Let’s Get Real…About LLCs
A frequent question I get from founders is: do I have to form a legal business entity? The answer is, technically, no. Businesses aren't legally required to incorporate. In fact, sole proprietorships are the most common business type in the US (a whopping 70%). A sole proprietorship can be a great stepping stone for a brand-new business, particularly if money is tight. (Full disclosure: For a hot second, I considered launching Audette Law as a sole proprietorship.) For founders with long-term growth plans, though, I recommend forming a legal entity, like an LLC, sooner rather than later. Let's talk about why.
PROTECT YOUR ASS(ets)
Hands down, the most important reason to form an LLC is to protect your personal assets from anything that might go wrong in your business. Business is risky. Things will go wrong even when you're taking steps to prevent it. Forming an LLC provides protection for your personal assets (e.g., house, car, personal savings) if your business gets sued or faces financial trouble. Your LLC is a little like Captain America’s shield, warding off attacks to your personal assets.
The liability protection alone was all I needed to launch Audette Law as an LLC from day one. As the sole financial provider for my family, I couldn't put our personal assets at risk. A word of caution: LLCs do not completely shield you from personal liability for things that might happen in your business. That’s why, I also recommend that founders look into and obtain sufficient business insurance.
Pro Tip: Ensure that your LLC operating agreement (Yes, you need one) includes clear terms regarding liability protection for the LLC owner(s) AND an indemnification clause expressly allowing the LLC to pay the LLC owner's legal expenses should the owner get sued due to LLC business.
STOP SIGNING BUSINESS-RELATED CONTRACTS IN YOUR INDIVIDUAL CAPACITY
For me, the second most important benefit of forming an LLC or other business entity is that your LLC—not you, personally—is the party to and signatory on all contracts related to your business. When your LLC is the party to your business-related agreements, it’s the LLC that assumes legal responsibility under the agreement (and also any business-related risks that go with it). This separation is a vital aspect of the limited liability protection provided by LLCs.
FLEXIBILITY
Another feature of LLCs that I love is their flexibility. One of the common misconceptions of LLCs is that owners will lose control of the business if they form an LLC. Not true. With LLCs, you choose how you want your company to be structured (e.g., single-member, multi-member) and managed (e.g., by you, your business partners, or a designated manager). Even if you appoint a manager to run the company's day-to-day operations, you retain control over major business decisions. With an LLC, you have the flexibility to bring on partners, investors, or even sell your business in the future. I like to think of LLCs as a way to set your company up for success no matter what plot twists and potholes you might encounter on your founder journey.
BOOST THE CREDIBILITY OF YOUR COMPANY
When you form an LLC (or other legal entity) for your business, you send a message to your future clients (and potential investors) that you are serious about your company and its future. Even if you operate as a one-woman show right now, your future is bright, and first impressions are so important! For me, boosting Audette Law's credibility and professionalism in the market was a close second to liability protection in my decision to form an LLC.
TAX BENEFITS
Who doesn’t like lower taxes? Forming an LLC for your business can open up tax benefits and deductions that might not be available to sole proprietors. Standard tax deductions (i.e., "write-offs") for LLC owners include:
Self-employment tax deduction (for sole owners of LLCs)
Legal and professional fees related to running your business (e.g., bookkeeping, contract drafting/review/negotiation, other legal document preparation)
Auto expenses (if you use your car or other vehicle for LLC business)
Bank fees and interest
Home office expenses (e.g., portion of rent, mortgage, property taxes)
Office supplies expenses
Business travel expenses
Phone and internet expenses
Business meals
Advertising and promotional expenses (e.g., printing costs for business cards, TV, internet, and social media ads, cost of designing and maintaining websites, promotional events expenses, sponsorships)
Business insurance premium payments
Education expenses (for educational programs that increase your business expertise or add other value to your LLC)
Medical insurance premium payments
Pro Tip: In addition to the above expenses, you can deduct up to $5,000 of the costs of forming your LLC, including legal fees and expenses (e.g., LLC filing fees), in your first tax year. Audette Law offers competitive rates for LLC formation and our fees are tax deductible—double bonus!
REAL TALK ABOUT THE COSTS OF FORMING AND MAINTAINING AN LLC
You agree that forming a legal entity for your business might be brilliant; now what? Let's talk about some of the potential costs of forming and maintaining an LLC:
Lawyer fees and LLC filing fees: $1,500-$2,700 depending on where you file and if you want it done right the first time.
LLC publication fees: Some states (AZ, GA, NE, NY, and PA) require LLCs to publish an ad in the newspaper for a specified number of weeks to complete the registration process. Publication costs are location-dependent and can be an additional $1,000-$2,000.
Registered agent fees: In many states, an LLC owner can serve as the registered agent for the company. Or, you can hire an outside registered agent (e.g., a lawyer/firm or registered agent service) for a relatively minimal yearly cost. There are several benefits to hiring an outside registered agent, including availability (agent must be available during regular business hours to receive legal documents) and privacy (LLC owners might prefer to keep their personal address private); and some states have restrictions on who can serve as a registered agent for an LLC.
Periodic reporting: Many states require LLCs to file an information statement (a Biennial Statement in NY) every two years. You can usually file the information statement electronically, and the filing fee is nominal.
Corporate Transparency Act Beneficial Ownership Information Report: LLCs, unless exempt, must file an initial Beneficial Ownership Information Report and any necessary updates and corrections. There is no filing fee to file the report or for corrections/updates. Some LLCs might require a lawyer's assistance with the report, but many won't. You can read more about this reporting requirement on our blog here.
Professional Fees: Some LLCs might decide to hire a lawyer or accountant to navigate reporting and compliance requirements.
Annual state minimum tax: Some states, like California and New York, assess a minimum yearly tax on LLCs. These fees vary by state.
THE BOTTOM LINE
Forming an LLC (or other legal business entity) is a no-brainer for most founders. From protecting your assets to saving money on taxes, the benefits substantially outweigh the costs. We offer competitive corporate formation packages for badass female founders. Schedule a free initial strategy call to learn more.