Should you create an LLC for your blog? Will an LLC reduce your taxes, or will creating one be a big mistake?
We'll assume you've decided that your blog is a business, not a hobby. Generally, if there's a profit motive behind your blog, it is a business. The fact that you're thinking about this is good because it indicates that you're thinking like small business owners should.
There are several ways that you can set up your business. Making the right decision can be very important. We'll examine what an LLC is, how it impacts your taxes, and things to think about when making your decision. Finally, we'll look at other business types.
- What is an LLC?
- Other business types and terms
- What an LLC does for your taxes
- Advantages of creating an LLC for your blogging business
- Disadvantages for bloggers who create an LLC
- Steps to help you decide whether you need an LLC
Before we go any further: DO NOT take any of this as tax or legal advice. This is intended only to educate you about how different business structures work and the implications for how you structure your business. For specific advice related to your unique business and financial situation, you should seek out your own legal and professional experts who can advise you.
Finally, this article is about blogging in the United States. Other nations have different structures, legal requirements, advantages, and disadvantages. Much of this may not apply outside the U.S.
What is an LLC?
A limited liability company is a formal business entity. Investopedia calls LLCs “hybrid entities that combine the characteristics of a corporation with those of a partnership or sole proprietorship.”
But what exactly does that mean? An LLC is like a corporation in that it exists as a separate entity from its owners. However, it's not a corporation, as corporations are taxed separately.
An LLC has a lot of flexibility in how it's structured. You can choose to have the LLC taxed like a sole proprietorship or general partnership, or you can elect to treat it like a corporation from a tax perspective.
An LLC owner is called a member. If it's just one person who owns it, it's a single-member LLC. It's possible to have multiple owners, and the tax burden is spread out among them based on terms of ownership.
An LLC's members work within the company and can receive all or part of company profits but cannot be paid on payroll (unless they choose corporate taxation).
Each state has different rules for creating an LLC. Some states have an option for an LLP (Limited Liability Partnership) with different rules for managing and structuring the company. We won't dive into all the details here as this is primarily an overview.
Other business structures and terms
We've already referenced other business types. It's good to understand those types when discussing LLCs and how they work.
What is a sole proprietor?
A sole proprietor is someone who owns an unincorporated business by himself or herselfInternal Revenue Service Sole Proprietorships page.
A sole proprietor is someone who goes into business for themself without creating a formal business entity. It's often the default designation for anyone who does a side hustle, such as independent contractors in the gig economy. A significant number of small businesses are sole proprietorships.
What is an independent contractor?
An independent contractor is someone who has contracted with a business or individual to provide goods or services as a business rather than as an employee.
“Independent contractor” is not a business entity. Instead, it's a description of the business relationship. The contractor has agreed, by contract, to provide goods or services for someone else.
Is a DBA different from a sole proprietor?
DBA (Doing business as) refers to the business name used by an individual or a business entity. If the business name differs from the person or business, it's known as a DBA.
A sole proprietor may do business under their legal name, or they may choose a business name. At the same time, a corporation could have a DBA. If a business of any kind operates under a different name than their legal name, that's a DBA.
Most states require a DBA to be filed. However, that does not make a DBA a business entity. Instead, a DBA only identifies a business name.
Is an independent contractor the same thing as a sole proprietor?
No. An independent contractor may often be a sole proprietor, but the terms define different things. “Independent contractor” describes the business relationship, while “sole proprietor” describes the business structure.
An independent contractor can be an individual or any type of business entity. The term generally distinguishes a business (or self-employed individual) providing services for a business from employees of that same business.
An unincorporated organization with two or more members is generally classified as a partnership for federal tax purposes if its members carry on a trade, business, financial operation, or venture and divide its profits.Page 2 of IRS Publication 541: Partnerships
One way to put it is that a partnership is a multi-owner version of a sole proprietorship. If you have two or more people who choose to go into business together but have elected not to incorporate or create an LLC, it's a partnership.
A partnership is a bit more of an intentional business structure than many sole proprietorships. That's because there needs to be some kind of agreement between partners. Who has what responsibilities, who is in charge of what operating costs, and how are profits distributed?
Rules vary by state, but many states require partnerships to be registered.
A corporation is a formal business entity that completely stands alone from its owners (or shareholders).
