LLC or Inc for Online Business: Everything You Need to Know
Setting up an LLC or Inc for online business gives you some pros such as personal liability protection and cons like corporate debts.3 min read
Setting up an LLC or Inc for online business gives you some advantages such as personal liability protection and subjects you to some disadvantages like no liability protection and corporate debts.
Sole Proprietorships and Partnerships
A business that is not an LLC or a corporation is a sole proprietorship or a partnership by default. These forms give you almost no protection from liability if your business is sued. The debts and liabilities of such a business are the personal responsibility of the owner. That means that your personal assets, like your house and cash, can be taken to settle business obligations. A lawsuit against your business is a lawsuit against you personally. Sole proprietorships and partnerships also provide no tax benefits.
On the brighter side, sole proprietorships and partnerships are easy to set up, inexpensive to run, and require less paperwork and reporting. You can register a trade name for your business with the Secretary of State's office where you are operating.
LLCs and Corporations
LLCs, corporations, sole proprietorships, and partnerships are all perfectly legal and legitimate business structures. However, unlike a sole proprietorship or partnership, an LLC or a corporation provides you with some level of protection for your personal assets. These companies have a separate identity under the law. If the business incurs some liability, only the business assets stand good for that obligation. While they are different in most other respects, LLCs and corporations have the same type of protection against liabilities.
Though the laws vary by state, corporations and LLCs usually have more administrative requirements than other business forms. They're more complicated to start because specific organizing documents called Articles of Organization (for LLCs) or Articles of Incorporation (for corporations) must be filed with the state. Both structures require a registered agent, and the associated filing fees can be a significant expense.
The ongoing requirements are greater than for a sole proprietorship as well. For example, corporations are usually required to have by-laws and regular meetings of the Board of Directors. LLCs are not required to have by-laws or member meetings, though they are still recommended.
Corporations do have an advantage over LLCs when it comes to perks like stock options, employee stock plans, and retirement options. Corporations don't pay taxes on these types of benefits.
LLCs are inexpensive and easy to establish. You decide who the members are and how much ownership each one retains.
Business Structure and Taxes
Every business structure is treated differently under the tax code.
- LLCs are called pass-through entities because income from the business passes through to the owners and is taxed as personal income through a formula that reflects their ownership percentage.
- Corporations are taxed twice. Profits from the business are taxed when they are earned, and then they are taxed a second time when they are paid out to shareholders. LLCs are not subjected to this double taxation, making the LLC the preferred structure for most start-ups. However, if your future plans include going public with your company, you'll find that it's easier to sell shares of corporate stock as opposed to interests in an LLC.
Where to Establish an Online Business?
If your business operates online, you may be unsure of the best place to file your organizing documents. Most entrepreneurs choose to establish the corporation or LLC in the state where they live or where they expect to do the majority of their transactions, but there are other factors to consider.
- Expenses: Every state has different fees, taxes, and costs associated with setting up the business.
- Legal environment: State law governs certain aspects of how your business can operate, liability, and tax codes.
- Multi-state operations: You may be required to register with multiple states if you plan to do business in those locations. That could mean additional filing fees and documentation. Failure to meet these requirements can result in penalties or fines.
- Reputation: Some states are more business-friendly than others. Delaware, for example, is home to many companies because of its flexibility and pro-business climate.
How you go about setting up your business is a fact-dependent process that can be very specific to the type of goods and services you offer. It's wise to seek the advice of a competent attorney who is familiar with the laws of your state.
If you need help with creating an LLC or Inc for your online business, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.