There has never been a better time for aspiring entrepreneurs to start their own businesses than now. After all, running an online company provides users with an affordable and convenient way to reach ideal audiences. The startup costs are dramatically reduced with internet, software, and other tools. Plus, you can reach an audience like never before. In many ways, the internet has leveled the playing field to provide opportunity for everyone. Read this article to understand if and how to use an LLC for online business.
One of the first things to consider is the legal structure you want to use. Your choice will affect the tax return form you file.
Many experts recommend choosing LLC for online businesses because of its unmatched liability protection. This article will discuss how viable this direction is. Read on to learn if it’s the best option for you.
What Are the Different Business Structures?
The business structure you choose will affect your legal, financial, and operational strategies. There are various company types, but below are the most common ones. Before we dive into it, it’s good to know that most people opt for an LLC for online business because it provides the liability protection of a corporation (sole p provides none), tax options of either sole p or corp, and also makes it easier to handle ownership.
A sole proprietorship is a default organization owned and operated by an individual that has not created another entity. In this arrangement, the business is not a separate legal entity from the owner, and the latter has unlimited liability for debts and any injury or lawsuit that may arise. Read here on why an LLC is better at protecting your liability at a very low cost.
On the other hand, a partnership is a business setup between two or more individuals who divide management duties and profits. There are various types of partnerships, including general and limited. A general partnership is like a Sole P in that there is no liability protection but it’s even scarier because you’re now on the hook for all the debts/liabilities of both you and the business partner. The caveat would be if you used a lawyer to set up a limited partnership. If you’ve done nothing and are working with another person, you’re a partnership, so act now and get an LLC.
A corporation is a separate legal entity so it solves the concern of liability. It also have various tax elections available from S to C. It also allows for easy transfer or ownership like you see traded on the stock market. The downside is that they are clunky for an online business, quite inflexible, and expensive.
S Corporation / S LLC
Also called an S corp, an S corporation is actually a tax election. When elected, the business is permitted to pass its income, losses, and deductions to its shareholders. However, the law only grants this status to small companies with at most a hundred shareholders. This S status is available to both corporations and LLCs. So, if you’ve heard LLC verus S Corp, that’s a misnomer. You can do both.
If you are starting an online business, applying for a limited liability company (LLC) would be ideal. As the name suggests, this business structure prevents owners from being responsible for a company’s debts and liabilities. Regulations on these entities vary from state to state.
Benefits of LLC for an Online Business
Now that you know the various options for a business structure, it’s time to learn the advantages of choosing an LLC for an online business.
Naturally, an online business may subject you to liability. For instance, if you sell handmade pottery, a customer might claim your candle holders caused an injury. Any judgments against your product can make you liable for personal injury claims.
Under a sole proprietorship or general partnership setup, this scenario makes you and your online business the same entity. For this reason, you have unlimited personal liability for all your company’s debts and other financial responsibilities.
Customers can go after your assets, including your home, car, or personal bank account to satisfy their claims.
However, choosing LLC shields you from personal liability. If you have assets to protect, the cost of forming an LLC should be a worthy investment.
Note that guaranteeing a loan precedes the limited liability LLC offers. For instance, if you personally guarantee a business loan, you are still liable for the whole or partial amount.
An LLC typically doesn’t pay any taxes. Instead, owners compute profits and losses and file them in their individual tax returns.
Owners can choose their tax treatment as a regular C corporation or an S corporation. This flexibility often enables them to save on taxes.
If a single person owns an LLC, they usually file for their tax the same way as they would in a sole proprietorship. On the other hand, if multiple members own an LLC, they typically pay taxes as they would in a partnership.
An LLC for online business usually qualifies pass-through deduction. Use an accountant once you have money coming in to help you determine the best way to keep the most amount of money and pay the least to the government. Legally of course.
How To Set Up an LLC
The law does not require businesses to hire a lawyer to form an LLC. However, having a reliable attorney on your side simplifies the process. Here are the steps to set up an LLC for your online business:
- Choose your business name: Check with your Secretary of State or Department of Corporations that your preferred name is available and will not infringe on another brand.
- Assign an agent: This person serves as your business representative in a state. They should provide a physical office address to accept mail, including lawsuits.
- Draft your articles of organization: You can find the forms you need from your Secretary of State or Department of Corporations. A lawyer can help you fulfill this obligation.
- Draft your operating agreement: Like a corporation’s by-laws, this document details business functions.
- Apply for employer identification number (EIN): You can file an online application to complete this task. The system will provide you with a nine-digit number that you can use to file taxes and open business bank accounts.
- Apply for business permits: These licenses may vary from state to state, so determine what you need for your online business.
Create an LLC for Your Online Business Now
Choosing an LLC for your business structure is most often the right choice as you can enjoy liability protection, tax flexibility, and ease of running it.
If you need an attorney to help you with legalities, contact a lawyer here.
Or, use Drafted Legal will file the LLC for you without the hourly rates of a lawyer. At Drafted Legal, we help clients accelerate the creation process without unnecessary errors. File now to start your online business journey.