Do I Need An LLC? | EVERYTHING You Need to Know About Sole Proprietorships and LLCs

Hi, I'm Brittany Ratelle, an attorney for online business owners just like you, and I'm here to help you get legally legit and to help you show up as a more confident entrepreneur. Today we're going to be talking about LLCs and DBAs and sole proprietorships and a whole lot of other alphabet soup and trying to get you the answers that you need so that you know which entity structure should you be choosing for your online business. You hear a lot of confusing information online in Facebook groups, from Google Law School, or from so-called business coaches, advisors, even accountants accountants. But I want to help you wade through all that because I'm a licensed attorney and I've helped hundreds of business owners just like you with the kind of questions and direction and guidance they need to make sure they're choosing the right structure for their business now so that they can be set up for success in the future. So let's get into it. As always, while I am a licensed attorney and I practice in Utah and Idaho, I'm not your attorney and this is not official legal advice. If you have any questions, make sure you're consulting with an attorney in your jurisdiction. I'm also not a tax professional or a CPA, so If you have tax law questions, make sure that you talk to a good accountant and a good attorney. Both should be in your corner as you develop your business. So LLCs, EINs, sole props, DBAs, it's a lot of acronyms out there, right? Can we tell that the government is involved? How are you supposed to know what is gonna be the right fit for your business, especially as an online business? I'm sure as you found, if you start to dig into a lot of the resources that are online, even going into your local SBA office or talking to your business banker, you might get some conflicting information and you might get get a whole lot of people who maybe don't understand or maybe even don't think you are a real business and that you don't have to worry about any of this stuff for right now. And I'm going to poke a little bit of holes into that theory because while the truth is, is that if you do nothing, meaning you just start making money, however it is that you make money, that you are a sole proprietorship and there's nothing illegal about that per se. However, you're missing out on a lot of huge benefits in terms of liability protection and certainly could be missing out on some tax benefits., and we'll dig into that as to why that is and why an LLC might be the right cheap, flexible entity structure for you. Let's talk about LLCs. What are they and do you need one? An LLC is a limited liability company. That's literally what the acronym stands for, LLC, and they are set up at the state level. So they're your state, wherever you live is the one that cares and keeps an online registry of LLCs. That's who you would go to to set up an LLC. Now, as I talked about, if you do nothing in your business, you are by default a sole proprietorship. Think of it as like the Times New Roman of a business entity. It's what comes up whether you do anything or not. The issue with this is that the IRS considers you a business if you're making more than $600 a year. If you're making less than that threshold, they basically say, okay, you're a hobby, we're not too worried about you. But as soon as you make more than $600, they expect to see some sort of business activity in terms of income and expenses on your tax return. And a lot of people think that there are tax consequences, which kind of throws them into an analysis paralysis of deciding, what should I be? And I don't want to screw it up, and I can't move forward, and I don't want to do it wrong, and I don't want to overpay in taxes. And the simple answer for here is that becoming an LLC doesn't actually change the way that you're taxed, for good or for bad. What it does get you is liability protection. That means that there is a fence in between your personal money and your business money. By setting up an LLC with your state, you're basically saying, hello world— can you tell I used to be Coeur d'Alene Junior Miss? So I I have a good parade wave. Hello world, I am creating a new entity and this entity will be the one to solve your problems and to make money and to provide goods or services. Not me. I'm a manager of the entity. I help work for the entity as an employee or a member or a manager. However, I am not the entity. We have some separation here. In fact, we have so much separation that all of the business money that it's going to make is going to go into the entity and all the things that it needs to pay for, all the business expenses are going to flow out of that entity. And if you have a problem with that business, your problem is with the entity, not me. You see, what we want to do is have a nice firm boundary. We love boundaries. Boundaries are super sexy, and they're certainly sexy in business. And by putting up this boundary or fence in between ourselves and our business, we are making it so that if there is an issue in terms of liability, if someone sues the business, if someone comes to collect on a debt on the business that we can't pay, it's a business problem. It is not a personal problem. This is especially important if you have personal personal money that you own in a checking or a savings account that you want to keep separate, if you have money from a spouse's business or from their income, if you have retirement funds, if you have a home, if you have vehicles, other toys, cars, vacation money, other investment properties, if something goes wrong, the best way to put up that boundary is with an LLC, a limited liability company. See, it's even in the name. We're going to limit the liability. Now, this protection is not 100% ironclad for all activities, meaning there are ways to pierce the corporate veil if it could be shown that you are commingling money in between your personal money and your business money. So this is our biggest mistake that I see people make when they set up their LLC is they go to LegalZoom or they go to Incfile or they go to some online business formation thing. They throw money at someone or an attorney. Usually attorneys give you a little bit more guidance, but sometimes not an accountant. Someone helps them set up an LLC and they're not given any more guidance on what to do next to make sure they keep that LLC protection in place.. And the number one way that people screw that up is they commingle their money. You don't want to be commingling anything unless it's on the dance floor. So make sure that after