Congratulations on your new business! If you find yourself asking this question, then you’re not alone. Many small business owners think they can wait until their company starts earning revenue before forming a limited liability company (LLC). While each business owner’s situation is different, forming your LLC ahead of time could offer your business and personal assets liability protection from day one.
If you’re starting a side gig, brick-and-mortar store, becoming an independent contractor or building an online business, here’s what you need to know about when to form an LLC.
What Is an LLC?
An LLC is a special type of business structure that separates your personal assets from your business assets. As a limited liability company, your homeownership, personal bank accounts, and other assets are potentially protected if your business gets sued or has to pay certain types of debt.
LLCs can be structured in multiple ways to meet your business’s needs. This legal structure is popular with small business owners who want liability protection without the paperwork of a corporation.
While forming an LLC won’t prevent all lawsuits, it can offer a layer of protection that sole proprietors do not have.
Why Waiting Could Leave You Legally Vulnerable
The sooner you form your LLC, the sooner your business will have liability protection. Many new entrepreneurs mistakenly believe they shouldn’t form an LLC until the business is making money.
Think about everything you do before your first sale. You might sign contracts, order inventory, lease office space, pay vendors, market your business, network with other business owners or consult with clients. If a lawsuit or disagreement happens during these startup phases, operating as a sole proprietor could put your personal assets at risk.
Forming an LLC before your business starts operating could reduce your personal risk by establishing that legal separation between you and your company on day one.
Forming Your LLC Ahead of Time Offers Benefits
In addition to liability protection, starting your business as an LLC could have other advantages.
These benefits include:
- Separating your personal and business assets
- Establishing credibility with future customers and vendors
- Opening business bank accounts
- Making it easier to scale your business in the future
- Laying a stronger legal foundation for your contracts
It can also help you build good business habits early that can pay off down the road.
Can I Form an LLC After It Starts Making Money?
Yes. It’s possible to form your LLC after your business starts making money. However, that means your business will be exposed during startup. Many business owners form their LLC after their business has been operating as a sole proprietorship.
If you decide to form your LLC after your business starts earning money, be advised that you’ll have to update your contracts. You may need to close your business bank account and open a new one, obtain a new employer identification number in some cases, update your licenses, and notify your customers and vendors.
While none of these tasks are difficult, they can be easier to manage before your business opens its doors.
Liability Protection is Just One of the Benefits of an LLC
Liability protection doesn’t just protect your physical property. Forming an LLC can also protect your savings, bank accounts, and other assets.
Say you get sued by a customer, a vendor claims you breached your contract, or your business accrues debt. Your LLC can help provide peace of mind by only exposing your business assets to risk, not your personal property.
Of course, there are no guarantees in any lawsuit. Business owners should always follow best practices for their business finances in order to maintain that liability protection.
Every Business Is Different
The right time to form your LLC depends on your business. When you choose to form an LLC depends on:
- The type of business you’re opening
- Your risk tolerance
- Your financial goals
- Your long-term plans
Business owners typically form an LLC before they:
- Sign any contracts
- Start selling products or services
- Hire employees or contractors
- Purchase equipment
- Open a physical location
- Attract investors or financing
Consulting with a business attorney can help you understand your options and select the right time to form your LLC.
Don’t Forget About Compliance
Just because you’ve formed your LLC doesn’t mean your legal responsibilities are over. Business owners are responsible for ongoing compliance to keep a healthy business.
Annual reports, business records, state filing fees, license renewals, and operating agreement stipulations are just some of the things you may be required to do to remain in good standing. If you don’t maintain that standing, you could lose the liability protection your LLC affords.
A business lawyer can help you stay compliant as your business grows.
Get Legal Guidance You Can Trust
Figuring out your business structure is one of the first decisions you’ll make as an entrepreneur. Online filing services make it easy to form an LLC. However, many online legal services don’t offer legal advice for your unique business.
An experienced business lawyer can help you understand the pros and cons of an LLC versus other business structures. Your attorney can prepare your formation documents, write your operating agreement, review contracts, and help you avoid legal mistakes that could harm your business for years to come.
By starting your business with the right legal foundation, you may have more confidence and flexibility to grow your business into the future.
Contact Patton Law Group
“What’s the best time to form an LLC: before or after your business starts earning?” starts before your business earns its first dollar. Let the team at Patton Law Group help you decide when to form your LLC. Our experienced business attorneys can help you choose your business structure and make sure your business is built on a strong legal foundation. Contact Patton Law Group today to schedule a consultation and get started protecting your business, your assets, and your future.
