After a long pause while I moved houses and embraced the vibrant, yang energy of summer, I'm back—grounded in the transition to Fall. This is the last bit of my sharing, with a few more juicy posts before we go paid. As we move through this eclipse portal, I want to dive into a common question I hear quite often: “Should I form an LLC?”
Many people are told to form an LLC when they start a business. While this may seem like the right choice for everyone, it’s not always the best move, depending on your circumstances. Let’s unpack the key reasons for and against forming an LLC, especially if you’re based in California, where I have the most expertise.
Should You Form an LLC? Here's What You Need to Know.
Why You Should Form an LLC
🌀You’re earning over $50,000 per year*: Once you hit this income threshold, forming an LLC can help protect your personal assets and offer tax flexibility. It’s particularly important if your business is bringing in consistent revenue and you want to shield your personal finances from potential risks. *My personal opinion, wait until you have hit $80-100k or have some serious assets to protect.
🌀You require personal liability protection: An LLC separates your business and personal assets, offering protection if your business faces legal issues, such as lawsuits or debt. This is key if you're entering a field with more risk, or if you have contracts and clients that could potentially pose legal threats. Now I say require here because not all of us require this, but maybe, it is something you want. If you don’t need it yet, consider holding off. You can always purchase E&O insurance (errors and omission) which is usually cheaper.
🌀You plan to grow: If your business is scaling and you’re thinking long-term, an LLC might be beneficial to formalize and legitimize your operations. It can also help if you’re planning to take on investors or partners, as the LLC structure is more appealing to potential stakeholders.
Personal story: I got sucked into the idea to scale, scale, SCALE when I started my business and then realized I did not love managing people as I prefer being off grid than tied to my phone. If scaling is something you are serious about and if you don’t mind compromising your personal time for many many years, then consider this route, but if not, maybe reconsider your goals.
Why You Should Hold Off on LLC Formation
🌀If you’re earning under $30,000 per year: For solopreneurs or side hustlers who are still in the early stages, the cost of maintaining an LLC may outweigh the benefits. Focus on growing your income before taking on the extra legal structure.
🌀You don’t have significant assets to protect: If you don’t own substantial property, vehicles (own not lease or pay to own), or investments, the urgency to form an LLC may not be there yet. You can always operate as a sole proprietor until your personal assets grow.
🌀You’re unsure about long-term business growth: If you’re still testing out your business idea or side project, wait until you have a clearer vision of your future. Forming an LLC too early can add unnecessary complexity and cost.
🌀You can not keep your personal and business expenses separate: I see this far too often. Small business owners go out of their way to set up an LLC and then they pierce the corporate veil by making personal purchases. Your boba tea, your pet’s bill, your friends lunch, all that needs to stay on your personal card, and if you are not disciplined enough to keep things separate than you should reconsider deciding to incorporate because you would be exposing your business and putting your assets at risk.
California Considerations
🌀Annual State Tax: In California, you'll need to pay an $800 annual base tax to keep your LLC active, regardless of your income. This fee is non-negotiable and can feel burdensome if your business is still small or seasonal.
🌀State Business Closure: If your LLC doesn’t meet the minimum earnings requirement (which varies by situation) for four consecutive years, the state may close your business. This could be problematic if your revenue fluctuates, so be sure to understand how sustained growth will impact your LLC.
Disclaimer: As I reside in California, the advice here is specific to this state. If you live elsewhere and want to explore whether an LLC is right for you, I’m happy to offer support through a personalized consultation (for a fee). My expertise is strongest in California, Oregon, and Washington, but I can research specific requirements for your state as needed.
With all of this info, you should have a solid answer on your when. If you are still unclear or wish to discuss it further, I can be of support!
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Written under many moons, and published under a Libra sun and a current moon in Cancer. 🦀
A Word on tax services with Collective: I recently tested Collective’s services but wasn’t fully impressed. It was a bummer because they are good at selling what they will do. If you're seeking a CPA or tax professional, I can connect you with trusted names. Just keep in mind that a solid CPA typically charges around $800–1,000 for a business tax return, so it’s important to budget for that when you decide to form an LLC.
Final Thoughts: Build Slow and Steady
There’s no rush to form an LLC if you’re not ready. Building your business with intention and patience is sustainable. Jumping into legal structures too early can add unnecessary costs and complexity. Focus on growth, and when the time is right, you’ll be well-prepared to make that move.
A note on collaboration
My expertise lies in systems and procedures. If you are small and want to discuss setting up a bookkeeping system that works for you, I would love to book time together. It would be an investment and yes, you are more than welcome to book a conversation. Once my books open up for October, you will be the first to know! Dear Serah will also be opening up in October for paid subbies.
With gratitude for the ever changing seasons and you,
Serah