So, why form an LLC?
At the end of last year, I spent a couple of weeks trying to decide whether or not to move MasonWorld.com from a Sole Proprietorship to a Limited Liability Company. So, I thought it was appropriate to make a blog post describing my findings while researching this topic. I thought it might save you some time in the future.
In the end, I did form an LLC and I used LegalZoom to do it — but I did not do it for the reasons that you might think.
Having said that, I need to let you know that I’m not an attorney, and in fact I don’t even play one on TV. If you need legal advice, you definitely need to consult an attorney. Don’t do anything based on my opinion. You need to seek professional advice for legal matters and for tax accounting, for that matter. Also, you should know that LLC laws vary from state to state (and from country to country). So, you really need to talk to your attorney.
Even though I am not an attorney, I do think it’s useful to understand what kind of questions to ask an attorney. After all, attorneys cost $150, $200, or $250 an hour. It pays to know what you need to ask about before you go in to ask advice from an attorney. There’s no reason to get a background education from an attorney. You need to go in with an education and then leverage that education to get your tasks accomplished as quickly as possible for the lowest attorney fees possible .
Why Form An LLC (Myths Revealed)
I was considering moving the Mason World activity to a Limited Liability Company (LLC) for three basic reasons. I think these are the three basic reasons that most people consider using a Limited Liability Company for.
One, limit liability. Very clearly, if I get sued for something that I do on MasonWorld.com or one of my other websites, I’d like to keep someone from taking my life savings, my house, and my car. I want to limit my personal liability. As you can see, the general theme of protection” is the major selling proposition in the ad creative from LegalZoom below:
Two, tax protection. Everybody always says that the right thing to do is to form a Limited Liability Company under tax code sub chapter S. One of the things I wanted to determine was whether or not this would give me any tax savings.
Three, appearances. Hey, it looks cool to have a Limited Liability Company moniker behind the name of your company. So, forming an LLC might give you some additional credibility.
Now, I’m not really going to talk about my tax findings and this issue of credibility in this blog post. We’ll save that for a future blog post. But, I will tell you about my findings on the liability side. I had a long discussion with Lynn Terry in her Private Member forum, which as you know I participate in very heavily. I’ve come to some very definite conclusions after talking to a couple of attorneys, and they may surprise you.
An LLC May Not Protect You From Anything
If you are a Solo Entrepreneur, liability protection is not a good reason to form a Limited Liability Company according to my research. Again, I am no attorney (you should consult one to confirm my research). However, consider for a second what you want to be protected from. Limited Liability Companies protect you from the liability of debt, among other things. They separate your business activities from your personal activities and give you the opportunity to be protected against business debts that you may incur.
Now, I’m not borrowing hundreds of thousands of dollars to run MasonWorld.com. As you know, one of the great things about internet business is that it costs very little to run one. In fact, I run MasonWorld.com completely on a cash flow positive basis.
So, what I am really interested in is liability protection. If I write something on my blog that insults someone, and they decide to sue me and they win, then those damages could effect my personal assets. Assets that are not in any way related to assets generated by MasonWorld.com. The question is “can a Limited Liability Company protect those assets?” Will someone who sues me be able to take my home and my car?
My research suggests that in the case of a Limited Liability Company with a single employee, the answer is absolutely not –– the LLC will not protect you. The reason is very simple.  When someone sues a company, they also sue the people in the company that are responsible for actually doing the thing that has caused the suit. If the company contains only one employee then that employee will always be named in a lawsuit. In the case of MasonWorld.com, I am the only employee. There are many virtual assistants, but I am the only employee. So, any action taken by MasonWorld.com that harms someone would actually be an action taken by me — so I would be named in a suit.
Of course, if you have employees or a partner then everything changes. If your partner goes postal and creates liability for the company, a LLC may very well limit your personal liability. Again, consult your attorney.
An Example Helps Make This More Clear
Consider the example of Bob123Website.com, which is run by Bob. Note that Bob is not a real person — so if your name is Bob, please don't sue me. 🙂
Bob writes a blog post and says that a congressman is sleeping with his secretary. It turns out that defames the congressman, and the congressman sues for liable, slander, or defamation, whichever one applies, in this case defamation. Let’s say the congressman wins, Bob loses, and Bob now owes the congressman $250,000.
But wait — Bob’s got an LLC.  It won't matter because the congressman sued both the LLC as the company who took the action, and Bob as the individual who took the action. With Solo Entrepreneurs this is almost always true — Bob takes every action at his LLC because he is the only employee.
