Sometimes timing is everything. Like when you’re finding the right time to make that business acquisition or striking on a sale while the iron is hot.
Timing can also be important while you’re deciding when to form a limited liability company (LLC), and entrepreneurs often want to know if there’s an ideal time or window of opportunity.
For anyone who has already been running a successful sole proprietorship or general partnership, the timing can be tricky, and knowing when to transition to an LLC can help ensure your business’ security and prosperity.
For example, when is the right time to acquire an LLC’s limited liability protection? Should you create an LLC before you even start offering your goods and/or services?
There are plenty of good questions about this process, and we’ve got you covered! Follow this guide and you’ll be able to pinpoint the perfect time to form your LLC based on your unique business circumstances.
Quick Tip: If you need help starting an LLC or just want to make sure it’s done correctly, hire an online LLC service like ZenBusiness ($39) or LegalZoom ($99). They take care of all the legal paperwork so you can focus on what you do best.
The Basics of LLC Ownership
Maybe you’re still toying around with the idea of forming an LLC, wondering if your business actually needs it. This decision will take a little bit of self-reflection, but we’ll help you out by outlining common reasons for forming an LLC.
The LLC is a highly flexible business structure, allowing you to customize everything from operating procedures to taxation. Plus, it’s much easier to form an LLC than a corporation – by comparison, getting an LLC started is often a breeze.
By forming an LLC, however, you’re also sheltering your personal assets from the covetous eyes of creditors. Limited liability protection means that your personal possessions are safe from creditors if your company is ever sued. So you can breathe easy knowing that your house, car, personal savings, etc. are safe.
On top of that, LLCs aren’t required to pay separate corporate income taxes. Instead, owners report profits and losses on their personal tax returns. In doing so, you avoid the double taxation that corporations incur (income taxed at both the corporate and personal levels), and make your tax filing season much simpler.
If these sound like attributes that could benefit your business, then you might be ready to form an LLC of your own.
When Should I Form an LLC?
We’ve covered the question of “why?” so now let’s tackle “when?” If you have growth plans for your business, you don’t want your expansion to outpace your business structure.
After all, you want to have limited liability protection in place before you run into any potential issues. And you can’t hire any employees if you run a sole proprietorship or general partnership, so if you plan on hiring, you should absolutely form an LLC (or a corporation, etc.) before bringing them aboard.
Moreover, sole proprietorships don’t allow you to transfer ownership, so if you anticipate ownership changes, you’ll need to form an LLC first. Do you plan on financing your company through investments? You should know that investors rarely, if ever, take interest in sole proprietorships, simply because people would rather invest in an actual business than someone’s personal enterprise.
Considering the fact that an LLC isn’t a terribly complicated or expensive business structure to form or maintain, we’d suggest being proactive and forming one before you really need it. You don’t want to be stuck in a situation where you need limited liability protection or need to suddenly change ownership but aren’t able. So, if you foresee your business growing to the point where you’ll need the protections an LLC offers, you should probably form one before you actually reach that stage.
When Should I NOT Form an LLC?
There are a couple competing schools of thought regarding the best time to form an LLC, and sometimes it isn’t really a necessary step at all. It might seem a bit pointless if you’re getting along just fine as a sole proprietor ― for example, if you’re a freelance writer working out of your home, you likely don’t have much liability at all, and you probably don’t need an LLC’s protections.
It’s also important to remember that an LLC requires that you keep your business and personal finances strictly separated ― a hassle you can avoid if you operate a sole proprietorship or partnership. Furthermore, if money is tight for your one- or two-person business, you might instead want to operate as a partnership or sole proprietorship to maximize your financial resources, saving a bit of money on LLC and registered agent fees.
Remember that you can always start small and form an LLC in the future if you find that it becomes necessary.
How Can I Form an LLC?
If you’ve come this far, you likely have a good idea of whether an LLC is the right choice for you. And if it is, your next question might be: “what now?” The truth is that, while LLCs are easier to form than corporations, the process can still be slightly tricky and/or time-consuming, especially because it’s slightly different in each state.
You can certainly tackle the DIY route, preparing and filing your articles of organization yourself, which will save you some money, but is riskier and requires much more effort. And as an entrepreneur, you’re probably pretty busy, so you might not have the time to figure it out. Fortunately, whether you don’t have the time to DIY your LLC, or you’d feel more comfortable leaving it to a professional LLC service, you have a few options.
Some people choose to hire a lawyer to form their LLC, which offers unrivaled legal expertise but can be quite expensive. Still, with a lawyer, you’ll get the peace of mind that everything will be done correctly.
However, our preferred option gives you the best of both worlds – the affordability of DIY and the reliability of a lawyer.
Hire an LLC formation service like ZenBusiness or LegalZoom and they’ll take care of the whole process for you. These companies are much less expensive than hiring a lawyer, but you can still be confident that they have enough experience and expertise to get the job done right. If you’re interested in this option, here’s a quick look at a few of our favorite service providers.
- ZenBusiness – $39: Yes, this is one of the most affordable LLC services online. But that doesn’t mean they provide inferior service. While they don’t have the extensive track record as LegalZoom (below), they’ve formed thousands of businesses so far and very positive online reviews.
- LegalZoom: – $99 – Their prices are definitely higher than ZenBusiness, but LegalZoom has a ton of experience and unrivaled brand power. They offer extended customer service availability hours and a 100% money-back satisfaction guarantee, so they’re always worth a look.
There’s no one-size-fits-all answer to the question “When is the best time to form an LLC?” But the one overarching rule is that you should form an LLC before you find yourself in a pickle where you need its protections.
It’s much better to form one too early than too late. If you’re still on the fence, ask yourself a few simple questions. Do you want to hire employees? Do you need personal asset protection? Do you want to open a business bank account? If you answered yes to any of these questions, perhaps it’s time for you to form your new LLC.