Is an LLC right for me? Recently, my friend Andrea asked if I’d be willing to participate in a session at USITT. The topic: Is an LLC right for me? Fortunately, I’ve advised hundreds of clients on this specific topic.
The main takeaways are:
- An LLC isn’t for everyone.
- The more risk you have in your profession, the more an LLC becomes relevant.
- If you have business partners, you should use an LLC.
- LLCs are not a replacement for insurance.
- Contract terms make all the difference.
To fully cover this topic, I need to cover a few introductory things. Then, we’ll jump into the meat of this important decision.
- General Disclaimers
- What is an LLC?
- What is Limited Liability?
- Intellectual Property
- Why Should I Form an LLC?
- How to Form an LLC
- Common Pitfalls
The information in this article is extremely general. Each one of these headings could be its own class, but we’ve condensed the important points into this short article.
Beyond that, remember, I’m not your attorney unless we enter into an actual attorney-client relationship. This article isn’t legal advice. It’s legal education and a little entertainment. Laws are subject to change and different states have different laws that I might not cover in here.
What is an LLC?
A limited liability company (LLC) is a separate legal business. It isn’t a corporation. Legally, it is a collection of owners like a partnership, but with limited liability protection. An LLC has similar formalities to corporations like annual meeting, separate bank account, and having management.
What is Limited Liability?
The limited liability protection of an LLC means creditors cannot go after your personal assets in certain circumstances. Nothing is ever 100%, but with correct contract terms, you can shield yourself in most circumstances.
For example, if you’re hanging lights, but one falls on an audience member, normally, you could be fully liable for the medical bills and possibly more to that audience member. However, if you have an LLC, and liability is properly directed to only that LLC, your personal assets will be off limits.
Furthermore, employees and partner liability will automatically be the LLC’s problem, not your personal problem. That’s great because employees and partners can create a lot of big liability.
If you’re operating as an LLC, you can deduct normal business expenses from your taxes. However, you can do that as a corporation or sole proprietor anyway. In my opinion, if you operate like almost all small businesses, the tax treatment doesn’t matter that much.
By default, single member LLCs are taxed as disregarded. Multiple member LLCs are taxed like partnerships. And, LLC owners can elect any of the tax treatments they want. It’s the most flexible type for tax treatment.
If you’re in a creative field, intellectual property is a major concern. However, if you’re the sole owner of a company, it might not be that big of a concern for the purposes of this article.
There are several topics in intellectual property that can, and do, take up an entire semester or more in law school. Fair Use, Work Made for Hire, and Licensing are massive topics. They’re important, sure, but it would be ridiculous to try to cover them in any reasonable amount in this article.
For our purposes, it’s important to know the following defaults:
- If content is created by an employee, it belongs to the employer.
- Independent contractors own the copyright, but the employer owns a license to use it for the specific purpose it was made.
- Owners in a corporation are employees, so the corporation owns the copyright.
- LLCs are weird. You should clearly define ownership of copyrightable materials in your operating agreement.
Why Should I Form an LLC?
Ultimately, LLCs are one of the cheapest ways to protect yourself from the catastrophic issues. If liability is limited to your LLC, the worst case scenario is you end up having to close down your company. However, if you’re operating as a sole proprietor and get a $1,000,000 judgment against you, you could lose your house, retirement accounts, savings, and more.
So, what are the biggest sources of liability?
- Risky Professions
- Real Estate
There are a bunch of big sources of liability, but because we’re talking about theater tech specifically, these are what you’re going to encounter. Obviously, if you’re working with explosives, there’s some serious liability. But, if you’re making costumes, maybe your liability isn’t enough to warrant the extra cost of an LLC. Unfortunately, in law, it all depends. You need to decide for yourself if your potential liability justifies the cost.
That said, if you have employees, renters, or business partners, you should definitely have an LLC or corporation. Each one of those areas has the potential to bankrupt you very easily.
How to Form an LLC
Forming an LLC is easy, and don’t let any attorney or website tell you otherwise. There are basically 4 steps:
- Name Search
- Articles of Organization
- Operating Agreement
Of these, the name search is legally the most difficult (and the one the DIY sites mostly ignore). To do this properly, you need to check the following places:
- Your own state’s registry
- USPTO (Trademark search)
- Your state trademark registry
- Assumed Names search
In each of those, you’re looking for exact matches plus anything that sounds like the same, is spelled substantially similar, or different language variations of the same thing. This is so comprehensive that you even have to cover letter replacements like “Hate” versus “H8”. Those would likely be the same.
After those legal databases, you should also check the following:
- Google/other search engines
- Social Media sites (and reserve those names immediately)
- Domain name availability
If your name is available in all of the above, the likelihood it is not available on a legal registry is very low.
Articles of Organization
Articles of Organization are super easy. They all ask for roughly the same things:
- Business Name
- Registered Agent
- Principal Office Location
- Officers (even if they don’t ask, include these for the banks)
None of these items should be too difficult.
Your Employer Identification Number (EIN) is your company’s tax ID number, even if you don’t have employees. THESE ARE FREE!!! Do not pay someone for this. It takes ~2 minutes and is super easy. This link is my step-by-step guide to getting yours for free.
Even if you’re a sole proprietor, you should get an EIN so you don’t hand out your social security number all the time.
There are a few pitfalls people run into with LLCs. The big scary one is “Piercing the LLC Veil”. This is not all that common. In fact, there is only one appellate case on this topic in North Carolina, and the guy really deserved it. Basically, this means a credit proves your LLC is not validly run and operated. If they can prove you’ve been using it merely as a facade or “alter ego”, they might be able to go directly after your personal assets.
Next, I see a lot of people wanting Delaware, or other states’ LLCs. If you don’t live in a state, you generally do not need an LLC in that state. Small businesses don’t see the same benefits large corporations do. In fact, you’d see a substantially increased cost if your LLC is in some other state.
Finally, secret ownership is really bad! Eventually a court will find out who owns the business and you’ll already be in the realm of fraud simply because you were trying to hide your identity. Not saying it is fraud, but it definitely comes across that way.