LLCs are great, but you should be aware that single-member LLCs may offer less liability protection than you expect, and in some circumstances it can be easier to pierce the corporate veil.
If you're worried about limited liability, you're probably not trying to get your lil' side project off the ground. But the article still mentions it, so it shall still be corrected.
An LLC does help with getting a proper EIN and DUNS number which helps greatly in establishing trust in a relationship with a new client.. Yes it absolutely helps with accepting payments.. having an EIN is necessary in many cases..
No it doesn't. Sole proprietors can get DUNS numbers just fine. It's literally the first option when you tell them how your business is structured right after telling them your name and email address.
> "Yes it absolutely helps with accepting payments"
A billion people accepting payments in every possible form without being incorporated say that you're wrong. No method of payment processing, from credit cards to memecoins, cares whether you're incorporated.
> "having an EIN is necessary in many cases"
Again, getting an EIN and forming an LLC are completely unrelated.
You can certainly use all of those mediums via consumer fintech, but you will often find yourself limited to products which are designed for consumers, and many B2B service providers may refuse to work with you.
Nobody said consumer fintech? You can just operate as a business. "Sole proprietor" is a real thing that almost every service knows how to deal with, and if one can't there's a competitor willing to right next door.
"Sole proprietor" is a real thing that many B2B services deal with by throwing your application in the trash.
Yes, you can go get a personal loan, or a retail banking account, or a personal payment processing account, but as I said, you're going to be locked out of a lot of B2B products.
Sure. If you absolutely need one of those services then you do the thing. Most of the time there are alternatives, IME.
Example, since you edited to add examples: I have several business bank accounts and far too many Stripe accounts all registered as sole prop. I haven't had to take a loan but I do have a sole prop credit card. My understanding is that even with an LLC a bank is going to require a personal guarantee for a loan.
Forming an LLC doesn't make separating finances any easier. It doesn't help you do it or help you force yourself to to do it. My objection is specifically to the claim that it helps you do anything. It doesn't.
Also, you should separate finances as a sole proprietor too.
Some vendors will only deal with companies (of all types) and refuse sole proprietors as customers, either because they don't know how or because they judge you as unserious. This comment is based on an actual experience I had.
That's very sweet! But I recommend subscribing to me only once, not every time I write a comment. Otherwise you'll end up with thousands of duplicate subscriptions.
This is not my experience. My costs are higher, but the costs offset and then some by tax advantages.
Sharing here, to give a picture of what a real single person LLC looks like, compared to a vanity hobby LLC as described by OP.
I'm a contractor with a registered LLC S-Corp in the US. Almost all of my income is 1099 from one source. I was converted from W-2 to contract when my employer was acquired, my job role did not change. You might call me a misclassified full time employee. I could report this of course, and then I would burn my professional contacts and lose my job. So I don't.
I hire myself, pay myself a fair market rate as a salary, and run a payroll just for me. And I provide myself a few benefits from the LLC, like health insurance.
I'm required to keep up with a pile of quarterly and yearly fillings between the state, county, city and IRS. This is a non trivial amount of time and effort. I have to maintain separate business books and bank accounts in coordination with my accountant. I don't actually get to access the money I earned until it exits the business entity through a controlled process. I have to file business taxes separate from personal taxes. I still have to pay quarterly estimates on my personal taxes too.
My family health insurance is roughly $12k this year. If I purchase that insurance directly, I use post-tax income to do so. I'd pay ~$4k in taxes to take home the ~$12k income used to buy health insurance. But when the LLC buys the health insurance and provides it as a employee benefit, the ~$12k is not taxed.
The salary I pay myself is taxed at ~37%. The same as if I just filed as self employed. But the business income I earn over that salary is taxed at ~20%. This is the biggest advantage. The gap between a "fair market value" for my role, and my actual contract rate. In that gap, the LLC structure saves me 20% on taxes by labeling that portion of income as "shareholder profit disbursement".
Rough yearly costs:
$150 registered agent service
$150 state registration filing
$2500 tax prep and account services throughout year
$1500 payroll services, including payroll tax filings
Where I come from, if they went back and looked at the years you were only earning what would normally be employment income from the single employer, they would classify it a "personal services corporation" and move any income in the company you declared as corporate income into your personal hands, tax you at personal rates and make you pay interest on that difference for the time you had it misclassified.
