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5 Things I Wish I’d Known Before Starting an LLC
The legal and financial advice that would have been helpful when I was setting up my own business
The first year that my income as a freelance writer surpassed my husband’s teacher salary, I knew that it was time to talk to a tax professional about the best option for turning myself into a business.
Initially, I ran into a few challenges trying to find someone who could help. My first attempt was with a CPA more interested in regaling me with stories of his own short-lived writing career (Western mysteries, mostly) than digging into my finances. A second CPA insisted on referring to me as a “blogger” (I was not). A third CPA actually ghosted me, refusing to answer any of my emails or phone calls.
Eventually, with a tax deadline looming, I was able to cobble together the paperwork to set up a limited liability company, or LLC, a setup designed to separate you as a person from your business. When executed correctly, it provides limited legal and financial protection, so that if you’re sued, the person who is suing will go after your business assets and not your personal ones. I turned in my forms, crossed my fingers, and hoped that I’d done everything correctly.
Thankfully, it’s been relatively smooth sailing since then. But a few years into running my business, I still wish that I’d had more guidance while forming my LLC, and that I hadn’t had to figure out quite so much for myself. Here are a few things I learned along the way that would have been helpful to know from the beginning. (Disclaimer: This is all based only on my own personal experience, and you should always consult with your attorney before making any decisions for your business. And yes, the lawyers I interviewed asked me to say that.)
LLCs are not about saving on your taxes.
The number one misconception that people have about LLCs, says Megan Naasz, a Certified Public Accountant and owner of Allay Accounting, is that setting one up will save them money on taxes. (I was certainly guilty of this.)
“The LLC is not a tax-savings strategy,” she explains; rather, LLCs and sole proprietors are taxed at exactly the same rate, meaning that you will pay the same amount in taxes whether you’re an LLC or just you. There is one caveat to this: If your net income (that means income after expenses and your own paycheck) grows to somewhere around $30,000, Naasz notes that you can then consider electing to have your LLC taxed as an S-corp, which does allow for some tax savings. Until then, the primary point of an LLC is just the legal protection it provides.
You’ll have help.
To me, setting up an LLC and dealing with the intricacies of business finance seemed incredibly intimidating. But what may seem complicated to you — like figuring out QuickBooks, expense categories, and payroll — is all in a day’s work for a CPA or a bookkeeper, and most professionals expect that you will need some help sorting your business out, especially in the beginning.
“I think people are afraid of reaching out to a CPA, because they think they will be talked down to and made to feel dumb if they don’t 100 percent get the financial stuff,” Naasz says. Or “they feel like their finances are a mess and complicated, and it’s easier to ignore it or put it off than to just deal with them.” Both are relatable worries, but they’re also misguided.
So is the fear that setting up an LLC is akin to waving a giant, red flag to the IRS. According to Sam Vander Wielen, an attorney-turned-entrepreneur whose company, Sam Vander Wielen LLC, provides legal templates for people looking to start their own businesses, becoming an LLC does not increase your chance of an audit.
It’s incredibly important to find a professional who “gets” you.
Wielen likens the relationship between business owner and CPA/attorney to that of a client and therapist. “It’s like therapy,” she says. “You want to have someone you can have a good fit with and have open communication with, especially in online businesses.”
As someone who often feels like I am bugging my CPA with questions, this particular piece of advice hit home. You shouldn’t have to apologize for getting the answers you need to run your business. But to find a fit, you may have to search for a CPA or attorney who understands your industry. Wielen says that she was motivated to start her own business, in part, after seeing so many of her friends who ran their own online services, like coaching or copywriting, be misunderstood and placed in the category of “bloggers.”
“It’s like therapy. You want to have someone you can have a good fit with and have open communication with.”
“I realized, ‘It’s no wonder my friends can’t find legal help, if people don’t understand their businesses,’” she adds. “People are so excited when we connect, because they can be understood and don’t have to explain what they do.”
Where you live matters.
For the most part, setting up an LLC is affordable enough to be a smart business move. Attorney Shannon Davis, owner of Davis Legal in Tennessee, estimates that the average person who hires a lawyer to help them start an LLC will pay somewhere in the range of $200-$600.
But there are additional annual fees and maintenance costs that vary by state; California, for instance, charges LLCs a yearly franchise tax of $800, whether or not you make a profit. The experts I spoke to encouraged every business owner to do their own initial cost-benefit analysis based on where they live and what they can afford. Where I am, in the Midwest, I don’t have to pay a franchise tax, but the overall expense of starting and maintaining my LLC still took me by surprise.
You have to act like an LLC to be an LLC.
Davis explains that all of that limited liability protection you gained through your LLC can only be used if you run your LLC correctly. That means keeping your business and personal finances completely separate (with no “double-dipping”), keeping up with annual business registrations and state paperwork, and using contracts anytime you do work.
One of the most common mistakes LLC owners make is signing contracts with their own name and not the LLC name, or skipping contracts all together. “As important as contracts are for sole proprietors, they are even more [important] as an LLC,” Davis says. “You have to make sure that your LLC has contracts with the LLC’s name.” If you forget and sign with your personal name, then technically, you could lose any protection your LLC offers.
For me, this would have been crucial knowledge to have from the get-go, since I specifically chose my own name as the name for my LLC to make filling out paperwork “easy” — only to find out, three years in, I’ve been doing it completely wrong.
I’m still learning, but overall, I’m glad I took this step — especially because all the experts I spoke to strongly recommend that business owners consider setting up an LLC as soon as possible. An LLC lays the foundation for your business to grow, establishes good financial habits, and offers some limited protection for your assets. All positive things, provided you have some basic understanding of what you’re getting into in the first place.