When is the Best Time to Form an LLC?
Especially among entrepreneurs who currently operate a sole proprietorship or general partnership, the question of when to form an LLC is a very common one.
Is your business at the point where you should be thinking about formally creating an LLC? 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’re here to help! In this guide, we’ll discuss a variety of topics related to the formation process that should help answer the question of when you should form an LLC.
The Basics of LLC Ownership
To begin, we should probably address the question of why you would want to form an LLC (limited liability company) in the first place. The LLC is a popular business structure for several reasons, beginning with its flexibility, and the relative simplicity of the formation process. Especially compared to corporations, it’s much easier to form an LLC, and that’s no small factor in the LLC’s popularity.
As for the benefits an LLC provides, it all starts with personal asset protection. If someone sues your company, your personal assets are protected from the lawsuit, meaning creditors can’t pursue your house, car, personal bank accounts, etc.
In addition, the “pass-through” taxation of the LLC means you avoid the double taxation that corporations have to deal with. It also makes tax filing season much simpler, because instead of filing a business tax return, you claim business profits and losses on your own personal tax return.
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?
If you have growth plans for your business, you don’t want your growth to outpace your business structure. After all, you want to have limited liability protection in place before you run into any potential issues. Also, you can’t hire employees with a sole proprietorship or partnership, so if you plan on hiring anyone, you should absolutely form an LLC (or a corporation, etc.) before you take this step.
Another aspect that’s worth mentioning is the fact that you can’t sell or transfer ownership of a sole proprietorship, so you’ll need to form an LLC well in advance of any potential ownership change. Along these same lines, you shouldn’t expect to attract any investors if you’re operating a sole proprietorship, simply because people would rather invest in an actual business than someone’s personal enterprise.
In general, considering the fact that an LLC isn’t a terribly complicated or expensive business structure to form or maintain, it’s advisable to form an LLC before you really need it. In other words, 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. For example, 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 to speak of, and you probably don’t need the protections of the LLC format.
In addition, with an LLC, you’d need to 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, it may be advisable to operate as a partnership or sole proprietorship for a while to maximize your financial resources, saving a bit of money on LLC and registered agent fees.
It’s important to keep in mind that you can always start small, and form an LLC in the future if you find that it becomes a necessity.
How Can I Form an LLC?
If you’ve read through the previous sections and you think forming an LLC is the right call for your business, you have a few different options.
Some people choose to hire a lawyer to form their LLC, which is an option that can be quite expensive, but also carries a considerable amount of peace of mind that everything is done correctly. Another popular option is to tackle the DIY route, preparing and filing your articles of organization yourself, which can obviously save you some money, but is definitely a bit riskier and requires much more effort.
Our preferred option gives you the best of both worlds, and that’s hiring an online LLC formation service like IncFile or LegalZoom. 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.
- IncFile: $49 – They provide a full year of registered agent service with your LLC formation, and they have thousands of overwhelmingly positive reviews available online. You can never go wrong with LLC service from IncFile.
- Northwest Registered Agent: $79 – Northwest also includes a year of registered agent with any LLC formation package, and they’re the only major service provider that locally scans every document they receive on your behalf (most competitors only scan government docs). Throw in their premium customer support, and they have quite the appealing offer.
- LegalZoom: $149 – Their prices are definitely higher than Northwest and IncFile, 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?” In general though, you should form your LLC before you find yourself needing its protections. 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, or if you think you will in the near-future, perhaps it’s time for you to form your new LLC.