Your jurisdiction might not do that, but I'd be damn careful and if you are liable that way, they might let you off the hook on the interest if you went back and declared it correctly before they do.
For all these things I think just having an EIN is simpler.
You don’t even need that to start; you set up Capital One (for example) business accounts using your SSN. The EIN is just to avoid putting your personal SSN on invoices.
LLC matters if you think you’ll have liability risks.
>The EIN is just to avoid putting your personal SSN on invoices.
In order to do that, your LLC has to elect to be taxed as an S-corp, which requires it to file its own return. Worse, certain states and cities will impose a corporation tax on it.
Otherwise, if you retain disregarded entity status, you have to use your personal SSN for invoices. The corporation EIN is then mostly for employment tax purposes.
(Not actual tax advice)
"For example, if a disregarded entity LLC that is owned by an individual is required to provide a Form W-9, Request for Taxpayer Identification Number (TIN) and Certification, the W-9 should provide the owner’s SSN or EIN, not the LLC’s EIN." [0]
>>The EIN is just to avoid putting your personal SSN on invoices.
> In order to do that, your LLC has to elect to be taxed as an S-corp, which requires it to file its own return
I think your interpretation is wrong and you have stripped the context on your IRS advice you quoted, changing the meaning. At the start of the paragraph containing your quote, it says "For federal income tax purposes, a single-member LLC classified as a disregarded entity generally must use the owner's social security number (SSN) or employer identification number (EIN) for all information returns and reporting related to income tax."
IMO, this has has to do with how one files their income and/or report to the IRS - as a pass-through entity, the IRS expects the human behind the single-member to file the income under their own own SSN even as after are distributing invoices with their LLC's EIN. IANA(Tax)L
No, you're misreading it. Information returns in most cases is the W-2 you send out to your employees and file a copy with the IRS for their information. I've always said that, for employment tax purposes, you use the LLC's EIN.
The entire quote on the IRS's webpage: "For example, if a disregarded entity LLC that is owned by an individual is required to provide a Form W-9, Request for Taxpayer Identification Number (TIN) and Certification, the W-9 should provide the owner’s SSN or EIN, not the LLC’s EIN.
For certain Employment Tax and Excise Tax requirements discussed below, the EIN of the LLC must be used. An LLC will need an EIN if it has any employees or if it will be required to file any of the excise tax forms listed below."
The original statement was SSN hiding for invoices, that's directly covered in the W-9 example. You can (have to) hide your SSN on W-2s, but not the W-9s you give to customers.
I have an EIN for my Sole Prop consulting business, and no LLC. They are orthogonal concepts.
It’s really easy to get an EIN online without forming an LLC. This is sufficient for any sole proprietor business where you don’t need liability protection or employees.
No, it's not orthogonal. You don't get that benefit for an LLC. It's written on the W-9 form itself. Thus it's a reason why _not_ to have an LLC.
"If you are a sole proprietor and you have an EIN, you may enter either your SSN or EIN.
If you are a single-member LLC that is disregarded as an entity
separate from its owner, enter the owner’s SSN (or EIN, if the owner has
one). If the LLC is classified as a corporation or partnership, enter the
entity’s EIN" [0]
You're the best kind of correct, but to be clear, for most income forms submitted to the IRS, the IRS prefers the proprietor file once as an individual and use their SSN.
I feel like a lot of people (not holman) are looking for permission, as if having an LLC is a marker that says "I am a serious business doing serious business things." You don't need permission. You can just do things.
A formal business structure is good (but not required!) if you have employees and/or business partners, or if your attorney tells you you need one. IME as a solo entrepreneur an LLC (or two, in my case) just invited more paperwork into my life.
You know what actually functionally limits liability as a solo business? Good contracts backed up with business insurance.
Seeming serious is often needed for others to do business with you. E.g. I believe ARIN and APNIC will only let companies hold internet number resources (while RIPE will also allow sole proprietors, but that's only relevant if you're in Europe). Enterprise B2B companies just don't have their systems set up to deal with sole proprietorships.
Sure. If you find yourself needing ARIN services and that's what they need to move forward then that's what you have to do. All I'm saying is that it's not a thing to set up preemptively.
