Jack DonaldIt often happens that time is all we have. Situations when we get a chance to buy a business, sell-offs, or when we simply need to make our choice fast to not miss the best deal. The same goes for forming an LLC. Entrepreneurs often want to know if there is a perfect time for this process or a special “opportunity window.” Identifying a profitable time to switch to an LLC will keep your business safe and prosperous.
Do you know the right time to obtain LLC’s limited liability protection? Should you create an LLC before you start offering your products or services? There are so many important questions that may raise some doubts about the process. And we’re here to answer them!
Follow our guide to determine the best optimal time to create your LLC, based on your unique business goals, conditions, and circumstances.
Word of advice: before we get to the basics, we’d like to let you know right away about the easiest ways to go. If you need help forming an LLC or just want to make sure you’ve done everything right, you can hire proven online LLC services. We recommend ZenBusiness ($49 + state fees) or LegalZoom ($79 + state fees). These companies will take care of your worries, all the paperwork, and allow you to focus on other important business aspects.
Do You Need an LLC?
Perhaps you are still thinking about forming an LLC, asking yourself if your business really needs it. Yes, this decision requires self-analysis as well as knowing a few basic reasons for forming an LLC.
An LLC is a fairly flexible and profitable business structure, allowing you to customize anything from operational processes to taxation. Plus, starting an LLC is much easier than forming, say, a corporation.
However, having an LLC also means that you are “hiding” your personal assets from voracious creditors. Now, the protection of LLC’s limited liability means that your personal assets are safe in case someone files a lawsuit against your company. This way, you can grow your business in peace, knowing that your personal property is 100% secured.
In addition, LLCs are not required to pay separate corporate income taxes. Instead, owners report profits and losses on their personal tax returns. In doing so, you are free of double taxation that corporations incur (income tax at both the corporate and personal level) and greatly simplify the tax filing period.
If you feel that all of the above-mentioned could benefit your business, then you are ready to form an LLC.
When You Should Form an LLC
Now you know “why,” but what about “when”? If you plan to grow your business, you certainly don’t want its expansion ahead of the structure. What you want is your LLC’s limited liability protection before you run into any possible problems. Also, if you plan to hire employees or transfer ownership, you can’t do that running a sole proprietorship (or a general partnership). Thus, if you expect to transfer ownership, you need to form an LLC (or corporation, etc.) first, the same goes for hiring employees.
In case you plan to finance your company with investments, you should know that investors rarely (if ever) show interest in sole proprietorships. The reason for this may be the fact that people simply prefer to invest in real businesses rather than someone else’s personal enterprise.
Given that an LLC is not a terribly complicated or expensive business structure to form or maintain, we recommend forming it in advance, before you might actually need it. You don’t want to find yourself in a situation where you need limited liability protection or an urgent change of ownership without the ability to do so. So if you foresee your business growing to the point where it needs protection, you might want to take care of it before you reach that level.
When You Should NOT Form an LLC
There are a few competing viewpoints about the best time to form an LLC. Sometimes, there’s no reason to do that at all. Thus, forming an LLC can be pointless if you are doing just fine as a sole proprietor, i.e. a freelance writer working from home. In this case, you probably don’t have much responsibility at all, consequently, you don’t need to form an LLC and ensure its protection.
Keep in mind that an LLC requires strictly separated business and personal assets – this can be a hassle that you can avoid by running a sole proprietorship or partnership. Moreover, if there’s not enough money for your one- or two-member business, you can instead operate as a partner or sole proprietor to increase your financial resources, saving on LLC formation and registered agent costs.
With that said, keep in mind that you can always start small and form an LLC in the future should you deem it necessary.
How You Can Form an LLC
By now you should have a good idea of whether or not you need an LLC. If your answer is “yes,” you may wonder, what’s next? The harsh truth is that even considering the simplicity of forming an LLC (compared to corporations), the process can still be quite time-consuming. Especially, considering the fact that the formation process varies slightly from state to state.
You can certainly take the DIY path and try to save some money. You will have to prepare all the paperwork, file Articles of Organization, etc. However, keep in mind that if this is your first LLC, and you don’t have enough knowledge and skills, there’s a big risk of making serious mistakes that will eventually cost you a lot of time and money. In addition, as an entrepreneur, you probably have a lot on your mind, which means you may simply not have enough time for all the hassle with paperwork. Fortunately, you can leave this to professionals. There are two popular ways to choose from.
For example, some entrepreneurs hire an attorney to set up an LLC, which, although offering unparalleled legal expertise, can be quite expensive. However, for many, peace of mind and knowing that everything will be done right is a much more important factor.
Despite this, we would recommend the second, our personal preferred option, which combines two main qualities – affordability and legal reliability.
We are talking about professional LLC formation services, such as ZenBusiness or LegalZoom. They are able to take care of the entire LLC formation process and prepare the necessary business documents for you. These LLC formation companies will cost you much less than lawyers. Plus, you can be sure they have enough successful experience and knowledge – these guys really know what they do. Thus, if you’re interested, you can check out the two of our favorite service providers in more detail below.
- ZenBusiness (starting from $49/month + state fees). This is one of the most affordable LLC services online, which in no way means it provides an inferior level of service. Even though ZenBusiness can’t boast of an extensive track record when compared to our next favorite, LegalZoom, they’ve still managed to build a loyal customer base, help form thousands of businesses, and gain a large number of positive online reviews.
- LegalZoom (starting at $79 + state fees). Yes, their prices are obviously higher than those of ZenBusiness, however, there are reasons for that. LegalZoom has tremendous experience and an unrivaled reputation – they’ve not just built a successful company but have created one of the strongest brands on the market. LegalZoom offers extended hours of customer service and a 100% money-back guarantee, so they’re definitely worth your time.
Conclusion
As you’ve probably guessed by now, there is no universal answer to the question, “When is the best time to form an LLC?”. It all depends on your business plans and circumstances. However, there’s one general rule, which states that forming an LLC makes sense before (possibly) finding yourself in a situation where your LLC needs urgent protection. In other words, in this case, sooner is better than later.
If you’re still in doubt, ask yourself a few simple questions. Are you going to hire employees? Will you need to protect your personal assets and limit the liability to business resources only? Do you need a separate business bank account? An affirmative answer to any of these questions will mean that it may be the time for you to think about forming an LLC. In this case, you might want to consider hiring professional LLC formation services like ZenBusiness or LegalZoom to boost the process. They can also help you understand if an LLC structure is right for your business. Otherwise, you can check with your state office to learn all the rules and guidelines for forming an LLC in your state.
