The final core component of financial literacy is protecting the wealth you’ve earned, budgeted, invested, and amassed. Financial protection can come through a number of devices such as insurance policies and protected accounts, but for creators specifically, legal business structures are one of the best ways to protect your business and personal assets. Limited liability companies, or LLCs, are one of the best examples of these business structures.
Disclaimer: This post does not contain financial advice and is purely for entertainment purposes.
What is an LLC?
An LLC is a legal business structure that, at its core, simply separates personal assets from business assets. LLCs are advantageous for a number of reasons, but chief among them is the simplicity. LLCs are easy and inexpensive to create and very simple to govern and maintain.
Why form an LLC?
There are three main reasons a creator might form an LLC: protection, taxes, and credibility.
LLCs serve as a major form of protection for creators because they protect your personal assets from any legal action including getting sued and declaring bankruptcy. For creators, this is particularly important as the lines between personal and business assets, liabilities, and expenses can be very blurred. Creators are also prone to a number of legal issues like copyright and intellectual property claims. They can also be vulnerable to claims of defamation, false advertising, and breach of contract. And while bankruptcy is never something to expect or plan for, forming an LLC means that the owners are not personally responsible for any defaults on debt.
LLCs also provide a unique business tax structure referred to as pass through taxation. Pass-through taxation means that all the profits from the business are taxed only once as part of an individual’s personal income. The business profits “pass through” to the owners and investors. This differs from a corporation where profits are first taxed at the business level and then taxed again as part of the stakeholders’ personal income. LLCs can also help simplify your April filings as they require you to keep a separate business bank account and keep all business and personal transactions separate. This will help you identify and sort end of year business expenses more easily.
Finally, an LLC can provide an indirect bonus of added credibility for your business. Forming an LLC shows that you view content creation as a business and have enough foresight to plan for the future of your business. This can help when applying for lines of credit, pursuing small business loans, or forging business partnerships
What are my other options?
There are three other business structures one might consider besides an LLC: a sole proprietorship, a partnership, and S corporation. Sole proprietorships and partnerships both provide a pass-through taxation structure, similar to LLCs, but do not separate or protect personal assets from business claims. A sole proprietorship is not a formal business entity that requires any filing at the state or federal level. In some states you may need to obtain a permit, but the ease and lack of regulation surrounding proprietorships is the main draw.
Partnerships are similar to sole proprietorships except they involve two or more people and more formal government filings. Partnerships still don’t protect personal assets from liability, but depending on the structure of the partnership, they can protect one partner from being liable for the mistakes of the other. At its core, a partnership is simply an agreement between two people on how to divide up the operations and profit of their business.
Finally, S corp tax status can be added to your LLC and can be more advantageous for creators with significant earnings and any investors or employees. S corps can come with reduced self employment taxes and additional tax benefits. However, S corps add a layer of complication and regulation that can, at times, limit the growth of a company.
How do I get started?
This process may vary state to state, but generally there is a simple and straightforward path to filing an LLC.
- Pick a name for your company.
- Designate a registered agent. This person receives official or legal documents on behalf of the company. This person can be anyone, including employees or owners, but many opt to hire someone from a registered agent service like Incfile.
- Obtain business permits. This may not be necessary depending on the state you file in.
- File the Articles of Organization. Submit required paperwork on company details that varies state to state. This step often comes with a relatively inexpensive filing fee.
- Create an operating agreement. Outline all operational details for your company.
- Maintain your LLC. Depending on your state, you may need to submit an annual report or pay an annual fee to keep your LLC status.
This is part four of the four part series: Financial Literacy for Creators. Look back at additional installments including Budget, Invest, and Borrow.