As someone living in Taiwan, can I set up an LLC and get all the benefits of it?
I now have a Singapore entity that helps me out for getting a Stripe account mainly.
There are all sorts of circumstances you will find that having and LLC is a chance to go through the easier/faster door. The whole article starts off with a painful javajoke and the punchline is sometimes you need to go really fast. That's what already having an LLC handy for helps with.
Recent personal discovery about an LLC, useful for gaining PDK access to proprietary fabs, so I can finally try touching lower process nodes again that are not open source, despite being out of university and not having a job that gives me the PDK access.
Depends on what's your goal. Privacy and the least amount of paperwork? Probably a place like Wyoming, where your annual report is a single page saying "yeah I'm still alive". But an LLC will usually need to be parallel-registered in the state it's doing business in, so if it's a pain-in-the-butt state like California, might as well register it here - you're not escaping their fees and paperwork either way.
If you live in California, you likely have to register in California. So you really only have one option, unless you want to register in two places. You’ll also have to pay at least $800/year for the pleasure.
The follow-up question then is... what are the legal workarounds to avoid having to also register it in one's home state, e.g. California? Surely there are some.
Um, it implies that if you’re “doing business” in California, you are required to register there? “Doing business” has a specific definition, any single member LLC where that member lives in California qualifies.
I agree that if you're engaging in the tech business you should have an umbrella llc. I have been asked multiple times to do projects for people and it's always easier to invoice as an llc with everything already set up.
However most software engineers don't engage in the tech business at all outside of regular employment. It's not useful for them
>Cost-wise it’s maybe $500 a year, all in (unless you have the pleasure of living in California, in which case you have to add their inane $800 on top). But that’s pretty reasonable considering the optionality it gives you to just… build shit these days.
You don't need an LLC to build things and sell things. And you also get the downsides of needing to stay at an office to be able to be served or having to have your active home address be publicly viewable.
You don't have to actually be physically present at your registered address, but they do need to be able to serve legal papers there. Any incorporation agent you use will be able to accept them on your behalf.
additionally many RAs offer mail forwarding/virtual offices (that can even accept deliveries) for pretty affordable , eg northwest registered agent offering seemingly millions of sheridan wy suites
In the UK, there used to be significant tax advantages in forming a Ltd: you could pay significant part of the income as dividends (since you were both employee/director and shareholder), which attracted lower tax & could be split with your wife etc. Then regulation IR35 came along...
LLCs are great, but you should be aware that single-member LLCs may offer less liability protection than you expect, and in some circumstances it can be easier to pierce the corporate veil.
If you're worried about piercing corporate veils, you're probably not trying to get your lil' side project off the ground.
If you're worried about limited liability, you're probably not trying to get your lil' side project off the ground. But the article still mentions it, so it shall still be corrected.
Single-member LLCs may reincorporate as any other type of corporation to meet growth, or other needs.
> "An LLC will help you force a separation of personal and work finances"
No it won't.
> "it’ll help you accept payments"
No it won't.
> "or sign up for a bank account"
No it won't.
An LLC doesn't make those things any easier than they already are (very easy) as a sole proprietor.
An LLC only does the liability thing. And that's fine. Just don't make other things up. You don't need to.
An LLC does help with getting a proper EIN and DUNS number which helps greatly in establishing trust in a relationship with a new client.. Yes it absolutely helps with accepting payments.. having an EIN is necessary in many cases..
> "An LLC does help with getting a proper EIN"
No it doesn't. Sole proprietors get EINs just fine. It's literally the first option on the first page of the application. https://sa.www4.irs.gov/applyein/legalStructure
> "and DUNS number"
No it doesn't. Sole proprietors can get DUNS numbers just fine. It's literally the first option when you tell them how your business is structured right after telling them your name and email address.
> "Yes it absolutely helps with accepting payments"
A billion people accepting payments in every possible form without being incorporated say that you're wrong. No method of payment processing, from credit cards to memecoins, cares whether you're incorporated.
> "having an EIN is necessary in many cases"
Again, getting an EIN and forming an LLC are completely unrelated.
There are many financial products which require business incorporation.
"Financial products" is vague, so what if we just go down the list of payment methods and see which ones require being incorporated.
