LLCs 101: The Complete Guide for Creative Business Owners
Every time we host our popular legal free training weeks (enter your email below to be notified for when we host the next one) we get a flood of questions about LLCs and generally dedicate an entire training to them and then also spend hours during the Q+A’s talking about them too.
So we wanted to create a thorough resource that covers all the important LLC topics and questions we often discuss!
As a new creative business, one of the earliest (and most important) questions you’ll be faced with is when it’s time to move forward from being just a sole proprietor, to a formal business structure, such as an LLC.
Let’s get started, shall we?
LLCs 101: The Complete Guide for Creative Business Owners
Starting off with the basics…
What is an LLC and why do I need one?
From the moment you start your business, we want you to think of it as a completely separate entity from yourself, and we don’t just mean that from a mindset perspective, but also from a legal perspective.
A limited liability company (LLC) is a business entity that provides enhanced liability protection for the business owner, and the tax benefit of a partnership. Your LLC is created and governed by your specific state’s law, and it can have one owner or multiple owners.
LLCs have many advantages over other business formations: Unlike corporations, LLCs don’t have annual meetings and record-keeping requirements, and LLCs can elect how they are taxed (if as a partnership or a SCorp, business profits and losses “pass-through” to each owner’s individual tax return).
Above all, there is one specific reason why an LLC is the most popular business entity for startups: an LLC separates your personal assets from your business assets.
The driving factors behind deciding on a business formation revolve entirely around liability and taxes (get started with your local accountant to discuss tax considerations).
Business structures such as LLCs are popular for many reasons, mainly because they separate your personal assets from your business assets.
If you have a DBA instead, there isn’t any separation. That means if you’re sued for anything involving your business, a court could allocate your personal assets to pay damages.
For example, say you are a florist and set up a booth one afternoon at your local farmer’s market. It’s a great success, and you have a flood of customers. Things are going swimmingly, until all of a sudden, one customer trips over something in your booth and twists her ankle.
She ends up going to the doctor and bringing claims against you to recoup her medical bills, saying that you created an unsafe environment. You obviously did nothing intentionally to injure her, so wouldn’t your DBA and liability insurance protect your business?
Maybe, but it will be entirely dependent upon the terms of your insurance policy. And keep in mind, an insurance company is a business first and foremost. At the end of the day, it’s their job to give away as little money as possible.
So, if we think about the worst-case example and your insurance does not cover this customer’s claims, and you only have a DBA in place but with no LLC, then your car or your house could be used to help pay damages.
WHEN SHOULD YOU FORM AN LLC?
As soon as possible; preferably, before you begin bringing in any income through your business endeavors.
An important factor to take into account when making this decision is the filing cost of the LLC. (ie. How much does it cost to open the LLC?)
In Oklahoma for example it costs $100 to start an LLC and $25 a year to maintain it. So really, it’s a very affordable setup that provides you untold benefits in terms of protecting yourself from your business, and most states have fees around this ballpark range.
In California however it costs (at the time of writing) $875 to file an LLC, and that is by far the most expensive filing fee of anywhere in the country.
How much it costs to start the LLC is often a factor in a creative business owner’s mind when it comes to when to open the LLC. Should it be before you even take on your first client or just once the business idea has been proven to actually generate revenue?
For business owners in the vast majority of states in the country, we suggest you start the LLC right away before you even take on that first client.
Business owners in California however tend to wait just a little bit before filing because of the cost. For example, our shop attorney Paige Hulse had she lived in California she might have waited until the shop made the first sale or two just to prove the business had legs before diving into the LLC formation and paying the $875.
Don’t take waiting a “little bit” to mean months or years into your business. We really do suggest you do this right away and definitely after the first couple of sales if you’re in California where there are higher filing fees.
How do I start an LLC for my creative business?
Good news, the vast majority of starting your LLC you may do yourself and there are only 4 steps!
We’ll walk you through the steps from start to finish, pointing out which may be done yourself and which steps it’s advisable to get legal assistance with.
Step 1. Visit the Secretary of State website and fill out the ‘domestic limited liability corporation’
This is a simple form you may complete yourself, and you’ll answer questions such as the business’s name, who your registered agent is, what the business’s address is, etc. When you finish the form you’ve then completed what’s called your ‘Articles of Organization.’ It’s what the state has on file stating that you have an LLC.
Once you complete the process you’ll receive a certificate typically by email and when you have that, you have an LLC.
That first step may be completed in as little as 10 minutes, it’s really an easy process!
