What is an LLC? Is it Right For Your Creative Business?

Unsure about LLCs for your creative business? Learn what an LLC is, how LLCs protect your personal assets, save on taxes, and are easier to form than you might think.

BUSINESSTAX 101

David Kindness, CPA

5/16/2024

What is an LLC? Is it Right for Your Creative Business?

Updated on September 5, 2024

Written by David Kindness, CPA

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Do you ever feel like your amazing creative business is just a hobby with a website? Or maybe you worry about a client suing you and going after your personal stuff? Incorporating your business as an LLC might be the answer, taking you from casual to professional and offering legal protection in the process.

In this article, we'll explain what a Limited Liability Company (LLC) is, the legal protection they offer, how to incorporate your business, and more.

Fast Facts About LLCs

LLC stands for Limited Liability Company.
LLCs protect your personal assets from any business debts and lawsuits that might arise.
LLCs do not pay taxes - instead, their income and expenses are "passed through" to the owners, who report them on their individual tax returns.
Setting one up might be easier (and cheaper) than you think!

What is a Limited Liability Company (LLC)?

An LLC acts as a legal structure separating your business from your personal finances. Imagine your business as a studio space where your creative work flourishes. An LLC functions as the walls of the building, separating your business assets (inside the studio) from your personal assets (outside the studio). This separation is known as limited liability protection, and it keeps lawsuits and lenders from being able to go after your personal assets if a business-related issue arises.

Both sole proprietorships and partnerships can be incorporated and become LLCs. Sole proprietorships include freelancers and independent contractors, which are small businesses with only one owner who works for themselves. Partnerships are businesses with two or more owners who have agreed to run a business together and share in the income and expenses of the business.

What Does LLC Stand For?

"LLC" Stands for "Limited Liability Company". Let's break down what this means:

Limited: Personal assets are shielded from claims against the business.
Liability: Refers to debts or legal obligations the business may incur.
Company: This is the business structure, similar to a corporation.

Tax Advantages of LLCs

In addition to offering legal protection, LLCs can offer tax benefits compared to sole proprietorships (unincorporated businesses owned by a single person) because an LLC allows you and your business to be treated as separate entities for tax purposes.

This means you'll only pay self-employment taxes on the portion of your income that represents your active participation in the business (e.g. if you’re actively involved in day-to-day operations). Any passive income (such as rental income or investment gains) generated by the LLC is not subject to self-employment taxes. This could help you avoid paying self-employment taxes on all your business profits, potentially leading to tax savings. These are referred to as LLC tax benefits.

How to Start an LLC

Forming an LLC could be a simpler and easier process than you think, and it also might also be cheaper than you expect. Let's walk through the process below.

Naming Your LLC

The first step is to choose a name for your LLC. The name you choose should be unique, memorable, and relevant to your brand. It could be one word long, or multiple words long, and it can't already be taken by another LLC. You should also check to see if a domain name that matches your business name is available.

How to Find Out if Your Business Name is Taken

Each state has its own guidelines governing business names. Visiting your state's Secretary of State website is a great place to start researching your LLC name. You can use their business entity search tool to check if your preferred name is available, and you can also check free online trademark databases to learn more about statewide and nationwide business name registrations. Additionally, consider searching the name on Google to see if any matches come up, and do the same on social media platforms like Instagram, X, TikTok, or others.

How to Find Out if Your Domain Name is Taken

Figuring out if your chosen domain name is taken is an easy process. Go to a domain name website like NameCheap or GoDaddy, and use their search tools to look up your domain name. Remember that .com URL extensions are the most popular option, but there are a number of other URL extensions like .co, .net, .shop, .us, and more, to choose from. Most domain name search tools will give you alternative options if your chosen domain name is already registered.

File Articles of Incorporation

The next step is to file articles of incorporation (also known as articles of organization) with your state's business office. You can generally file them easily online for a small fee, either at your state's Secretary of State website, or with an online service like LegalZoom, Rocket Lawyer, or IncFile. The fees for filing vary by state, but the cost can be as low as $40.

What are Articles of Incorporation?

Articles of incorporation are the legal documents that officially form your business in the eyes of the law. They include information like your business name, the owner(s) (you!), and contact information like an address, email, and phone number. You'll also choose a business code, which tells the state what type of business it is (like a photo studio, a web designer, an architect, a musician, etc), and a description of your business.

Create an Operating Agreement

Next, you need to create an operating agreement for your business. You can either write this document yourself using software like Google Docs, Word, or another writing app, or you can use an online service like LegalZoom or Rocket Lawyer to make sure that you include all the necessary information.

Creating this document can either be free (Google Docs), or it can cost a small fee (LegalZoom), which is usually around $20 or less. Some states require an operating agreement for LLCs during formation, but not all do.

What is an LLC Operating Agreement?

An LLC operating agreement outlines the internal structure of your LLC and acts as a contract between the owners. It includes information like the ownership structure, how profits are to be distributed, and the decision-making roles and duties of the owners. If you're the only owner of your LLC, then this step may not be necessary.

Obtain an EIN

An Employer Identification Number (EIN) is like a Social Security Number for your business. You can obtain it for free by submitting your business information on the IRS website. EINs are nine-digit numbers that help the state and federal governments identify your business. They are formatted like this: XX-XXXXXXX.

Conclusion

Running a creative business can be exhilarating, but concerns about personal liability can cast a shadow. Understanding what LLCs are, how they're formed, and whether an LLC is right for you can help alleviate this anxiety.

Incorporating your business as an LLC can be a great way to safeguard your personal assets, reduce your stress, and potentially enjoy tax advantages.

Frequently Asked Questions (FAQs)

What does it cost to start an LLC?

The cost of incorporating your business varies by state, but it typically ranges from $40 to $200.

Do I need a lawyer to form an LLC?

You can easily form an LLC without a lawyer by using online services like LegalZoom, Rocket Lawyer, or IncFile. However, consulting a lawyer can provide personalized advice tailored to your specific situation.

Is an LLC suitable for all businesses?

For solopreneurs with minimal liability risks, an unincorporated sole proprietorship can be enough. However, many creative businesses could benefit from the protection offered by an LLC. However, keep in mind that only sole proprietors or partnerships can become LLCs.

Can I form an LLC online?

Yes, numerous online services, like Rocket Lawyer, IncFile, and LegalZoom, can assist with LLC formation for a fee. Some state websites also allow you to file online directly with them.

When should I consider forming an LLC?

If you're committed to your creative business and it is growing and taking on loans or larger clients, and you want to safeguard your personal assets, then it's time to consider forming an LLC.

What are the drawbacks of an LLC?

LLCs generally involve more paperwork compared to sole proprietorships and might have slightly higher annual fees depending on your state.

Disclaimer: the information provided in this article is for educational purposes only and does not constitute tax, accounting, investing, legal, or financial advice. The information in this article does not take into account your unique financial or business situation or goals, and YCCPA cannot be responsible for reader's financial decision-making. YCCPA's goal is to educate and support you on your creative business journey.

Written by David Kindness, CPA

David is a CPA (Certified Public Accountant) and professional photographer, videographer, and designer based in San Diego, California. Learn more.