I see so many people in the online entrepreneur space bragging about getting an LLC for their business as if it makes them somehow more of a “real” business owner. And I have a few bones to pick on this. Because if we’re being real, an LLC is in zero ways more legit than a Sole Proprietor, and I honestly feel like when people start bragging about their LLCs, they 1. do not realize that there aren’t as many benefits as they think and 2. it causes other entrepreneurs to question themselves and feel like they absolutely need to become an LLC otherwise they aren’t a real business.
The IRS considers you a real business the second you decide that you’re going to sell something. So technically, if I decided that I was gonna go out in front of my house and start selling mangos or lemonade, I’m a business owner and the IRS expects me to report that income on my tax return. That’s a fact.
In some states, counties, and cities, you may or may not need to obtain other licenses, but you’re never forced to get an LLC to become “legit”.
What’s The Benefit Of An LLC?
Limited liability. When you become an LLC, you’re granted what’s called limited liability. LLC stands for Limited Liability Company (not Corporation). What this means is that in the event you get sued or default on a loan, whoever is suing you can only come after your business assets. So your personal home, your car, and your personal bank account is safe.
Now, in order for that to ring true, you absolutely cannot be commingling your business and personal expenses and you absolutely must have a separate bank account for your business activities. If not, you might as well not even become an LLC in the first place because a good lawyer will argue that since you’ve mixed your personal and business cash, you’ve “pierced the corporate veil” and your business isn’t really separate from yourself. What this does is take your personal assets like your personal bank account out of it’s safety net and it’s all fair game now–you can kiss that “limited liability” goodbye.
Are There Tax Benefits To Becoming An LLC?
Nope, not by default. By default, an LLC and a Sole Proprietor are taxed exactly the same–on the Schedule C form and it’s all integrated into your personal tax return (so don’t ever file your personal taxes without your biz info!). As an LLC, you do have the option to elect S-Corp status which can possibly have some tax benefits, but not until you’ve got around $30K-$50K profit. Read more about S-Corps here.
What’s A Sole Proprietor And How Is It Different From An LLC?
A Sole Proprietor (Sole Prop for short) is what you are the second you decide that you’re going to get paid for services or products that you provide. This is the default classification and you don’t have to do a thing to be a Sole Proprietor. That being said, you need to check your state’s Secretary of State website to see if your city, county, or state requires you to have a business license–some places do and some don’t. A business license is not the same thing as an LLC, though. If you’re in a state that requires you to obtain a business license, this license is simply a license to sell and you’ll still be a Sole Prop unless you officially file to become an LLC.
A Sole Prop is 100% a legit way to operate your business and if you live in a state where getting an LLC is crazy expensive, it could be a valid option–especially at the beginning. Sole Props, remember, are taxed exactly the same as an LLC by default so on the tax side, it really doesn’t matter one way or the other. On the liability side, it does. With a Sole Prop, if you get sued or default on a loan then they can definitely come after your bank account, your house, your car, and anything else you own.
With a Sole Prop, it’s not a requirement to have a separate bank account for your business, however, it’s definitely beneficial and will make it much easier to keep track of your income and expenses. An easy and free way to create a work-around in the short term is to create a business PayPal account and have all of your business income & expenses flow through that.
Do You Need a DBA?
Yes–if you’re a Sole Prop who will be operating your business under a name that is not your own legal name, DBAs are required. DBA stand for “Doing Business As” and is also often referred to as a “Fictitious Name”. When you become an LLC, you claim a business name, but if you are operating as a Sole Prop, the only way for you to claim a business name is to obtain a DBA. If for example, your name is Jane Doe and you’ll be promoting yourself and operating as Jane Doe, then you don’t need a DBA. However, if you want to promote your business as Janes Jewels then you’ll need to obtain a DBA for “Janes Jewels”.
Getting a DBA is super easy and usually pretty inexpensive. All the details on how to get one will be at your Secretary of State’s website. Inside of the program The Initiation
, you’ll find a click-by-click tutorial on how to become a LLC and on how to get a DBA.
When Should You Become An LLC?
You can become an LLC whenever you want. A few things to consider are the annual cost for your state, the chances of you being sued or defaulting on a loan, the amount of assets you have, and whether getting a separate business bank account is something that you want to do right now (a separate business bank account is REQUIRED to get that limited liability to safeguard your personal assets–REQUIRED. DO NOT MIX your personal and business expenses if you’re an LLC!).
In some states, like Florida, becoming an LLC is just $125 per year. Not a huge deal, might as well do it, right? In other states, like California, the cost is $800 per year, so maybe you’ll sit on that decision for a bit.
Everything Is Always Up To You!
Overall, whether you decide to become an LLC or stay as a Sole Proprietor for a while is completely up to you and now that you understand what they are and what’s involved, you can make this decision for yourself and choose what is best FOR YOU. What’s best for one person is not always best for another and that’s why it’s essential that as a business owner, you stay informed on these topics.
To learn more about what business structure is right for you and get advanced training and tools for bookkeeping for your business, join The Initiation
–the program where you learn exactly what to do FIRST to build the foundation for a legit and successful business.