by Taylor J. Kovar – CEO/Founder, Kovar Wealth Management
–Hey Taylor – I’ve been working as a part-time consultant for the last few years, advising business owners and whatnot. I’m wondering if it would help or hurt me to form an LLC. The business is just me and I make probably $25,000 a year.
–Hey Elizabeth – Congratulations on running your own business! Sounds like things are going well. When it comes to forming an LLC, you’ll get different advice from different schools of thought. It comes down to personal preference most of the time, so let’s just get into the details and you can decide what makes the most sense for you.
- Limited liability company. As the title suggests, an LLC has some liability protections that a sole proprietorship does not. Essentially, you’re less vulnerable to someone coming after your assets when you’ve made the move to incorporate. Being protected is never a bad thing–the question is more about the actual risk you face without the LLC status. A lot of people feel comfortable running a sole proprietorship for the lifespan of their business, especially if they never branch out and hire employees. That said, depending on the companies and professionals you’re consulting, an LLC could offer important protection.
- Costs and fees. Some business owners hesitate for fear of what expenses they might incur once they incorporate. Generally speaking, LLCs don’t run up the bill. Your tax structure stays the same as it was before so it’s not like you have to start shelling out more than you’re earning. The process isn’t 100% free, of course, and the cost of registering your company will vary depending on the state you live in. It’s really easy to start an LLC, but it’s not as simple as declaring, “I’m an LLC now!” and never having to worry about it again.
- Pros and cons. The pros are mostly covered in the first bullet point here: you get to worry less about risk exposure as an LLC than as a sole proprietorship. You also have the psychological benefit of customers seeing the LLC after your title and trusting the validity of your business a little bit more. One of the biggest drawbacks is learning to keep your personal and professional accounts separate, as you have to make that distinction much more clear with an LLC. If you’re not great with keeping track of which expenses to categorize as business vs. personal, that’s something you’ll definitely want to fix before incorporating. The mess caused by bad bookkeeping gets a lot messier once you’ve formed an LLC.
I think it’s definitely something you should consider, Elizabeth. If you think your business will keep growing, I feel like forming an LLC is the right choice. Just make sure to read up on what forms your state requires and then get all your ducks in a row before taking the plunge. Good luck!