Credit card? No. ACH? No. Wire transfer? No. Cash? No. Crypto? No. Check? No. IOU on a napkin? No. Pokemon card? No. Sex? Weirdly illegal in most places, but still no.
...uh...which ones did I miss?
You can certainly use all of those mediums via consumer fintech, but you will often find yourself limited to products which are designed for consumers, and many B2B service providers may refuse to work with you.
Nobody said consumer fintech? You can just operate as a business. "Sole proprietor" is a real thing that almost every service knows how to deal with, and if one can't there's a competitor willing to right next door.
"Sole proprietor" is a real thing that many B2B services deal with by throwing your application in the trash.
Yes, you can go get a personal loan, or a retail banking account, or a personal payment processing account, but as I said, you're going to be locked out of a lot of B2B products.
Sure. If you absolutely need one of those services then you do the thing. Most of the time there are alternatives, IME.
Example, since you edited to add examples: I have several business bank accounts and far too many Stripe accounts all registered as sole prop. I haven't had to take a loan but I do have a sole prop credit card. My understanding is that even with an LLC a bank is going to require a personal guarantee for a loan.
It doesn't force you to do anything, same as a sole proprietor.
What it does do is that since it provides a rigid structure, it compels law abiding citizens to do those actions, not forcing still.
You would have a hard time proving liability if you didn't have separated finances.
Forming an LLC doesn't make separating finances any easier. It doesn't help you do it or help you force yourself to to do it. My objection is specifically to the claim that it helps you do anything. It doesn't.
Also, you should separate finances as a sole proprietor too.
Some vendors will only deal with companies (of all types) and refuse sole proprietors as customers, either because they don't know how or because they judge you as unserious. This comment is based on an actual experience I had.
> "An LLC will help you force a separation of personal and work finances"
An LLC will require you, under civil or criminal penalty for non-compliance, to separate personal and work finances.
i wish there was a 'follow user' option on HN so I could subscribe to certain HNers, each time they wrote a comment.
Perhaps you'd find this helpful: https://hnrss.github.io/#user-feeds
Thank you so much, that's very kind of you.
That's very sweet! But I recommend subscribing to me only once, not every time I write a comment. Otherwise you'll end up with thousands of duplicate subscriptions.
Thanks! got it, I'm sort of new to HN... (as a participator, though I'd been reading for a while).
Don't worry, I was making a joke. :)
> Cost-wise it’s maybe $500 a year
This is not my experience. My costs are higher, but the costs offset and then some by tax advantages.
Sharing here, to give a picture of what a real single person LLC looks like, compared to a vanity hobby LLC as described by OP.
I'm a contractor with a registered LLC S-Corp in the US. Almost all of my income is 1099 from one source. I was converted from W-2 to contract when my employer was acquired, my job role did not change. You might call me a misclassified full time employee. I could report this of course, and then I would burn my professional contacts and lose my job. So I don't.
I hire myself, pay myself a fair market rate as a salary, and run a payroll just for me. And I provide myself a few benefits from the LLC, like health insurance.
I'm required to keep up with a pile of quarterly and yearly fillings between the state, county, city and IRS. This is a non trivial amount of time and effort. I have to maintain separate business books and bank accounts in coordination with my accountant. I don't actually get to access the money I earned until it exits the business entity through a controlled process. I have to file business taxes separate from personal taxes. I still have to pay quarterly estimates on my personal taxes too.
My family health insurance is roughly $12k this year. If I purchase that insurance directly, I use post-tax income to do so. I'd pay ~$4k in taxes to take home the ~$12k income used to buy health insurance. But when the LLC buys the health insurance and provides it as a employee benefit, the ~$12k is not taxed.
The salary I pay myself is taxed at ~37%. The same as if I just filed as self employed. But the business income I earn over that salary is taxed at ~20%. This is the biggest advantage. The gap between a "fair market value" for my role, and my actual contract rate. In that gap, the LLC structure saves me 20% on taxes by labeling that portion of income as "shareholder profit disbursement".
Rough yearly costs:
$150 registered agent service $150 state registration filing $2500 tax prep and account services throughout year $1500 payroll services, including payroll tax filings
Rough yearly tax advantage:
$15,000
Where I come from, if they went back and looked at the years you were only earning what would normally be employment income from the single employer, they would classify it a "personal services corporation" and move any income in the company you declared as corporate income into your personal hands, tax you at personal rates and make you pay interest on that difference for the time you had it misclassified.
