The original title for this post was “Why I Decided to Switch from Sole Proprietorship to an LLC.”
As you can see, I’ve changed my mind.
Before doing any research, I assumed I should switch from sole proprietorship to forming an LLC for my business. From the little I knew, the switch matched up with all my values. It would be a symbol of treating my business like a business. It would minimize risk, which is my style both personally and in business. And it could help me save money with taxes. Of course I wanted to save money!
Then I started researching. It turns out, a lot of my assumptions about LLCs were wrong. Here’s what I learned:
I am the sole owner of my business, so I would be forming a single member LLC. Once I started investigating the supposed tax benefits of LLCs, I learned that in my case, my taxes would be filed in the exact same way as I currently file them as a sole proprietor. Unless I turned my LLC into a corporation, my single member LLC would be a pass-through entity. I would still pay my taxes through my personal return.
Bottom line: In my case, forming an LLC would not help me save money on my taxes.
I had always heard that forming an LLC would protect my personal assets in case anything went wrong with my business.
But I discovered that in my specific case, as a freelance writer, the liability protection of an LLC doesn’t cover most of my highest lawsuit risks. I think my two biggest risks as a writer are copyright infringement and libel. In both of those cases, the person who is responsible for the copyright infringement or libel can be sued. So, even if I had an LLC, I would likely be personally sued. In that case, my personal assets would not be protected, even if I had formed an LLC.
Bottom Line: In my case, forming an LLC would not provide liability coverage for my biggest risk factors. Instead, I plan on researching personal umbrella insurance policies, which can offer more liability protection.
It’s important to me to treat my business like a business. It is not a hobby, it’s my career. I send my daughter to daycare so I can work. I have a home office. I have a set working schedule. Because I take my business seriously, my family, friends and clients do too.
But I don’t need to form an LLC to feel official. For others, this may be great motivation. If so, awesome! Form your LLC! While researching I realized that I don’t need that official designation to feel like a legitimate business owner.
Bottom Line: Forming an LLC for my business does not make sense right now. If and when things change in my business, I will re-research and call my tax accountant and lawyer again to discuss. But for now, I’m staying a sole proprietor.
Have you formed an LLC? What factors helped you make the decision?
*Note: I am not a tax accountant or a lawyer. The best plan for my business is not necessarily the best plan for your business. My goal is to simply help you recognize that there is no single “one-size-fits-all” solution. Do your research and get advice from a tax preparer and a lawyer.