When you finally get to set up your new business, you’re probably chomping at the bit to make yourself as “official” as possible. But not every business is a good fit for every entity type, and you might wonder: When do I need to set up an LLC? Do I need to incorporate at all?
The Hobby Test
There are a few key areas of interest when it comes to determining whether it’s worth incorporating your business as an LLC, and Seller Accountant CEO Tyler likes to refer to them as “The Hobby Test”.
If your business is:
- low volume (you’re only selling a few pieces in a month)
- netting a very small profit (the few $100 it costs annually to file taxes and maintain your LLC status seems like a huge amount)
- an intermittent side project (you sell the occasional baseball card on eBay, but you don’t go out of your way to look for new cards to sell)
you don’t need to incorporate quite yet.
But how do you know when you should incorporate?
Why to Incorporate
If your business is becoming a legitimate entity and passes the criteria for the above Hobby Test, here’s what incorporating can do for you:
Legitimizes your business for fund-raising purposes
An LLC has better chances for raising funds and getting loans than a sole proprietorship, which only ever qualifies for personal signature guarantees. Registering your business as an LLC builds credibility for your brand and makes lenders more comfortable doling out funds.
An LLC will legally separate your business from your personal assets. For example, in the event that someone has an allergic reaction to or somehow gets injured by your product, a court cannot seize your personal investments or assets like your house or car to cover your legal expenses. All liability for your business is solely the responsibility of the business entity.
Makes filing taxes easier
When you’re filing taxes, separating your business and personal expenses is key to getting as much back as possible. Your LLC will have a separate bank account and credit cards, which makes it much more simple to do your own taxes or send your financials to a tax professional. Separating your business expenses also makes defending your deductions easier, since they aren’t muddied up by your personal finances.
Separating your business and personal expenses also makes your business financials clearer and easier to read for yourself as a business owner. Easy-to-read financials make for a better sense of where your business is headed, helping you to make better CFO decisions and, hopefully, become more profitable.
Have questions about accounting for your e-commerce business?
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