For instance, according to UpCounsel, “Each member (of an LLC) has a claim to business assets.” Meanwhile, the corporation directly owns its assets. Shareholders do not have a direct claim to those assets. It's only an indirect claim concerning their stake in the company itself.
There's a difference in how an active owner of a corporation is paid. The profits for a sole proprietor, general partnership, or typical LLC are the compensation for the owner (or owners). Profits for the company are taxable income for the owners.
An active owner of a corporation is on the corporation's payroll and compensated with wages or a salary. The owner can also take dividends from the overall profit of the corporation.
Corporations are generally an S Corporation or a C Corporation. Each has its own regulations about how ownership is structured, and taxes work differently. A C Corporation pays corporate income tax on the profits. In contrast, the owners of an S Corporation pay personal income tax on their profit.
A company that exists for certain purposes for the public good can be structured as a nonprofit organization. Profits for such a company are not taxed. Since a nonprofit has no owners, profits can't be distributed to owners. Nonprofits are often supported by charitable donations from supporters. Blogs can be operated by nonprofit organizations, though generally, the motivation for the blog is related to the organization's mission rather than a profit motive.
A relatively new type of business structure is known as a B Corporation. It's sort of a hybrid between a nonprofit and a corporation. A B Corporation must have a third party certify that its mission benefits the public good as much as or more than it does shareholders. B Corporation profits are still taxed and can be distributed to shareholders.
As of the last update by UpCounsel, Twenty-nine states had some form of benefit corporation designation, with fourteen more considering it.
EIN (Employer Identification Number)
An EIN is a sort of business version of a Social Security Number. It's a specific identifier that the IRS provides to a business venture.
Registering an LLC or incorporating your business will require you have an EIN. Sole proprietors can get an EIN as well. To do so, one must operate mainly in the United States and have a valid tax identification number (a Social Security number, ITIN, or another EIN).
As a sole proprietor, your EIN will be associated with your Social Security Number and your personal legal name. It can also be associated with a DBA.
An LLC taxed as an S Corporation or C Corporation.
When you create an LLC, it generally acts in many ways like a sole proprietorship or general partnership, depending on how many owners (members) there are.
However, an LLC can elect to be taxed like a corporation. This means the company could have the LLC business structure but act more like a corporation. An LLC's active owner(s) would then be on the payroll, and taxes for the LLC are handled like they would be if they were an S Corp or C Corp.
It's when you elect to be taxed as a corporation that an LLC offers potential tax savings. Savings often relate to how self-employment tax works. However, a C Corp election poses the threat of double taxation (where profits are taxed at the corporate rate, and then your dividends are taxed again on your income taxes).
You should meet with a tax professional who can examine your business and help you understand if there is an advantage for you to be taxed as a corporation.
What an LLC Does for your taxes
Creating an LLC typically changes nothing on taxes for your blog. By default, an LLC is taxed the same as a sole proprietorship, because it's known as a disregarded entity.
Disregarded entity” is a tax term. It refers to an entity that, as the name implies, will be disregarded — or ignored — for federal income tax purposes. The most common disregarded entity for federal income tax purposes is the single-member limited liability company (SMLLC)Wolters Kluwer: What is a disregarded entity?
This means that on its own, being an LLC offers no tax benefits. However, you can elect to have your LLC taxed as a corporation. Creating an LLC allows you to file with the IRS requesting S Corporation or C Corporation tax status.
There may be tax advantages with an S Corp or C Corp election. Such an election also allows you to become an actual employee of your company.
Advantages of creating an LLC for your blogging business.
The main advantages of creating an LLC are:
- Protecting yourself (as an individual) from your company's liability
- Formally creating a business entity
- Flexibility in how you set up your business.
The main reason that most will set up an LLC is to protect their personal assets if things go horribly wrong with their business. If your business has a debt that cannot be paid, an LLC is legal protection against losing your home or other assets.
The fact that an LLC is a separate entity is significant. In many ways, it's as though the LLC is a person. The LLC's debts and assets belong to the LLC, not to you as the owner.
If your business borrowed money and things fell apart, creditors can only go after the business's assets, not yours.
Suppose your blogging business is successfully sued (such as for copyright infringement or harmful information). In that case, creditors can only go after your business.
This kind of thing can protect you from losing your home and savings if something goes horribly wrong with your business.
