Don't Start An LLC Until You Watch This Video

What is an LLC and do you need one to start your business? How can you sort through all of the online noise about this and get some straight answers? A lot of online business owners struggle to know how to protect themselves. I'm Brittany Ratelle, an attorney for online business owners. I make it easy to get legally legit so you can avoid hiccups and show up as a more confident business owner. Whether you're providing services, digital products, physical products, or you're a YouTuber, influencer, podcaster, or blogger, you're probably confused about the conflicting advice you've seen online about LLCs and whether you actually need one. So let's Let's dig into what the truth is behind that to make sure that you're set up and using your resources wisely in the beginning days in the setup of your business. Now, to start off with a little disclaimer, because what kind of attorney would I be if I didn't have a disclaimer? While I'm an attorney and I'm licensed to practice in Idaho and Utah, I'm not your attorney. This is strictly for educational purposes only, and there's no attorney-client relationship. If you have any questions, please consult with a licensed professional in your jurisdiction. All right, let's get into our first tip and truth. LLCs are not a legal requirement for starting your business. Contrary to a lot of popular belief, there's no one who's going to make you set up as an LLC. In fact, the IRS doesn't care, your state doesn't care, the federal government doesn't care. While the IRS considers you a business, if you're making more than $600 a year, they will simply move you from the hobby category to the business category and assume that because you are making more than that $600, that you are going to pay some taxes on that income that's going to be filed on your Schedule 1030-C. Just know that in the eyes of the IRS, they don't really care either way what you file as or whether you registered or incorporated or not. They're just asking you to pay your fair share. However, your state does require that you file as a doing business as, or also sometimes known as a fictitious business name, if you are operating a business that's different from your name. For example, my name is Brittany Ratelle and I own an LLC called Brittany Ratelle LLC, actually the LLC that I run my creative contract shop with, my Shopify store that sells online legal templates. Now since That store is called Creative Contracts, and that's the domain, the social media handle. That's what shows up on people's receipts. An average customer might not know that the actual business behind Creative Contracts is Brittany Ratelle LLC, and the state of Idaho cares that matches and that there's someone who's actually a live human so that if anyone has a problem with Creative Contracts, they know who to get in touch with and ultimately sue if they need to be able to enforce their rights as a consumer. If you have not set up an LLC, that's okay, but it means that you are a sole proprietorship. That is the default status if you do nothing. It's like the Times New Roman font of business entities. And if you're a sole prop and you are operating your business under a trade name, fictitious name, or DBA, it means that you should file with your state and meet that compliance requirement. Another thing is that if you get your EIN number, your tax ID number is going to want to know what kind of entity you are before so they can match it up properly in their tax record system. If you apply for your EIN as a sole prop or with your DBA, and then later you change into an LLC, you're gonna wanna get a fresh new EIN number so that it matches the name of your LLC. Truth number 2, although an LLC can be really important in helping separate liability, there are additional costs to filing an LLC. In most states, the filing fees for a limited liability company range anywhere from $80 to about $300. And if you live in the blessed sunshine state of California, unfortunately your state government has decided that you should pay a little bit more in something called a franchise tax, and it means every single year, whether you make any money or not, if you have signed up and are an LLC, you are going to pay $800 to the state of California to keep that open and alive, even if you make no money. And that's just one additional fee. You'll note that when you start to be an LLC, it's likely that you'll need to have a little bit more tax support in your bookkeeping and making sure that you're deducting your expenses. And so most accountants and how they structure their tax packages are going to charge you more if you're an LLC. Think of it as a little bit of a ladder. A sole proprietorship is gonna be the cheapest and most flexible at the bottom. It's probably going to get a little step up in services and support as an LLC. And then up here is going to be an S corp and a C corp or a nonprofit. Just note that with that additional compliance and that additional legal complexity, you get some benefits, but there are some administrative costs that you just want to be aware of so that you're not taken by surprise. Note there might be those additional accounting or even bookkeeping fees if you're looking to have outside services and maybe a vendor help you on the finance side of your business. The third truth is that an LLC is meant to protect your assets. It literally stands for a limited liability company. It means that once you set it up, puts a fence in between your personal money and your business money so that if you are doing things with your business money and your business is operating agreements, signing contracts, ordering services, hiring, the business is doing it with their business money, which is separate from your personal money. It also means that if some unknown iceberg comes floating around, the worst that can happen is it sinks your LLC. So the LLC has isolated that risk from your other assets. The advantage to that is obvious, that you get protection from the liability. However, if you don't own a lot of assets, if you don't have a lot of liability in your business, then it may not make a lot of sense to start an LLC right now. With your tax advisor and your