you set up your LLC, you keep your money separate from the get-go. So we'll talk about the right order of operations in a little bit to make sure that you've got that structure right and you know what's supposed to come first. But hopefully I piqued your interest that an LLC might be the right vehicle for you, because if you're making more than $600, the IRS already thinks you're a business. Now you might be saying, what if I'm not making money? What if actually I'm investing in the business and losing money. Don't a lot of companies operate at a loss and they're still a real company? Absolutely. In fact, if you think that you're going to be in that camp and that you might be taking a loss in this business on this year's tax return or on next year, one of the things that you can do to kind of prop up your case and show the IRS, hey, I'm not making any money, but I am still a real business, I'm not trying to scam you, is to form an LLC. Because usually people don't form LLCs unless they have an intent to make money eventually. That's their goal. It should hopefully be on everyone's to-do list. So what we want to make sure we're doing with our LLC is that all the income is coming into our money and all that money is coming out. What's another reason to maybe form a limited liability company? Do you have plans of doing any of these activities? Hiring somebody, deducting business expenses, selling parts of the business or all of the business, investing in expensive equipment, software, vendor or services. Entering into contracts, having a business partner or partners come into the business and be an equity partner with you. If you are interested in doing any of these activities, I highly recommend that you set up a limited liability company. It's what your colleagues and your clients and customers would expect for a sophisticated business at that level. It shows the world that you are interested in being treated as a real business, that you care about doing things right, that you've got your ducks in a row, that you're being intentional with your time and your resources and your business plan and how you want to show up and serve not just today but have a lasting business with a sure foundation. So a limited liability company says all those things, and in most states it's the cheapest option of being able to form that business structure. When I talk to business owners and do workshops and public speaking, I always get questions immediately after this. What about an S corp? What about a C corp? I've heard about— or a B corp now— I've heard about those. Let's make sure you're not leaving those on the table. Great question. So an S corp is actually not an entity structure. It is a tax designation, and it can save you some real tax savings. There could be a point in your business— in fact, you hope hopefully hit it when you earn somewhere around a reasonable salary in your business. I usually see it around $50K is when it's advantageous for people to make that switch. And it actually means that you are changing your tax designation or your tax election status with the IRS. You're saying, hey IRS, I'm an LLC, I'd actually like to be taxed differently now because I think that's going to save me some money. So it is something you definitely want to keep an eye on. I advise working with an accountant or another tax professional to make sure you're doing it at the right time and that you're following through with the steps. Most importantly, that you're setting up payroll and good books, so you're doing it right. In terms of a B Corp, B Corporations are C Corporations that have a benefit purpose that are built into them, and they're not offered in all states yet, but there are some. And it is something that could be a good hybrid choice if you kind of have a social good or mission that's part of the founding documents and mission for your company. So make sure to look into it, ask a local attorney or whoever is working with you to see if it might be a good fit. In terms of a C Corp, C-corps are great. However, they have a couple more hoops to jump through, and they're a little bit more administratively taxing and burdensome for a company that's just getting started. I usually don't recommend and advise those for companies unless you are looking to go public and to get seed capital and fundraise immediately or in the next year or two. If you're in that kind of startup trajectory, then it may be beneficial for you to skip the LLC and directly incorporate as a C-corporation. Delaware is probably the most popular state in which to do that. If you are forming an LLC, however, please do Do not be swindled by any online ads or people trying to sell you affiliate codes for programs or services. There is no special state where it's going to be better for you to set up your LLC. It's not Delaware, it's not Nevada, it's not Wyoming, it's not any of these other companies that are just trying to make a buck on you. The best state to form your LLC in is your state or a state of a business partner. If you have multiple business partners, pick the one that has the cheapest filing fees and form your LLC there. So let's briefly walk through the steps for forming an LLC. And if you have more questions about this, make sure to download my free guide at getlegitwithbritt.com. This Legally Legit Workbook is going to walk you through what are the right steps to form your LLC. As I advise business owners, especially ones that work from home, perhaps like you with a purely online business, the first step you actually want to do is set up a business address. I recommend a PO Box or a virtual business mailbox. You want to have that in place because you're going to need that address when you set up your LLC with the state Secretary of State website. You can easily find it by typing in LLC plus your state and looking for the.gov result. You're you're going to get a bunch of ads and a bunch of people trying to sell you and hop on extra fees to try to sell you our easy filing services. Don't fall for it. You're simply going to fill out the same forms that you would on your own. They're just going to charge you extra and try to upsell you on some stupid binder or rubber stamp or EIN services. That's free, by the way. You don't need to pay for any of that junk. So simply, you want to find where your state has you file LLCs. If you land on a website that has some random government seal that you've never seen and it looks like it's straight out of the late '90s, you're in the right spot. If you're on a really slick website with a really cool user experience, that's likely not a government website. That's a third