Or maybe you’re just getting started in the business world, and you’re wondering when the best time is to take the next step and form an LLC?
The LLC is a highly popular American business entity, with thousands of them formed across the country every day. Because of this popularity, we hear quite a few questions from our readers about many different aspects of the LLC, including when you should form one for your business — either on your own or through an affordable LLC formation service.
This article addresses many different elements regarding the timing of limited liability company formations, and by the time you’re done reading, we hope to answer all of your tough questions about when to form your new LLC.
What Is an LLC?
Before we get too far into the details, let’s quickly address some of the basics.
The limited liability company is a business owned and operated by one or more people, who are often referred to as “members” of the LLC. The LLC is a hybrid business structure that combines the casual flexibility of sole proprietorships and general partnerships with the limited liability protection of a corporation.
The main reason for the LLC’s popularity is because it provides personal asset protection, which means that creditors can only pursue your business assets in a lawsuit against your company, while your car, house, and personal bank accounts remain protected.
In addition, many entrepreneurs save a considerable amount of money on taxes thanks to the LLC’s “pass-through” taxation, which has the LLC owners claim business profits or losses on their personal returns, and there is no corporate-level taxation.
When Is the Right Time to Form an LLC?
The answer to this question depends somewhat on your circumstances, but overall it’s important to focus on when you need the limited liability protection provided by an LLC.
In general, we advise our readers to form an LLC before you start conducting business in any way, because if you sell products or services as a sole proprietor or general partnership, you won’t have personal asset protection to fall back on if something goes awry.
It’s also important to form an LLC before you need to hire employees. While sole proprietorships and general partnerships are legally allowed to hire employees, there are some significant downsides to doing so.
For example, let’s say that you hire employees as a sole proprietor, and one of them slips and falls while working, due to a wet spot on your floor. That employee can sue you for medical costs, and those expenses would come out of your pocket, because you don’t have the legal protections of an LLC backing you up.
One of our favorite aspects of the LLC, as opposed to a sole proprietorship or general partnership, is the air of professionalism and legitimacy this business entity provides. It’s a good idea to form an LLC before you consider doing any advertising, because the LLC’s ability to reserve your unique business name is a big upgrade in the credibility department compared to using your own personal name to represent your business.
Given the fact that it isn’t very expensive to start or maintain a limited liability company, and it doesn’t take a tremendous amount of time or effort either, we recommend forming one well before you find yourself actually needing it.
If you operate a sole proprietorship or general partnership and you have any plans for growth, this is probably the time to go ahead and acquire the protections afforded by the LLC business entity.
When Is the Wrong Time to Form an LLC?
There really aren’t many circumstances when we would specifically advise against forming a limited liability company, because as we mentioned in the previous section, it’s not all that costly or time-consuming to form one.
One situation where we could see it being unnecessary is if you function as a sole proprietor, and you don’t have any liability ― for example, if you work from home and have no employees, risks, or expansion plans.
The only other time that we don’t think it’s a good idea to form an LLC is if your business is operating under extremely tight budgetary restraints, or if you don’t have the time and energy to devote to forming and maintaining it. Even in this circumstance, you might want to reserve your desired business name with your state. This is typically a very inexpensive process, and it ensures that the name you want will be available when you’re ready.
How to Form an LLC
To form a limited liability company, you will need to fill out a document known in most states as the articles of organization.
This is a relatively simple form that includes some basic information about your company, including the name of your business, the name and address of your registered agent, the identities of your LLC’s owners/members, and the name of your LLC organizer. Most states have articles of organization templates available on the Secretary of State’s website.
If you want some assistance with your formation, you could hire a business lawyer, which provides a great deal of peace of mind, but also costs quite a bit of money. Our favorite option is to hire a business formation service to help form your company. There are plenty of reputable companies offering this service, and their rates are usually much more affordable than a business attorney, especially considering the tight startup budgets many LLCs start with.
If you’re interested in using an online business formation service, you can take a look at our guide to the best LLC formation services, or if you’d just like a quick overview, here’s a look at our top three:
- Northwest Registered Agent ($225): For the price point of $225, Northwest will form an LLC and include a full year of their premium registered agent service. They also have next-level personalized customer support that makes Northwest one of our favorite companies in this industry. (Read our full review)
- Incfile ($0): Incfile drastically undercuts Northwest’s price tag, while also offering a free year of registered agent service. While Incfile doesn’t have the same level of customization for their customer service as Northwest does, they do have thousands of fantastic customer reviews available online, which can be quite the advantage depending on your preferences. (Read our full review)
- Zen Business ($39): Zen Business can’t match Incfile when it comes to pricing, and but they do include any registered agent service with their LLC formation packages. Plus, Zen Business has a large customer volume and impressive brand power, so if you want to use a great LLC service that has excellent features, Zen Business is worth a look. (Read our full review)
The question of when to form a limited liability company has varying answers depending on the nature and size of your business, as well as what your aspirations for your company are.
For the most part though, we recommend forming an LLC well before you expect to ever need the limited liability protection this business entity provides.
Especially considering the affordability and convenience of the LLC, there really aren’t many downsides to forming one at any time. Unless your budget is very tight, or you simply don’t feel that it’s necessary to obtain the protections of an LLC, we don’t see any reason that you should put off the LLC formation process. Especially with good LLC services like Northwest and Zen Business.