legal advisor are going to be able to make the best decision on my risk portfolio. How big of a boat do I have here and how likely is it that an iceberg is going to come and tear a hole in the side of my ship? We're going all in with this Titanic analogy. And you'll note that there are businesses with different risk. I would say a food media blog has a pretty low level of risk for issues and drama. And legal risk in your business is like a copyright or trademark infringement, right? It's having a photo on your blog that you're not supposed to have. For example, on the other side, if you have an in-person business, if you are doing bachelorette rock climbing adventures, very different risk category, right? And so we would want to make sure not only that we would have an LLC set up, but we would also have some of the other tools that we'll talk about that can layer in that liability. Remember to consider what your what your risk pool is and what you're comfortable with when you're deciding whether is it time to start with an LLC. Here is the fourth truth about why you might not need an LLC. There are other tools out there that can protect you. For example, you can use contracts, insurance, and you can use, as a third final thing, you can use that LLC. And ideally these form an overlapping umbrella of protection. And as most businesses get started, they decide to start with one of these and they keep layering on as they get more assets, as their business gets more complicated. As they maybe enter into more and more relationships with other people. Some of the most important contracts that you can have in your business will protect your revenue streams. This is common sense. We want to protect the money in your business because if we have a business that is not making money, it's not going to be a business for very long. The most important contracts you can have in your business are your client service agreement. If you offer client services, this is that master agreement that governs what you're going to do for the person who is paying you to do those things. Then number 2 is going to be an independent contractor agreement. This is an agreement that you're going to hand to any 1099 freelancers that you are hiring to help you in your business. And you want to make sure that relationship is protected so that all the cool intellectual property information that they're doing, and that you have the protection of some NDA or confidentiality language. The third most important document or contract is going to be your website legal docs. These are the documents that are found in the footer or fine print of your website. You've probably seen them and ignored them. Usually only nerds like me read them, but they're really important to have because there's a couple state laws now in the US regarding privacy law, along with some federal legislature so that you can protect all the information and the relationship with people who come onto your website. And then the next level of written agreements are going to be vendor agreements. These are going to be other people that you might be hiring to work with, things like affiliates, or if you're entering a giveaway with somebody, if you are entering into an operating agreement, having a founder's agreement or buy-sell agreement. These are all really important agreements to have as you start complicating the layers of your relationship. Remember that we get it in writing not because we don't trust people, but because we want to trust test and verify. We respect business boundaries, and the best way for us to model that is something in writing and to let the contract be the bad guy. One of our last tips is that an LLC does not save you taxes. This is a huge myth that I want to bust right now. In fact, an LLC is considered a pass-through entity, meaning again, IRS does not care. And so if you make money in your business, whether you're a sole prop or an LLC, it really doesn't matter in terms of how you're going to be taxed. It passes through your entity to you, and then you are supposed to be the one who's gonna try to decide and make records of what was income and what's deductible in your business. Now, if you are making more than $60,000 in your business profit per year, you may wanna talk to an accountant about setting up and changing to be taxed as an S corp. This is a tax designation, and the easiest way to do that is for you to become an LLC and then to be taxed as an S corp. S corp, and this involves putting yourself on payroll and then taking the remainder of your profit as a profit distribution and avoiding that self-employment double tax on all your income. I have another video all about it if you want to learn more, but the moral of the story is you want it to be something on your radar, especially if you are not talking to your tax advisor regularly. And say you have a really good launch, a really good quarter, or something else that goes really well in your business, that's great news, but let's make sure that we're leveling up our tax planning strategy with that. And the very last tip here is that under these situations, I would say that you actually you should become an LLC. And regardless of any other information you hear from me or any other guru online, if you are in a business partnership, meaning you have a business partner, either one partner or many partners, I highly recommend that you set up an LLC to protect you, protect the entity, to make sure that you're separating your legal liability, and that you get a written operating agreement and/or a buy-sell agreement to talk about how you're going to make decisions big and small in your business. And if someone wants to leave, what is your exit plan? So get yourself together, follow some of the tips and other videos that I on this channel and make sure you set yourself up in your state as a limited liability company. Remember that having a business is all about managing risk, but my goal is to help you become more empowered and more informed so that you can manage that risk in the smart way that you've done with all the other sides of your business. Thanks so much for being here, and make sure you check out the links and then hit subscribe if you haven't already