judgment from a lawsuit against the business.
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/house/car, literally -- they can only get what is in your biz account.
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. PLUS, being an LLC looks LEGIT to your clients - big bonus!
So then what is the difference between an LLC and a Corporation?
Basically. PAPERWORK. For realz - corps have a lot more paperwork.
But there are other differences as well. Unlike a corporation (S-Corp or C-Corp), in a Limited Liability Company (LLC) there are no annual meeting or minute requirements, limits on membership, and profits/losses are passed through to the owner’s tax returns.
This “pass through” taxation means members of the LLC report their profit and loss on their personal tax forms and the business itself is not responsible for taxes on its profits (but usually means more taxes).
* NOTE - I AM NOT A TAX ATTORNEY AND GET JUST AS CONFUSED ABOUT TAXES AS YOU DO :)
If you are a small biz owner, starting as an LLC is always a great choice - you can always choose to be taxed as an S-Corp later which may save you $$ if you are making more than 100K. LLCs usually end up paying more in taxes but unless you have some predictability on your income, S-Corp isn’t likely for you (meaning you should be making over 100K before thinking about this and then go talk to a tax attorney and accountant).
C-Corps aren’t really for us, those are for BIG ASS companies. If you have questions on taxation, chat with a tax attorney or your accountant!
So now are you wondering: when and how do I incorporate my LLC?
It’s true that deciding when to incorporate your new business as an LLC is a tough decision. There are differing views on when is the best time – one point of view is to wait as long as possible to avoid spending money and to ensure the business is viable.
The other thinking is the earlier the better to ensure legal protection and have standing ASAP.
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 100 in a few days 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!
As an attorney, I always advise people to incorporate within the first 6-12 months of your biz.
While getting your other legal foundations in place (contracts, website policies, etc) should be FIRST on the list, this is right after.
It usually is not that expensive (ranging from $100-1000 depending on the state) and you can set everything up directly through your state's secretary of state or similar - just google your state + set up LLC and you should find what you need!
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.
Sarah Kornblet Waldbuesser, Esq.
Attorney for Coaches & Online Business Owners
After several years at a law firm and a few career jumps, she ended up falling in love with online business and loves helping entrepreneurs achieve their dreams in a smart and protected way. She is also an adventurer, traveler, and food and wine lover. When not at her computer, she loves hanging with her family, having wine with friends, flying around the globe and connecting with other online business owners.