Your jurisdiction might not do that, but I'd be damn careful and if you are liable that way, they might let you off the hook on the interest if you went back and declared it correctly before they do.
For all these things I think just having an EIN is simpler.
You don’t even need that to start; you set up Capital One (for example) business accounts using your SSN. The EIN is just to avoid putting your personal SSN on invoices.
LLC matters if you think you’ll have liability risks.
>The EIN is just to avoid putting your personal SSN on invoices.
In order to do that, your LLC has to elect to be taxed as an S-corp, which requires it to file its own return. Worse, certain states and cities will impose a corporation tax on it.
Otherwise, if you retain disregarded entity status, you have to use your personal SSN for invoices. The corporation EIN is then mostly for employment tax purposes.
(Not actual tax advice)
"For example, if a disregarded entity LLC that is owned by an individual is required to provide a Form W-9, Request for Taxpayer Identification Number (TIN) and Certification, the W-9 should provide the owner’s SSN or EIN, not the LLC’s EIN." [0]
[0] https://www.irs.gov/businesses/small-businesses-self-employe...
>>The EIN is just to avoid putting your personal SSN on invoices.
> In order to do that, your LLC has to elect to be taxed as an S-corp, which requires it to file its own return
I think your interpretation is wrong and you have stripped the context on your IRS advice you quoted, changing the meaning. At the start of the paragraph containing your quote, it says "For federal income tax purposes, a single-member LLC classified as a disregarded entity generally must use the owner's social security number (SSN) or employer identification number (EIN) for all information returns and reporting related to income tax."
IMO, this has has to do with how one files their income and/or report to the IRS - as a pass-through entity, the IRS expects the human behind the single-member to file the income under their own own SSN even as after are distributing invoices with their LLC's EIN. IANA(Tax)L
No, you're misreading it. Information returns in most cases is the W-2 you send out to your employees and file a copy with the IRS for their information. I've always said that, for employment tax purposes, you use the LLC's EIN.
The entire quote on the IRS's webpage: "For example, if a disregarded entity LLC that is owned by an individual is required to provide a Form W-9, Request for Taxpayer Identification Number (TIN) and Certification, the W-9 should provide the owner’s SSN or EIN, not the LLC’s EIN.
For certain Employment Tax and Excise Tax requirements discussed below, the EIN of the LLC must be used. An LLC will need an EIN if it has any employees or if it will be required to file any of the excise tax forms listed below."
The original statement was SSN hiding for invoices, that's directly covered in the W-9 example. You can (have to) hide your SSN on W-2s, but not the W-9s you give to customers.
(As far as I understand:)
1) Unless you only take card payments through e.g. Stripe, at which point your SSN information goes to Stripe not the client.
2) You can get a personal EIN, and then you don't need to share your SSN with your clients.
> your LLC
I have an EIN for my Sole Prop consulting business, and no LLC. They are orthogonal concepts.
It’s really easy to get an EIN online without forming an LLC. This is sufficient for any sole proprietor business where you don’t need liability protection or employees.
No, it's not orthogonal. You don't get that benefit for an LLC. It's written on the W-9 form itself. Thus it's a reason why _not_ to have an LLC.
"If you are a sole proprietor and you have an EIN, you may enter either your SSN or EIN.
If you are a single-member LLC that is disregarded as an entity separate from its owner, enter the owner’s SSN (or EIN, if the owner has one). If the LLC is classified as a corporation or partnership, enter the entity’s EIN" [0]
[0] https://www.irs.gov/pub/irs-pdf/fw9.pdf
They're orthogonal. LLC gives you some legal cover, and a personal EIN gives you privacy. You can use both.
I have no idea why you’re talking about LLC requirements in response to my Sole Prop non-LLC suggestion, sorry.
> or EIN
Anyone can get an EIN for their sole proprietorship business (just one, though) and use it on tax forms.
You're the best kind of correct, but to be clear, for most income forms submitted to the IRS, the IRS prefers the proprietor file once as an individual and use their SSN.
