Do I Need an LLC for My Side Hustle?
Whether you’re inventing new technology or selling handmade items, the IRS says your hobby becomes a business as soon as you plan to make a profit from it. Starting a new business can be a daunting process, and it is important for business owners to protect themselves and their businesses through proper structuring. One of the first decisions a new business owner needs to make is how best to manage the business. Forming a corporate entity for all matters, even small side businesses, can help organize business affairs and provide a safety net for the owner.
There are many entity options, from informal operations like sole proprietorships and general partnerships to organized and regulated entities like corporations, limited liability partnerships, and limited liability companies. Is a limited liability company (LLC) right for your new small business?
What are the benefits of an LLC?
LLCs, or limited liability companies, can be extremely versatile tools for business management. They provide many benefits to business owners, including:
Limited personal liability. Most importantly, the limited liability provided by these entities means that the individual owner is shielded from most debts and legal liability of business conducted in the entity’s name. This feature protects the owner’s personal assets when conducting business. This protection can be extremely important for a new business and is one of the most notable benefits of organizing as a formal entity; no business is too small to start thinking about liability protection.
Pass-Through Taxation. The default LLC form utilizes a pass-through taxation structure, meaning profits are only taxed at the individual level once they’ve been distributed from the entity to its members. This structure avoids the double taxation scheme present in some other entities like most corporations, making tax matters much simpler.
Flexibility. The formalities of an LLC can also provide helpful structure to a business because LLCs are highly flexible. LLCs can be used in single-member structures for small businesses owned by a single person or can be organized in more complex schemes to involve multiple managers and members. LLCs also require fewer formalities than other entities like corporations.
Structure. Writing Articles of Organization to establish an LLC helps a new business owner consider many possible scenarios before they happen and have a plan ready ahead of time. LLCs can also have their own bank accounts, making separation of business and personal matters easier.
What if I run my business without an LLC?
Creating a formal entity is not necessary to conduct business, and it may seem appealing to conduct business without setting up a new legal entity to avoid the time and expenses of doing so. However, choosing to perform business with an informal operation rather than setting up an LLC risks exposing the owner to personal liability and can make it more difficult to firmly divide business matters from personal ones.
How do I create an LLC?
The process of setting up an LLC is fairly straight forward. To set up an LLC in North Carolina, a new business will need to choose a unique name and then write Articles of Organization, which outline exactly how the business will function. The business will then need to file the Articles of Organization with the Secretary of State along with a filing fee of $125.
Vennum Law is here to help you decide if an LLC is right for your business and make organizing your entity easy. Click here to schedule a consultation.