Do I Need an LLC? When to Form an LLC & What to Consider

There is nothing more exciting for entrepreneurs than seeing their business take off. However, a rising business comes with more potential liabilities that could shut it down. Knowing when you need an LLC for your business is crucial.

An LLC is one of many business structures entrepreneurs choose to protect themselves and their businesses. Discover when the right time is to incorporate your business.

What Do You Need an LLC For?

Entrepreneurs turn their businesses into LLCs for numerous reasons, including:

Legal protections: In legal terms, an LLC is considered separate from the entrepreneur. So if someone sues your business, they are suing for the business’s assets, not your personal ones.

Tax options: While most LLCs are taxed as a sole proprietorship or partnership, they can also be taxed as an S corporation or C corporation. You can choose which tax option is best for your business.  

Credibility: Having your business as an LLC can provide more legitimacy for potential customers and investors. 

When to Become an LLC

If you’re considering registering your business, ask yourself these five questions.

1. Are You Making a Large Profit?

Some businesses are considered “hobby level” when they earn minor profits, but not significant or consistent. Those businesses can become LLCs, but usually do not. 

If your business has consistent growth and profits, an LLC can increase the protection of those profits. The tax choices can also help boost your profits, which can be reinvested in your business. 

2. Do You Have Large Risk Exposure?

As businesses grow, so does their risk exposure. Lawsuits, creditors, and improper contracts can all derail your business. Having a clear separation between your personal and business assets can ensure that even if something goes wrong with your business, you do not lose your home or personal savings. 

3. Are You Hiring Employees? 

Hiring employees is another form of risk exposure. While entrepreneurs should not see staff as a risk, employee-related lawsuits can occur. These lawsuits can target your personal assets if not protected by forming your business as an LLC. 

4. Are You Signing Contracts?

Contracts are legally binding for both parties, and if the contract is breached, a variety of issues can arise. If your business is an LLC and you are found liable for the contract breach, it will only affect your business—not your personal assets.

While you should never assume something negative about potential business partners or investors, a smart entrepreneur is always cautious and protects their assets. 

5. Can You Afford the Annual Fees?

Filing an LLC requires, at a minimum, annual fees. Depending on the state you file in, additional costs may exist. Is your business making enough profit to pay for these expenses each year? 

If the answer is yes, then forming an LLC is a smart move. If not, it may be worth waiting for a little more success. 

Recommended: 8 Pros and Cons of Starting an LLC

6 Common Misconceptions to Kill

There is a lot of misinformation about LLCs that can confuse entrepreneurs not familiar with the topic. Let us clear these misconceptions.

Myth 1: LLC Will Protect Your Business Name

Registering an LLC is not the same as a trademark. A trademark will protect your name and prevent others from using it. An LLC does not offer any type of protection; multiple businesses can use your name if they are in a different state. 

Myth 2: You Have to Register in the State You Live In

You do not have to register your LLC in the state where you live and operate. In fact, many entrepreneurs choose a different state that offers more business-friendly tax advantages. 

Myth 3: An LLC Will Provide Tax Savings

An LLC will not necessarily deliver tax savings, but it offers different tax options. The foremost tax advantage you receive is that your business is taxed separately from yourself. 

Myth 4: An LLC Is a Type of Liability Insurance

An LLC is not the same as having liability insurance. While there is protection because it separates your personal assets from business ones, it does not protect your business as a whole. 

Myth 5: An LLC Is the Same as a Corporation

No, an LLC is not the same as a corporation. The many differences between the two include structuring, compliance requirements, and taxation. Corporations must have a board of directors to operate and have annual shareholder meetings. LLCs have greater freedom and don’t require such things. 

Myth 6: An LLC Cannot Turn Into a Corporation

Actually, an LLC can become a corporation if it needs to. Very often, businesses start as LLCs, and once they see significant growth, they incorporate to expand further. 

Setting Up an LLC Is Easy 

The last misconception to clear is that forming an LLC is hard and expensive. You can do it in four parts:

1. Register Your Chosen Name

If you haven't chosen your name already, make sure you have one. Check if the name is available in the state you want to form your LLC. It is not a bad idea to have backup names, just in case.

2. Choose a Registered Agent

To form an LLC, you need a registered agent. A registered agent receives all the formal paperwork and letters for you. You can be your own agent or use a third party. 

3. Put Paperwork Together

You need to complete various paperwork, including the articles of organization, Employer Identification Number (EIN), and operating agreement. 

4. Pay Fees

All formations have a registration fee, and more fees may be required depending on the state. You must pay all these expenses to become an official LLC. 

Incorporate with Davinci

Davinci can help with the registration process. We offer mail services, which are important because there must be a physical mailing address to form an LLC. Our representatives will receive and sort through your mail, sending you the most important ones.

We also offer a registered agent service that will walk you through every step of the formation process and handle the annual registration needs.

Learn more about other Davinci services today. 

About Coco Quillen

Coco is the Chief Operating Officer at Davinci Virtual Office Solutions. She manages the strategic development and operational implementation of services for Davinci. She works closely with all teams to ensure customers are well taken care of.