party trying to sell you something. So you're going to go and fill out the form. You're going to have to set up a username, password, go through their portal, answer their questions. There's going to be a lot of questions about a business that you're probably not involved with, but answer the best that you can. After you get that, you're going to get some founding documents, usually called articles of organization or certificate of organization, that's going to spit out. It's going to have your state seal on it. It's going to look nice, legit, and official. The next step after you get those is you're going to set up your EIN or your tax ID number. This is with the IRS. It is online. It is free, but the business does have websites. It's weird. I know. Go blame the feds. This is like your business Social Security number, and it's going to get you set up for your business and allow them to make sure they're tracking your payment details, that when accounting and money is flowing to your business, it's going to that business Social Security number and not you personally. Like we said, we decided that we're going to set up our business address. We're going to file for our LLC. We're going to get our EIN number. We're going to take both of those documents with us to the bank, and we're going to set up a business banking account in the name of our new LLC. Everything should match, by the way. So it's not a huge deal what you name your LLC. You could give it a boring legal name like Smith Holdings. If that's the case, make sure you file a DBA or doing business as or fictitious name filing. However, if you already know the name of your business and have done some research there, go ahead and name that the same business as what the public will know you as and just make it a little bit cleaner, a little bit clearer, less risk of chargebacks. So you're going to take those to the bank, you're going to set up your business bank account and any business credit cards that are to there. And the last but certainly not least important step is you're going to use your LLC. That means any money, all income, any products or goods or services you sell, whether in person, online, all that money needs to go into that business bank account. All the expenses should go out of that bank account. You're doing yourself a huge favor in terms of setting up your business bookkeeping and your payment records. You should be using some sort of way to track that business income and your profit and loss. A lot of people use software, whether it's QuickBooks or Xero or Wave or Bench or old-school spreadsheets. Choose your own adventure there. There's pros and cons, but QuickBooks is a pretty industry standard and easy-to-use software. And if you decide to get support with an outside bookkeeper or bring in an accountant or a tax professional, they're going to want you to use QuickBooks, and it's going to be easier for them to easily check on your stuff, get you set up for success. And then if you have business partners, or if you just want to have kind of that extra layer of protection and make sure that the formalities are set up, I also recommend that you have a business operating agreement. These are also sometimes called business founder agreements or buy-sell agreements or business partnership agreements. But an operating agreement is what governs an LLC and will give information about how you're going to get paid, how we're going to handle decision-making if there's partners, how are we going to split up equity, what happens when someone leaves— some really important decisions that need to be made and put into paper because people can remember conversations differently. The best thing we could do is have a fair contract. It's nothing to fear, and neither is a fair operating agreement that's drafted in the beginning, in the honeymoon phase, so we can avoid that ugly business divorce. Your operating agreement is your business prenup. We signed a prenup on the front end so we can avoid the ugly business divorce on the back end. I hope this has helped you walk through some of the decisions that you need to make whether it's time for you to form an LLC. And while you might be getting sometimes conflicting advice and there's some expenses and certainly time and resources that go into setting up your LLC, the big picture is that it will never be easier for you to form an LLC. In fact, the longer you wait, the harder it will be, the more backtracking you'll have to do,. You might have to redo payment processing and redraft contracts and vendor relationships because again, all of those should be in the name of your LLC. When you sign a contract, it should be in the name of your LLC. Brittany Ratelle didn't enter this contract. Brittany Ratelle LLC is the one that signed up for this service or paid for that website or hired this person as a videographer. You see what I'm saying? Because we want to make sure all of those things are set up as soon as possible and giving us the most protection, I highly recommend that you set up a limited liability company as soon as you can. Please don't delay on this. Don't get stuck and overwhelmed by some of these other companies and services that are going to try to get a piece of your money. This is something you can definitely handle on your own. You can DIY this. However, there's no shame in getting help and getting things done. So if you're the type of person that's probably going to wallow or take too long in getting this set up, you do have some other options. You can hire a local attorney to help you. You can pay a third-party filing system. Just know that you're paying a premium to fill out the same forms and the same questions. They're not giving you some special access that you don't have on your own to your state and becoming an LLC. I hope this helps you move forward on your journey. Remember that if you like what you're hearing here and want more information on how you can be set up to be a legally legit business, make sure you comment and like and subscribe. Love to hear from you about what you're liking about this video or what other questions you have about setting up your business. Make sure you also connect with me on Instagram. That's where I love to hang out because I'm like Ariel and I want to be where my creators and my creatives and online business owners are, and that's on Instagram. Thanks so much for joining me today. I'm Attorney Brittany Brittany Ratelle, and I'll catch you on the flip side when we dig into what exactly do you need to have a contract for in your business and how can you make sure that you're getting paid and getting paid on time.