*The information below is not legal advice. To procure legal advice, become a Legalpreneur Member*
If you’re like most people today, you have a side hustle that helps fill in the gaps between your regular job and whatever else is going on in your life. You might be a freelance writer, a podcaster, a social media consultant, an influencer or user-generated content (UGC) creator doing brand deals, or maybe even an app developer or digital marketer. If you work for yourself, then you need to make sure that everything is set up correctly from day one so that nothing falls through the cracks down the road.
In any case, setting up a limited liability company (LLC) is incredibly important when starting out as a freelancer online. This is because you want to protect yourself from liability issues down the road as well as establish boundaries between your business and personal life.
What is the purpose of an LLC?
An LLC is a limited liability company. It’s a type of business structure that protects the personal assets of its owners, as well as the business’ assets and finances.
The purpose of an LLC is to set up a separate legal entity that separates your personal identity from your actual business activities. This means that if something happens to go wrong with your business–for example, someone sues you for damages–it doesn’t affect their ability to sue other people involved in running the business (like family members).
In addition, if something happens at home like someone gets hurt on your property, then this person would have no legal claim over anything related to what happens inside of your business, because according to law there isn’t any connection between those two places!
You need an LLC from day 1.
Even if you haven’t made money, you need an LLC. If it’s a side hustle, you need an LLC. If you think you don’t need one, you need an LLC.
Why from day 1?
Oftentimes if you ask someone in the accounting or tax world, they will tell you to wait and file the LLC until you’re making a certain amount of money. This is because they associate the LLC with the S Corp election.
In the eyes of those in the accounting and tax world, the only benefit of an LLC is the S Corp election. However, this is not the case. And if your accountant or tax person tells you this, you probably need to find a new accountant.
You can make the S Corp election when you file the LLC, but you don’t have to. To learn more about the S Corp election, listen to this podcast episode.
The LLC is needed from day 1, even before you’re making money, because you never know what’s going to happen in your business, and the LLC is protecting you personally from mistakes you make.
What happens if I don’t have an LLC?
Let me paint the picture for you.
Let’s say today is day 1, and you listen to the awful advice to wait and file until you’re making a certain amount of money in your business before filing the LLC. Then tomorrow, day 2, you blow up on social media (TikTok or Instagram) and you start making a lot of money. Day 3 comes along and you remember that you’re making enough money to file the LLC, so you get it done on day 3.
Great! Somewhere down the line, day 4, day 100, day 1000 (it doesn’t matter), you get a cease and desist letter and eventually sued for something that happened on day 1 or day 2.
You know it sucks getting sued, but you think to yourself, “At least I’m an LLC, and they can’t come after me personally.” But guess what. Even though you’re an LLC at the time of the lawsuit, you don’t get the LLC protection because you were not an LLC at the time the act happened.
There are countless reasons you can be sued.
It’s impossible to know every reason, and mistakes happen. That’s why it’s so important to implement the LLC protection as soon as possible. We’re human. Shit happens. Protect yourself from our litigious society before it’s too late.
If you don’t have an LLC and get sued, the plaintiff (the person or business suing you) can go after your personal assets to pay the judgment. This means that if they win their case against you, they could garnish your wages or take money out of your bank account until they are paid back in full.
With an LLC, this isn’t possible because the court’s don’t allow the plaintiff to reach the individual owners to recover from the judgment. You, the individual, were not acting in your individual capacity. You were acting on behalf of the business, which is why only the business assets can be recovered.
In turn, this actually results in less lawsuits if you have a small business and they know the business doesn’t have assets to recover. It’s not worth their time to obtain a judgment that will never be recovered.
How to get an LLC
If you’re thinking about getting an LLC, there are a few options:
- Do it yourself. You can get an LLC by filing the paperwork yourself. This is called “self-formation.” It’s easy to do, but it might not be the best idea if you don’t have any experience with business ownership or legal matters. This is typically the lowest cost option.
- Work with a third-party such as Legalpreneur. We can file your LLC, get your EIN and get your operating agreement for $250 plus your state filing fees. This is typically the best option if it’s just you as the sole owner. Keep in mind, the $250 fee is waived when you join the Legalpreneur Membership.
- Work directly with an attorney. This is typically the most expensive option. If the LLC is going to have more than one owner (member), this is the best option because you will need a solid partnership agreement.
I hope this article has helped you understand the benefits of having an LLC for your side hustle. My biggest piece of advice, don’t believe when someone tells you to wait until you’re making a certain amount of money in the business. Early on is when you are least educated about business matters and are likely to make the most mistakes. Additionally, even if you don’t have assets now, the goal is to have assets, and the plaintiff can come after anything you accrue in the future.
Sign up here to have Legalpreneur file your LLC today!
*The information in this article is not legal advice*