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This question comes up about every month in the various groups, be it Careers, IT Service Providers or Best Practices and General IT. Having a correct legal identity for your business is key to protect you from liability in case things go very wrong. This How-to will help you answer if you should get an LLC or otherwise.

Disclaimer: I am not an attorney. I am giving this information with the understanding that neither I, SpiceWorks, or anyone else here are engaged in rendering legal, accounting, tax, or other professional advice. Since the details of your situation are fact-dependent, you should seek the advice of a local, qualified professional.

Step 1: Why are you considering an LLC?

Before you can decide, you must first ask yourself this: “Why am I doing that makes me think I need an LLC?”

Are you engaged in your own business, whether it’s a side gig or a full-time endeavor? Did your cousin (“Vinny”, perhaps) recommend that you get incorporated to protect your assets in case work you’re doing goes bad?

If you’re engaging in your own business, you should consider some kind of legal entity for your it. If you work full-time for someone else where you are considered an employee, and not a contractor, and the company already has some legal status (Inc, LLC, P.A., etc) then you do not need do anything. Pass GO, collect $200.

Step 2: What an LLC IS

A limited liability company (LLC) is the United States-specific form of a private limited company. It is a business structure that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. The definition and status may vary by country and state.

An LLC is, for all intents and purposes, a legal entity, just like a person (just don’t try to use your LLC paperwork in your car as an excuse to drive in the HOV lane- it doesn’t work). When you create an LLC, you’re creating this entity that can own things, do business, and -no one likes this part- be sued. but having one is better than not if you are.

By definition, an LLC is a Limited Liabilty Company, running your business as one does just that- it limits your personal laibility. Say that you’re working as an I.T. consultant and they have some kind of data disaster that you may or may not have caused. Since you were engaged in that part of the business for them, they may choose to bring suit against you to recover lost money. When you operate as an LLC, it shields you (to a degree) from being sues personally and having personal assets taken to pay business debts obligations (such as a court order).

As long as you conduct your business properly and ethically, LLCs can be really cool (and really easy to get into).

Step 3: What an LLC ISN’T

An LLC is not a corporation. A corporation is a company or group of people authorized to act as a single entity (legally a person) and recognized as such in law. This “person” pays taxes, whereas in an LLC, the taxes “pass through” to the owner, who pays them on their personal tax return.

An LLC is not a substitution for business insurance. You would be wise to carry insurance for your business to cover your expenses in the event you’re doing work at someone’s site and damage something or someone at the company or elsewhere gets hurt as a result of what you’re doing.

Last, an LLC is not bulletproof. While it will shield you from liability in most cases, this can’t prevent all negative action from reaching you personally. If you don’t maintain the proper formalities of keeping your business and personal financials separate, or not keeping good records, you can be personally liable. This also goes for if your business insurance has a claim that exceeds the insurance limits.

Step 4: When is an LLC a good idea?

Run through this checklist. If you answer yes to any of these questions, you should probably get an LLC.

  1. Are you working for real, legit businesses with more than 1 person?

  2. Is doing IT work for yourself your full time employment?

  3. Are you looking for flexibility in how you file your business taxes?

  4. Do you want to be able to sell or transfer your business eventually?

  5. Do you want your business to be owned by another business (another one of your holdings)?

  6. Do you want additional credibility or access to certain vendors?

There are many advantages to having an LLC for your tech business, but also some other things to think about. Having an LLC is an important decision, not to be taken lightly. If you’re not sure, be sure to consult an attorney, accountant, or other professional. I hope this information has helped you decide if you should create an LLC and helps contribute to your long term success.

9 Spice ups
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Always LLC. You have more to gain than to lose. Also it only costs on average about $140 to do so.

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Thanks!
This was very informative.
I’ve been looking into this as well.