Step 2. Get an E.I.N. number from IRS.gov
An EIN identifies your business for tax purposes and you'll need an EIN to open a business bank account, apply for business licenses and file your tax returns. It’s also an IRS requirement if you’re selling any goods or services in the US.
Again, this can take just 10 minutes to get and may be completed online yourself.
Step 3. Get an attorney-drafted Operating Agreement
This is the one step we do not recommend you complete yourself but instead rely on the help of an attorney.
Think of the Operating Agreement as the contract that governs the LLC. They’re actually not required in every state, but most banks will require that you have one in order to open a business bank account.
The operating agreement will set forth how distributions and losses are shared, how the LLC is managed and taxed, how members can sell or replace shares, etc. Are you unsure if you’re going to add new members to your business someday? Your operating agreement, if written correctly, will cover all of this. How can your LLC be dissolved, restructured, or “wound up”?
The language that you use in your operating agreement is imperative: if your LLC is involved in litigation, it will be considered an enforceable contract by the court.
There’s another reason why an operating agreement is imperative- it will protect you from something called “piercing the corporate veil”, which single-member businesses, in particular, are highly susceptible to.
Choosing to have a lawyer draft this agreement can be the sole differentiating factor between running your business the way you actually intend, or letting your business be dictated by an erroneous document.
Our shop attorney Paige Hulse has drafted two Operating Agreements which you may find in our online shop.
First is the Single Person LLC Operating Agreement or the Multi Member LLC Operating Agreement.
You would need one (not both) of these operating agreements, and most businesses lean towards the single-person LLC.
If you’re the only member of your LLC, you’ll need the Single Person Operating Agreement. If there are multiple members, you’ll need the Multi Member Operating Agreement.
legal Agreements mentioned:
A question we often get is who do I need to show my Operating Agreement to for it to be “legal”?
Your bank (see step 4) will request to see your operating agreement as it states points such as how much money you’re starting the business with, how many members you have in the LLC, how profits are distributed, who has signing powers over the bank account, etc.
However, the agreement doesn’t need to be submitted to your Secretary of States office or anything of that sort.
Step 4. Open a separate business bank account, credit card, PayPal, etc.
Remember at the beginning of this post we talked about how you want to think of your business as a separate entity from yourself? This is where that comes in especially important.
If your business is a separate entity, then it needs a separate bank account, PayPal account, Wise account, credit card, etc.
Often times business owners go to open a separate business bank account but neglect to open the other types of financial accounts for their business and this is a big mistake. You want all financial assets to be separate. Meaning no more using your personal credit card for business expenses or the other way around, and no more having clients PayPal you money to your personal PayPal account.
The bank will ask for your Operating Agreement from step 3, so be sure to get your Operating Agreement before continuing onto this step.
That’s it. Here’s a recap of those 4 steps to starting your LLC
Step 1. Visit the Secretary of State website and fill out the ‘domestic limited liability corporation’
Step 2. Get an E.I.N. number from IRS.gov
Step 3. Get an attorney-drafted Operating Agreement
Step 4. Open a separate business bank account, credit card, PayPal, etc.
1, 2 & 4 you may complete yourself, step 3 is where you’ll want an attorney to draft you a custom agreement or purchase a solid agreement template that’s been drafted by an attorney.
You may find our operating agreement templates available for purchase at the following links:
Okay so now you have the basics of why you need an LLC, when to start one and how to start one, let’s move on to common LLC questions.
Common LLC Questions
What type of business entity would be best for me?
We’ve been talking in this post about LLCs but they’re not the only entity option. Granted, we find our audience, creative business owners are most likely to need an LLC.
We’ll walk you through the decisions and options to help you make the right decision on if an LLC or some other entity is right for you.
The first and most simplistic form of entity is an LLC.
Frequently business owners get DBAs and think that’s the same as an LLC but they’re not.
A DBA (Doing Business As) is simply a way to name your business but it provides no liability protection like a LLC does.
Another frequent misunderstanding is that business owners want to form an S-Corp. It is possible to have your LLC taxed as an S-Corp without actually forming an S-Corp.
To know if getting your LLC taxed as an S-Corp is right for you, get in touch with an accountant as that is a decision very much so made based on tax implications.
If you want a more complex entity a C-Corp could be right for you, but again this is a situation where you’ll want to seek individual legal advice to determine if that’s the right path for your business.
There are other types of entities, but they’re very rare, so we’ll just leave it at that.
The bottom line: For the vast majority of new creative business owners an LLC is the right place to start.
Should I start an S-corp instead of an LLC?
