Choosing whether or not to organize your virtual assistant business as an LLC can have a massive impact on unforeseen (and often uncontrollable) circumstances down the road
If you’ve decided to take that leap of faith and set out on your own as a virtual assistant, you can technically just go ahead and do it. There’s nothing in the law that says you can’t just jump into business as a sole proprietor, use your social security number as your tax ID, and start taking on clients. However, here at Virtualcopia, we are firm believers in organizing as an LLC at your first opportunity for all of the benefits and protections it provides you as a new business owner.
The first reason to file as an LLC vs. a sole proprietorship is how it opens up your options with respect to business banking. We recommend opening a business checking account for your virtual assistant business, and many banks require an LLC to do so. There are a few that will let you open an account as a sole proprietor, though having filed as an LLC opens up several more choices, often with more and better benefits such as higher interest rates or built-in invoicing, covered in our best digital bank article here.
The next and most important reason you want to file an LLC over a sole proprietorship is the legal protections it gives you. That’s not to say if you organize as an LLC that you can go crazy and get away with murder or anything, but it puts your business dealings neatly in one category, separate from your personal life and finances, so that if someone has a problem with your business, they take it up with the LLC, not you as a person. They can sue your business, but not you.
All of your personal assets (house, car, boat, jewelry, etc) are essentially untouchable, as long as you are meticulous about keeping your records tidy and not mixing your personal and professional accounts. While a sole proprietorship costs you nothing in fees, it can cost you down the road in the form of legal or taxation issues should any trouble arise.
We’ve discussed it before in other articles (and also exactly two sentences ago), but it bears repeating (in all-caps, no less): KEEP YOUR PERSONAL AND PROFESSIONAL FINANCES SEPARATE. LLC or not, if you mix the two up enough and find yourself investigated or audited, a judge can rule that some personal assets are indeed vulnerable to seizure. This is called “piercing of the corporate veil”, and essentially negates the financial protections an LLC affords you.
While there are several important reasons for organizing as an LLC over a sole proprietorship, there’s really only one drawback — the cost involved with forming and maintaining an LLC. If you’re only doing business in one state, you’ll likely register in that state, and that can mean a significant difference in what you’ll pay up front and annually for renewal.
Some states like Minnesota and Mississippi don’t charge at all for a renewal, with a $135 and $50 first-time filing fee, respectively. Other states like Massachusetts charge a $500 first-time filing fee plus a $500 annual renewal fee. California, while having a very reasonable $75 first-time filing fee, has a whopping $800 renewal fee.
There once was a time when you could just form your LLC in a state that’s more financially favorable while doing business wherever you happen to reside, although those days are coming to a close. With so much remote employment, states are starting to crack down so as to collect what they feel is their fair share of taxes where applicable.
We do recommend that you file in your home state if possible, although if you decide to file elsewhere, you’ll need to hire what’s called a “registered agent” for it to be legal. The essential function of a registered agent is to be available during regular U.S. working hours to accept important legal notices and tax documents and then forward them to the appropriate person in the business. That’s it. There are all sorts of companies that are happy to not only set up your LLC in whatever state but will also act as your registered agent (for a recurring fee, of course) Two of our favorites are Swyft Filings and Zen Business. At the time of writing this article Zen Business is giving away $25 Amazon Cards with each LLC formation.
Whatever state you do end up filing in, be sure to check out their own individual rules, regulations, fees and renewal, which can typically be found on the secretary of state’s website.
Some states will require you to list the members (typically family members or partners) of your LLC when registering, which can also have its own sets of pros and cons. On the positive side, you could have a couple of people running the business with all the powers of the owner, which makes it easy to hand off specific duties to a business manager and free yourself up. However, should you have a falling out and a member leaves the company, goes bankrupt or dies, you need to file for a whole new LLC. Again, this is only in some states, and chances are you’ll be filing for yourself at first, but it is something to be aware of.
This all being said, we recommend filing for an LLC at the earliest time you can afford it. The protections that an LLC grants you versus a sole proprietorship are worth the cost of filing in almost every case. Leaving all of your assets vulnerable to a disgruntled client just isn’t worth the risk.
Wear your seatbelt. Don your bike helmet. Eat your vegetables. Do not poke the hornet’s nest.
File for your LLC.
Matthew Ogden is a Minneapolis-based copywriter and content writer and editor. He’s written for national retailers and lobster roll companies alike. When not writing he can be found nose deep in a book, writing and performing music, or nerding out about guitar tone.