Yes, and the attached Schedule C will have the EIN at the top.
I feel like a lot of people (not holman) are looking for permission, as if having an LLC is a marker that says "I am a serious business doing serious business things." You don't need permission. You can just do things.
A formal business structure is good (but not required!) if you have employees and/or business partners, or if your attorney tells you you need one. IME as a solo entrepreneur an LLC (or two, in my case) just invited more paperwork into my life.
You know what actually functionally limits liability as a solo business? Good contracts backed up with business insurance.
Seeming serious is often needed for others to do business with you. E.g. I believe ARIN and APNIC will only let companies hold internet number resources (while RIPE will also allow sole proprietors, but that's only relevant if you're in Europe). Enterprise B2B companies just don't have their systems set up to deal with sole proprietorships.
Sure. If you find yourself needing ARIN services and that's what they need to move forward then that's what you have to do. All I'm saying is that it's not a thing to set up preemptively.
ARIN isn't the only vendor who is like this.
As someone living in Taiwan, can I set up an LLC and get all the benefits of it? I now have a Singapore entity that helps me out for getting a Stripe account mainly.
There are all sorts of circumstances you will find that having and LLC is a chance to go through the easier/faster door. The whole article starts off with a painful javajoke and the punchline is sometimes you need to go really fast. That's what already having an LLC handy for helps with.
Recent personal discovery about an LLC, useful for gaining PDK access to proprietary fabs, so I can finally try touching lower process nodes again that are not open source, despite being out of university and not having a job that gives me the PDK access.
A question is: where do you register one? Should it be Caymans or Panama or South Dakota or Texas or Delaware or your home state?
Also, what type of LLC should it be?
Depends on what's your goal. Privacy and the least amount of paperwork? Probably a place like Wyoming, where your annual report is a single page saying "yeah I'm still alive". But an LLC will usually need to be parallel-registered in the state it's doing business in, so if it's a pain-in-the-butt state like California, might as well register it here - you're not escaping their fees and paperwork either way.
Delaware is for big companies.
If you live in California, you likely have to register in California. So you really only have one option, unless you want to register in two places. You’ll also have to pay at least $800/year for the pleasure.
The follow-up question then is... what are the legal workarounds to avoid having to also register it in one's home state, e.g. California? Surely there are some.
This is kind of California specific. There isn’t really a work around if you’re “doing business” in California.
Does this imply that any business that's not registered in California can't do business in California?
Um, it implies that if you’re “doing business” in California, you are required to register there? “Doing business” has a specific definition, any single member LLC where that member lives in California qualifies.
I agree that if you're engaging in the tech business you should have an umbrella llc. I have been asked multiple times to do projects for people and it's always easier to invoice as an llc with everything already set up.
However most software engineers don't engage in the tech business at all outside of regular employment. It's not useful for them
hello from an old TotalSpore-head :)
>Cost-wise it’s maybe $500 a year, all in (unless you have the pleasure of living in California, in which case you have to add their inane $800 on top). But that’s pretty reasonable considering the optionality it gives you to just… build shit these days.
You don't need an LLC to build things and sell things. And you also get the downsides of needing to stay at an office to be able to be served or having to have your active home address be publicly viewable.
That's specifically the $100 of the $500/year fee; you pay for a registered agent to handle all that for you (and shield your address).
You don't have to actually be physically present at your registered address, but they do need to be able to serve legal papers there. Any incorporation agent you use will be able to accept them on your behalf.
additionally many RAs offer mail forwarding/virtual offices (that can even accept deliveries) for pretty affordable , eg northwest registered agent offering seemingly millions of sheridan wy suites
Well if nothing else I feel a bit better having an llc sitting around doing nothing.
whats the uk equiv?
A ‘Registered Limited Company’, as in ‘Widgets Ltd.’. Per the ‘Limited Liability Companies Act’ of 1855.
In the UK, there used to be significant tax advantages in forming a Ltd: you could pay significant part of the income as dividends (since you were both employee/director and shareholder), which attracted lower tax & could be split with your wife etc. Then regulation IR35 came along...
[dead]
Why does everything need to make money so bad, this is terrible advice
"Everything" doesn't need to make money so bad. But if you're interested in making money on the internet, this is good advice.
because we live in capitalism?
[dead]