What is the benefit of having an LLC?

juliekitzes

I've had several people suggest I register as an LLC but haven't seen any reason for this. What benefit does an LLC give for an individual who just does freelance business under their real name?

Nyrryl Cadiz

@juliekitzes hi! I’m really new to this. What’s an LLC?

Coreyartus

@Nyrryl-Cadiz They may not have them in the Phillipines... LLC stands for Limited Liability Corporation. It's a way of organizing a business for tax purposes here in the US. Some artists are classified as "Sole Proprietors", some choose to go through some extra steps and form an actual business as an LLC. There are pros and cons to each.

I had an LLC when I was doing my wearable art business. It was useful for getting supplies at wholesale prices and such, but for me personally I wasn't making enough money for it to actually be substantially different from if I'd stuck to being a Sole Proprietor. The biggest security is that if you get sued, it's the company that is liable, not the artist. That can be handy when lawsuits can sometimes devastate artists financially.

There may be a lot of artists out there with LLCs because you can legally file a form to "Do Business As" a different name. I've heard of artists having LLCs that Do Business As their own name. But I don't know if that complicates things or not...

I think a lot of the benefit of having an LLC depends on what you envision doing with it that you can't otherwise. That might mean saving money on taxes or whatever. I'd be interested in hearing what others might say about this as well--it's a hairy topic with lots of different opinions. It's hard to distill the usable information, sometimes... Are there situations when an LLC is more useful than being a Sole Proprietor?

Nyrryl Cadiz

@Coreyartus thank you!

Paul Burton

@Nyrryl-Cadiz, @Coreyartus is 100% correct that when it comes to filing taxes as a small business owner things can get confusing.

A sole proprietor is literally anyone who decides to start a business. The moment you accept payment for a service or product, you become a sole proprietor in the eyes of the IRS. It's the simplest means of paying taxes as small business owner. Basically, all profits and loss are "passed" through the business to your personal taxes.

A sole proprietor has zero protection against two things: 1) getting sued and 2) debt. If your business gets sued or goes bankrupt, it's not the company that takes the hit ... it's you. For example, creditors can swoop in and take not only your business assets but your personal assets as well—like your house, car, television, and welcome mat.

Assuming your LLC is set up by a competent lawyer, the "limited liability" of an LLC protects you from both of these consequences. The problems begin and end with the business.

There are two types of corporations: an LLC and an INC. They are very different entities.
A sole proprietor (and corporation) pays income taxes quarterly.
Under an LLC, you are still considered a "sole proprietor" or a "partner" in the eyes of the IRS.
You will pay yearly state incorporation fees (fees for an LLC are typically minimal.)

You will hear a lot about "double taxation" as a corporation (INC)—this simply refers to being taxed twice on the same income for corporate taxes and personal income taxes.

Sole proprietors and LLCs are not double taxed—in other words, the corporation is not taxed, you are. BUT there's a catch ... you ARE subject to "self-employment" tax in addition to income tax. Technically, you still get taxed twice. Gotta love the IRS (but their customer service is outstanding. No kidding.)

After you create your LLC, you can reduce your tax liability by having your accountant file an "S-Corp" election with the IRS ... this is not a legal entity, it's an IRS designation.But it'll save you a bundle on taxes.

Anyway, to answer your question in a word ... An LLC is "safer".

I've been an LLC, in one incarnation or another, for 24 years, and the best advice I can give you is that the smartest decision you can make is to find a good accountant (not H&R Block and don't do your own taxes).

The second best advice I can impart is to work with a lawyer who specializes in corporate law to set up your LLC (this typically costs about $500)—While it's possible to set up an LLC on your own using online services that offer bargain rates and quick turnarounds, do NOT do this.

Cheers

Nyrryl Cadiz

@Paul-Burton thanks! I live in the Phillipines tho. I think we a have different system here.

Paul Burton

@Nyrryl-Cadiz Oops. My bad. I tagged the wrong person. Meant to tag @juliekitzes.

Nyrryl Cadiz

@Paul-Burton lol no worries. I think she’ll still see your post.

drawnbyshawn

@Paul-Burton Just for the sake of discussion, what would you say some of the issues are with setting up an LLC on your own?

Paul Burton

@drawnbyshawn Setting up an LLC on your own is easy. I'm not saying it isn't. I set up my first LLC using an online service. But there are simply certain things that you should leave to people who specialize in those areas of expertise—for me, that's laws and numbers.

I had a horrible, terrible, very bad experience with a client at the dawn of my career that caused me to take certain things about running a business seriously ... All it took was a year of ceaseless harassment and threats of a lawsuit.

I'm not a lawyer and my thoughts below are exactly that, thoughts (based on my experience). But any lawyer will tell you that the limited liability of an LLC will protect you ... if it's "set up correctly". And, no, I'm not exactly sure what that means.

Corporations (LLCs, Incs) are governed by the state in which you register. While the basic rules are fairly consistent, each state has different rules and regulations for the creation of business entities—Nothing at all unusual about this. But those rules and regulations do change from time to time and, if you set up an LLC on your own, you will be responsible for tracking and updating your company information with these changes.

Potential problem areas with LLC creation:

naming your organization
preparing your articles of incorporation
writing an operating agreement
obtaining business license

A lawyer will handle all of this for you and make sure that it's all completed correctly.

But the biggest benefit of retaining a lawyer is that he/she will make sure you are current with all your required annual state filings—including registration, filing your articles of incorporation, and minutes. Miss any one of them and you will get hit with penalties, late fees, and even suspension. I prefer not to have the responsibility of handling all of this on my own every year.

My lawyer handles all of my yearly incorporation paperwork and is worth every penny ... when I need him.

drawnbyshawn

@Paul-Burton Thanks for the detailed reply. Yeah, I hear what you're saying. I'd agree that "laws and numbers" are the two areas that I prefer to get outside help on. On the other hand, as I try to be mindful of expenses I'm always looking to find the balance between "I'm comfortable doing this DIY" and "no, I better have someone else do this".

Paul Burton

@drawnbyshawn You're welcome! Happy to weigh in on the discussion. And cheers to my Minnesota brethren ... I grew up in the burbs of St. Paul.

drawnbyshawn

@Paul-Burton Ah, cool! My wife is from St. Paul.

juliekitzes

@Paul-Burton Wow, thank you for so much for such a thorough answer to the question. I'm just curious, aside from something like copyright infringement, what are reasons an illustrator could be sued? I'm at a place where I really only make a few hundred dollars here and there so I feel like I can't justify spending money to establish an LLC right out of the gate, but I also want to be safe if there's a real risk.