The advantages can go beyond limited liability protection. I think there's a psychological advantage to creating a formal business entity. It causes you to act and think like a business owner. There's a certain amount of motivation and validation in that.
The flexibility can be great for helping you as you grow. Suppose your blog and income grow to a point where it makes sense to be taxed as a corporation. You can easily make that change without restructuring your business or re-incorporate.
Disadvantages of having an LLC for your blogging business.
There's some time and cost involved in creating an LLC.
Each state has a registration cost, usually between $50 and $200 (up to $500 in Massachusetts). Most states have an annual renewal fee, and some charge an annual franchise tax (California is the highest cost as of this writing, at $800 annually).
Using a lawyer or reputable service is a good practice to ensure everything is done right. That can add to your cost of incorporating.
Just because you have an LLC does not mean you are protected.
Applying for loans or other financing using a personal guarantee can open the door to creditors coming after you personally.
If you operate your business incorrectly, you may allow creditors to “pierce the corporate veil.” That means that they can bypass the usual asset protections.
Failure to keep proper records or file the appropriate forms, legal documents, and updates throughout the year can indicate that this isn't really a business.
When you create an LLC, you say the business is separate from you as an individual. However, mixing business and personal finances sends a different message.
This creates more pressure to dot your i's and cross your t's in operating your business. It adds a bit more formality.
Three steps to help you decide whether to create an LLC
1. Figure out your goals
What exactly are you trying to accomplish with your blog and other business activities. Are we talking about a little bit of income or something substantial?
Is this just a tiny side hustle, and that's all it ever will be? Or is this a full-time gig (or do you plan for it to be)? These things might help you determine how you want to structure your business.
2. Identify your liability risks
Liability protection doesn't mean much if you won't potentially have any liability. It also may mean little if you don't have any assets to protect in the first place.
For most of us, blogging is something you can bootstrap pretty easily. We buy a domain, pay a little for hosting, and maybe some plug-ins. Most of it is just writing blog posts, marketing, and search-optimizing the blog and figuring out the best ways to monetize.
Unless you're buying domains or blogs, there's rarely as much debt involved as many business startups have. If the business doesn't make it, it's not like you took out a loan or anything to get it off the ground, right?
Ultimately, there's often a risk for content creators. People can fabricate claims of copyright infringement. Sometimes you can use images or media that you thought were okay to use, but you find out you were mistaken.
What kind of actions could people take based on the information in your blog? Is there potential liability based on the advice you offer? Do you recommend products that could cause issues? Could you potentially be sued for something in your blog?
The potential for issues with copyright laws and lawsuits should not be taken lightly. The more litigious society becomes, the more critical it is to understand the risks. Do any of these pose a risk of you suddenly owing more money than your business can pay?
3. Get competent help.
One of the dangers as a blogger just getting started making money is that we're used to operating on the cheap. It usually doesn't cost much to run a blog, and many great free tools exist. Unfortunately, it's tempting to do it yourself on other things, sometimes on things you shouldn't try to do yourself.
When it comes to creating an LLC, there are a lot of so-called easy ways to do it yourself. It can be great until you discover all the things you didn't know.
There may be a point where it makes more sense to get a tax professional to advise you on whether or not creating an LLC makes sense. It may be better to have a business lawyer walk you through all the steps to ensure you have caught everything.
One thing about running a business: You start to learn the value of prioritizing your time and efforts. Does it really save that much money if you're spending learning how to do it that could have been spent creating more content?
Should you create an LLC?
I won't tell you what you should do. Everyone's situation is different. Your risks and financial condition differ from mine.
I started my blogging business as a sole proprietor. With the first dollar I spent, I was keeping records. The first official thing that I did was get an EIN. That allowed me to get a business bank account. It also created fewer situations where I had to provide my personal social security number.
As my blog became profitable, I created an LLC. I chose to be taxed as an S Corporation. While there are potential tax advantages to doing so, for me, it was more about putting myself on payroll.
In the end, my decision process was deeply personal. I'm sure yours will be as well. That's why I can't tell you whether you should create an LLC for your blogging business. All I can do is give you information about business structures and some factors that may become part of your decision process.
Ultimately, you'll need to make the decision that fits best with your personal reasons, your goals, and your business.