As mentioned above, often business owners ask about forming an S-Corp but often what they mean is they want to be taxed as an S-Corp. This is a discussion to have with your accountant to determine if being taxed as an S-Corp (most common) or actually opening an S-Corp (least common) might be right for your business.
What are the steps to keep an LLC operating year after year?
File articles of renewal on the Secretary of States website on the anniversary date of when you started your business. Often, your state will email you a few months prior to remind you and you can file the articles of renewal ahead of the actual anniversary date.
Articles of renewal is not a document but simply a form you fill out on the Secretary of States website.
What about if you miss the deadline for filing the articles of renewal? You can file articles of reinstatement and the filing fee to do so varies by state. For example in Oklahoma that costs about $25 whereas in Texas it costs $1,000.
Depending on your state, it’s a lot cheaper to remember to file the articles of renewal on time, so mark that anniversary date in the calendar or set yourself a reminder a few weeks before.
Can my LLC have/be my own name?
Yes.
When do I need multiple LLCs?
The way to make this decision is based on liability. We’ll answer this with an example.
If you’re say a wedding photographer and you’re going to start an education side to your business, those are two very different types of liability you’d take on with the in-person actual wedding photography versus the online education.
This would be an example where multiple LLCs would make sense.
If you had multiple LLCs a bride and groom couldn’t sue and get at assets generated from the online education business and vice versa. So multiple LLCs are basically creating little umbrellas of liability protection for the different sides of the business with different legal entities.
Why is having multiple LLCs beneficial?
The liability of the different LLCs is separated and judgements made against one entity cannot be satisfied with the finances of the other.
A family member has an LLC. Can I run my business through their LLC?
Coming back to the purpose of an LLC, to protect liability, it would likely be unwise to mingle the liability of your business and the family member’s business.
For example, if the family member’s business got into hot legal water, your businesses assets may then be used to settle a judgement, because if that’s the way you’re operating your business (through a family member’s LLC) then in the eyes of the law it’s all one entity.
How do I keep my entities (LLCs) separate?
(This applies if you have multiple LLCs.)
To ensure your different businesses are treated as different businesses it’s important that you:
Have separate operating agreements per entity
Have separate bank accounts, PayPal accounts, credit cards, etc. per entity
Pay your personal bills from your personal bank account, not the business account
Abide by all of your state corporate formalities
What are state corporate formalities?
Normally that comes back to the whole having an operating agreement and separate accounts for the entity. Some states may have different formalities, so it’s worth checking if there’s anything additional you need to know about in your state.
Can I use the same website & email address for different LLCs?
Yes, you can indeed.
(The wedding photography/photography education example from above is a perfect example of multiple LLCs but one website/business email address.)
What is a registered agent in an LLC?
It’s the person the Secretary of States website has on file who lives within the state to receive mail on behalf of the LLC. Basically, it’s the state’s contact for the company.
How do you move an LLC from one state to another? And do you need to stop selling during the move?
We’ll preface the answer to this with that each state may be different so it’s worth checking if there are any extra items you need to be aware of in your state.
Option 1: Keep the old LLC and register it as a foreign LLC in the new state you’re moving to.
Option 2: Dissolve the old LLC and start a new one in the new state.
Option 3: (Very infrequent & tricky) Merge the old LLC into a new LLC in a new state. To do this you file articles of merger.
How do you pick? If you’re for example moving from California to Oklahoma, it’s a lot less expensive to start and keep an LLC running in Oklahoma than California, so that’s an example of when it would be savvy to go for option 2.
How do I sign agreements and contracts on behalf of my LLC?
We’re so glad this question is asked because we often see business owners, especially business owners whose names are the same as their business names, signing agreements incorrectly.
You want to sign in the following structure:
Your name, your designation within the company (eg. owner, manager, etc.), LLC name
So let’s say your name is Mary Johannesson, your title within the company is Founder and your company name is Johannesson International LLC.
You would then sign as follows:
Mary Johannesson, Founder, Johannesson International LLC
What are the biggest mistakes business owners make when operating their LLCs?
Not having an operating agreement - almost might as well not have an LLC because if you’re brought into court arguments can be won very easily by you not having one. And having an LLC to protect your personal assets is the entire point to start an LLC, so if the LLC can be basically ignored in a court proceeding and your personal assets accessed, there wasn’t much point to the LLC.
Co-mingling funds - Another bit of proof that you’re not a business but just a person providing services, who can therefore be sued as a person, not a business, again meaning the judgement being able to claim assets from you personally and the business.
Does my LLC operating agreement need to be notarized?
No, it does not need to be notarized.
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