Where a Limited Liability Company would protect Bob would be if Bob had seven employees, and employee number five was the one who wrote the blog post. That would protect Bob’s personal assets, because Bob would argue it was the company that did it, not Bob.
So, if you can’t separate yourself from your company (if you’re really a single person inside a company and you’re taking all the actions on behalf of the company) there’s really no way for you to protect yourself from liability. Again, this is my opinion and I am not an attorney — but this is pretty clear.
Bottom Line: You are responsible for your own actions. You cannot hide behind a company name. After all, shouldn’t it be that way? Shouldn’t you be responsible for your actions? That makes sense to me.
I did go ahead and form MasonWorld Enterprises LLC at LegalZoom — but not for liability protection. I did it for several other reasons that I may discuss in detail in a future blog post. I even had a new logo designed.
By the way — I loved LegalZoom. I felt like they did a great job and made things really easy.
I’d love to discuss this matter further. If you’d like, please leave a comment at the end of this blog post and we can talk about this as much as you want, as long as you understand that I’m not an attorney, my advice may not apply to you, and you need to seek qualified legal advice before you take any legal action.
Thanks, and have a fantastic day.
Mark,
In your search, did you find any ways to protect yourself financially? Obviously to comply with all laws and provide great customer service, but we do live in a time where people seem to like to sue.
I am looking forward to reading why you decided to form an LLC anyway. I realize that perception is a great reason, but I’m sure you can shed some light on other good ones.
Yes — the answer is Liability Insurance. And that will be another post (when I get it all wrapped up).
This is what my CPA has been telling me for years and for years I’ve been hearing from others that he is wrong. So it’s good to hear 😉
I don’t think you discussed the tax issues did you? He tells me I wouldn’t benefit from an LLC in regards to taxes either. But I’m sure that depends on the person, company and other factors.
I plan on discussing taxes in another post — not done researching that one yet. Another issue is insurance. I’ll be working on that one as well.
Mark, I’m no attorney either, but I discussed moving to an LLC with a good CPA a few years ago, and the tax benefits were definitely not worth the costs (both financial and time) of starting and maintaining the LLC. And we never even discussed the liability issues such as the ones you mention (I wonder if he even knew about them).
I look forward to your follow up on the tax issue. Thanks for the info.
I am not surprised — so that is what I expect to hear from my tax atty. My big question will be “why or why not.”
I seem to remember the LLC liability issue being a disconcerting sticking point during a SBA-sponsored business seminar that I attended.
I remember it being laid out as you described it here and there were many in the class who were NOT happy.
It can raise all kinds of concerns for everyone from libelous scribes to drop-ship specialists who are suddenly caught in the middle of a product recall.
sba.gov has a wealth of resources to pour through before consulting a professional on how best to incorporate.
Question – Is LegalZoom the one that was co-founded by Robert Shapiro?
I’m looking forward to your follow-up posts.
Yep — that’s the one (although I did not even know that until you asked).
http://www.legalzoom.com/about-us/management-team.html#robertshapiro
Mark, good insight and agree wholeheartedly with your assessment of LLC and liability. While I’m not an attorney, I have been in a sole proprietorship, corporations of various configurations, and running buck naked as I am today. If you’re running solo, an LLC is pretty much the equivalent of a sole proprietorship in terms of liability.
Your article has prompted me to consult an attorney sooner rather than later to get my business structured to meet my needs and objectives.
Thanks!
Bill
Excellent — you should also consult your attorney about running naked – there are some public indecency ordinances that you probably need to consider….LOL
Rather a surprise on the legal issue Mark -that’s surprise spelled N-A-S-T-Y .
Caveats noted, but it seems that Branding and Taxes may be good reasons to incorporate but legal protection is not?
Totally agree — the liability protection (or lack thereof) really surprised me. Thus the article.
As for branding — I totally agree. This was my primary motivation (will discuss in a future article).
With regard to taxes — I am told by many that LLCs are not much tax help for individuals. But I have not gotten feedback from my tax pro about my situation. So, we shall see.
Thank you, Mark, for your LegalZoom testimonial. I appreciate you taking the time to create such a worthwhile post. Would you mind telling which package you purchased? Standard? Express Gold?
Your post is the first exploration of LLCs I have ever read in the many years of reading about LLCs that not once mentions the word “privacy”. You did mention “other reasons”. I’m wondering if your LLC is based in your neighboring State. 😉
Thanks again, Mark. Have a Great Day.
