The Basics of LLC Formation
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- Cheapest LLC formation
- Best online LLC formation service
- What are the formation advantages and disadvantages of an LLC?
- Do you need an EIN for an LLC?
- Should you keep money in your LLC?
- What is the biggest disadvantage of an LLC?
- Can an LLC owner get a W2?
- Do I need an LLC before selling online?
- How much should you make before forming an LLC?
What is LLC formation?
LLC formation is a type of business formation done by registering a business name with your state’s Secretary of State by filing Articles of Organization. This process can often be done online and requires payment of a filing fee (around $100).
Cheapest LLC formation
Some online business filing service providers offer LLC formation for equal to or less than the filing fee. These providers offer low rates because they expect, and sometimes require, customers to make other purchases in connection with the business filing.
Best online LLC formation service
There are 2 types of service providers you should consider when starting your LLC: (1) business lawyers that provide services remotely, and (2) companies that specialize in providing legal documents (e.g. LegalZoom). Remote business lawyers will be more expensive, but you will receive legal advice on what your business needs to securely start up (governing documents, permits, additional contracts etc.). Legal document companies offer the lowest prices for usable templates, and may offer business filings at discounted rates as part of a subscription or package. However, these services do not include legal advise, and without a business attorney to revise your documents, you will be relying on your own legal judgment.
What are the formation advantages and disadvantages of an LLC?
Advantages
- Easier to form than corporations
- Offers the most flexibility in structure
- Can provide tax benefits, even for single-member LLC’s, if structured properly
Disadvantages
- Not as desirable as a corporation for investors
- Can provide a false sense of legal protection for those who don’t understand piercing the corporate veil
- Operating Agreements are optional, so many people skip them and get into trouble
Do you need an EIN for an LLC?
Legally no, but practically yes. You can register an LLC without ever applying for an EIN. However, without an EIN, it will be extremely easy for someone to pierce the corporate veil, so you would essentially have no legal protection for your personal assets.
Should you keep money in your LLC?
Yes, unless you elect for S corporation tax status. An S corporation cannot retain earnings, so this would result in losing the tax advantages of S corp status. Otherwise, it is always good practice to maintain funds in your LLC for business expenses and to separate funds from your personal accounts.
What is the biggest disadvantage of an LLC?
The biggest disadvantage of an LLC is that proper separation of the business from the owner is not a legal requirement. An LLC owner is not required to obtain an Operating Agreement, elect any tax status, maintain a proper payroll schedule, issue a W-2 to themselves, etc. This can create a false sense that the business filing itself creates legal protections and establishes a separate entity.
Can an LLC owner get a W2?
Yes, an LLC owner can receive a W-2. This is often done when single-member LLC’s elect to be taxed as an S corporation. By electing this tax status, the owner can receive a “reasonable salary.” Since wages are subject to employment tax and capital distributions are not, any payments made from the LLC to the owner above the reasonable salary will have the advantage of not being subject to employment tax.
Do I need an LLC before selling online?
No, you can sell products online without an LLC. However, you should consider forming an LLC to protect your personal assets from liability and to receive tax deductions on expenses, such as your cost of goods sold.
How much should you make before forming an LLC?
There is no industry standard rule for what revenue threshold you should reach before starting your LLC. However, in my opinion, you should start an LLC if you plan on conducting business or selling goods for more than 1 year, or if you believe having a professional image would increase your revenue. LLC’s are not expensive, so you should not wait to start yours.
About
Attorney Collier started his own law firm straight out of law school and has been practicing law in Ohio for 5+ years. During that time, Joe focused on business law and litigation, gaining some exposure to intellectual property law. While running his firm in 2021, Joe decided to go back to school and get his patent license. Since then, Attorney Collier has been focusing on protecting innovators and entrepreneurs through his expertise in intellectual property and business law.