A recent survey shows 44% of Americans have a side hustle. Perhaps you mow lawns on the weekends or sell baked goods for extra cash. Or maybe you are a freelance blogger or sell jewelry on Etsy. Whether you’re selling services or products directly, it may make sense for you to form your own business entity legally. Learn how LLC formation protects your side hustle and the benefits of pursuing an LLC.
The benefits of LLC formation
The most common type of business formation is an LLC, or Limited Liability Company. An LLC can exist to sell products or services.
The biggest benefit of LLC formation is liability protection. Just like the name says, forming this type of business limits the liability of the business owner. Depending on what your business is, you may be thinking, “but I just sell Etsy jewelry.” Consider, however, you sell a piece of jewelry and customers complain it gives them a rash, seeking not just refunds but restitution via payment for medical bills. An LLC helps shield you from the debts and claims made against your business, meaning your personal assets can generally not be touched to satisfy a debt or claims, only the funds contained in the LLC.
Another benefit of forming an LLC is tax advantages. As an LLC owner, you still need to pay federal, state, and local taxes, just as you do when employed by someone else. However, you have flexibility in how you file (as a sole proprietor or partnership, or as a C-corporation or S-corporation, depending on which benefits you most) and can claim business deductions to help lower your tax burden.
Lastly, an LLC offers great flexibility. Unlike with large corporations, LLCs do not require a Board of Directors, annual meetings, or strict record-keeping and reporting. There can be one owner or multiple, and managers can be members or non-members. It’s also relatively easy to add or change owners without having to dissolve or dramatically change formation documents. An LLC can accommodate an investor partner as well.
LLC formation: a how-to guide
If you are looking to limit your liability and experience the tax benefits and flexibility of an LLC, come prepared to speak with an attorney about the following information:
- Location – in which county will you operate and in which state(s) will you sell your product(s) or offer your service(s)
- Trademark – what would you like to name your business and have on file as your LLC’s name? An attorney will research your name to see if it’s available or taken, assess the risks of possible trademark infringement suits, and discuss possible trademark filings to protect your business name or brands
- Business partners – are you a solo practitioner or do you have partners? Multiple people can start an LLC together, and an operating agreement will address the roles and relationships as well as dispute resolutions should the relationship change
Unlike DIY business services that offer “one size fits all” paperwork, a business attorney will customize legal documents that meet state requirements and offer proper protections for your business. Typical LLC formation documents include:
- Certificate of Formation – this document showcases your business name, purpose, address, and agent (if applicable)
- Employer Identification Number (EIN) – using IRS Form SS-4, apply for your EIN to give your business a unique tax filing identity and pay employees if you have any
- Operating Agreement – again, for singular owners, these can be very simple; for multiple owners, this document defines ownership (can be equal but often not), rights, and responsibilities; an experienced attorney will discuss what unique elements you may want to include depending on your business needs and goals
If you’re a licensed professional in PA, such as an accountant, dentist, engineer, or therapist, please note that you’ll need to structure as a Restricted Professional LLC, which requires additional unique documents.
Is it too late for LLC formation?
Many people working in a virtual environment have turned to side hustles for creative outlets and social connections. Others look to make extra cash to support a family or hobbies. Still, others have entrepreneurial spirits and hope to one day be self-employed. Even if you’ve been operating a side business for many months or even years, it’s not too late to form an LLC and start experiencing the many benefits and protections noted above. Let our Corporate, Business & Banking team help you with LLC formation and provide general counsel to help your business grow and thrive.