Patrick — my LLC is formed in Texas. I tool the standard package and added the option to have LZ get my EIN for me, and to be the official registrar for me. I did the latter to protect my home address (which is very easy to find in any case).
Great blog that you have here love the design and layout.
The quality of your information is second to none.
I will be back again soon
Mark McCulloch
Thanks, Mark. I appreciate the kind words.
Mark,
Thanks for the information on LLC’s. I’ve thought about forming one off and on for years but never have done it yet. Sounds to me like I don’t really need one based on your findings. I use very little money to run my business and if it won’t protect me in a lawsuit then no need. However, I am interested in hearing your findings on the tax side of things. Although sounds like Josh has gotten some advice on that and it wouldn’t help there either. Anyway, I appreciate it. Saved me some time and effort.
Trent
Just to be clear — I am not offering advice — your situation could be much different. However, given the information that I have, your decision sounds reasonable to me.
One thing that bugs me about this is that lawyers make money selling LLC setups. They are bound by a code of ethics, but it is still a conflict of interest. Since they are the only ones that really understand them, I find it hard to get an unbiased opinion on whether or not you need one.
Hi Mark
It seems to me (from a commonsense point of view) that there should be a difference between liability for actions connected with the company operations and those that are personal in nature (like insulting someone). I would expect that the limited liability would cover you if it were suggested that a product of yours had lost someone money.
Not sure if commonsense and the law often agree though!
Right — you are saying exactly what I thought. My understanding is that your common sense assumptions are incorrect.
Bottom line as I understand it — if your company harms someone and you are the only person in the company, it really means that you did the harm yourself. That means that you will be named in the suit, and the protection of your personal assets will be broken (easily as I understand it).
Mark,
Very interesting info and I’m looking forward to reading more about this topic in your blog.
I’m not an attorney nor am I am a CPA, but I do pay a tax attorney to do my taxes. Per my tax attorney, I need to make $10,000 per year or more from by business to realize any true tax savings by forming a LLC. Again, ask YOUR tax person for advice on your specific situation, but this is what I was told last year at tax time.
Also, a sole proprietor can apply for an EIN online. It’s very simple and only takes a few minutes.
Thanks again for the great info and a great blog.
-dc
Interesting — that is the first time that I have ever heard that number. Thanks for sharing that experience. Will be anxious to see what my tax guy (she is actually a gal) says.
The biggest reason I am thinking of forming an LLC is in order to get a Employee Identification Number. I want to join some affiliate programs but don’t like the idea of giving them my social security number. I would give them my company name and EIN.
Steve
Steve, I am pretty sure that it is possible to obtain an EIN as a sole proprietor. You might ask your Tax guy (maybe you did that already).
Thx for reply Mark. I didn’t know that. I will do some checking.
Steve
While I know this article means well, I think there are some misunderstandings about the roles and functions of insurance and corporations/LLCs. It’s a bit of a hot-button issue for me, and I started to put everything in a comment, but quickly rattled on so long that it became a blog article for me. You can find my article here:
http://www.peakpersonalfinance.com/llc-corporation-better-than-insurance/
Regards,
Rob
Rob — great article. Thanks for the comments — I really appreciate you taking the time to write an excellent response.
A few things — you are right, I do mean well. 🙂
Second, if I understand your point correctly, you are basically making the argument that since the LLC will provide some protection of personal assets in some situations, that there is no reason not to have one.
I agree.
My point here is that many people believe that if they form an LLC, that their assets are “protected” — and this is simply not the case. I think we agree on that.
The approach you recommend — LLC + Insurance — is exactly what I am doing, for exactly the reasons you state.
For the record, I have had a couple of lawyers that set up LLCs on a regular basis tell me that in my particular case (solo entrepreneur worried about blog-related damages) that LLC protection would be almost useless.
Thanks,
Mark
Hi Mark,
Yes, nothing can provide 100% protection all of the time, so LLC+Insurance is a good way to go.
While I can understand why some lawyers might feel that an LLC might not provide much protection for you. There is certainly less exposure for a blog about internet marketing that is mostly monetized with e-books, software and hosting services than with some other niches. However, the exposure that you might have may not be covered by most insurance policies either — so it’s good to look at those carefully.
However, how much an LLC can benefit an internet marketer really can depend on the web properties that a marketer/blogger owns. A blogger who sells their own “hard” products has more liability exposure than one who writes about fitness and occasionally links to fitness products — but both could get sued by someone injured by one of those products.
While you can’t avoid getting sued, if you could successfully have a court limit the suit to the LLC, that could also possibly prevent a lien going on your personal property during the time the litigation is pending (usually years) that could prevent you from selling your property or borrowing against it. And, for those who still have day jobs, being able to limit suits to the LLC can keep all of those distracting court filings from popping up when a prospective employer Googles your name. These aspects are usually overlooked by CPAs when they recommend against an LLC.
Kind of like insurance or a gun or a fire extinguisher — a person really doesn’t need corporate/LLC protection until they NEED it (and then you REALLY need it). And you may end up being surprised at how and why you get sued. In modern business times, anyone who really does any substantial business can plan on getting sued at least once.
So people have to talk with both attorneys and CPAs and then do their own risk-reward analysis. In many states, LLCs are cheap to form and require only a 1-2 page form to get started — an require much less paperwork than an S-corp or C-corp. In others, there can be a minimum yearly fee (some around $500, check with your State). Still, if a person is making any kind of real money online, that is a small price to pay for the extra protections and peace of mind.
Best,
Rob
just went to Irs.Gov and got an EIN issued in 5 minutes via the web site. Modern technology.
Steve
Now that is very cool!
Great detail, thanks Mark.
The laws “as I know them” are very similar in Australia. There are hefty fees involved in setting up a company here and the ongoing paperwork and level of information to be submitted regularly is significant.
Looking forward to what you find out regarding insurance.
I love the logo. 🙂
G’day Mark and all,
Like Michelle, I am an Aussie doing business on the internet, and I have been bombarded with well-meaning advice that I NEED to set up an LLC or Inc. in the US to protect myself and my assets from the possibility of legal action. I was, in fact, planning to do so in a couple of weeks, but now you are saying that as a sole employee of my company that I would not be covered from legal action anyway. That is scary!
As Michelle said, setting up company status in both countries is fairly expensive and time-consuming, so if there aren’t any real benefits to being an LLC then I might have to re-think the whole thing. Thanks for the info, Mark and Josh!
Terry
G’day again, Mark,
Just a quick heads-up to let you and the readers who are non-US citizens know that your affiliate link for LegalZoom won’t work outside the US. I keep getting an error message telling me that the offer is ‘not available in my area’.
Terry
Thanks — sorry about that. Not sure what the equivalent is in Oz.
I was told if you get sued and have an LLC, they can only take the money in the LLC. Thus you keep your LLC business account at a minimum at all times. I wish I knew if this was true or not but that is what I do.
Here is a message from Shawn Williamson via email
I’m at work, stucky behind a proxy server, so I wasn’t allowed to submit my comment to your discussion on forming an LLC.
Here was my comment:
– – –
I used to study real estate investing. I attended several presentations (some by lawyers, some not) on why to form an LLC. The more I found out, the more I learned you really need a good lawyer as soon as you can afford it.
Here’s two (of many) reasons:
How to protect your business from something you do outside of your business. Lets say you back into an nice old lady in a parking lot and she sues you for everything you have and wins. If you are the only “member” of your LLC, she can eventually “foreclose” on your membership interest and take over the company and everything it owns. The advice I got was to have a 2nd member in the company, even they only have a 1% interest. Why? Because if you own the whole company, you don’t need anyone else’s agreement to sell the company. If another person has to approve it, then sale is prevented. (Again, talk to an attorney, or hang out in real estate investor forums so you can be thoroughly confused).
As far as tax savings are concerned, unless you make a lot of money, there are no tax savings. The subchapter S tax method, for instance, saves you some taxes if you make more than what you (and the IRS) decide is a fair salary. (For example, you pay yourself as CEO of your company, $60,000 a year, but the company made $100,000. Subchapter S can help tax that extra $40,000 differently to save on self employment taxes.)
Dear Mark,
You are correct! Having an LLC at the end of your business name does make your business look a lot more impressive.
I run a single proprietor business right now. Am not sure if LLC’s apply here in the Philippines. But your post on LLC is very informative, at the least.
Jaime
I am not sure about PI, either. But, I am sure there is something similar available. Thanks for the comment.
Mark great post.. Have been thinking about setting up a LLC just for little extra peace of mind.. Your psot def gav me the kick to do it.
How was the process with Zoom?
Very very easy. The feature that I like was that they use a “setup wizard” approach to fill out your forms. As you answer, you can see how others have answered in the past.
Note that if you have them be the official document handler for your business (to avoid revealing your home address) that this will result in an extra fee. I did not think they did a good job of expaining that option (or the fee). So watch for that.
Otherwise, two thumbs up.
Very cool,, Thanks for the heads up Mark.
Thanks, for this nice post.