Admittedly, determining how your business will be organized is not nearly as exciting as picking your company name, creating a logo or building a sleek website. Yet, a proper business structure will help you maximize profits, minimize risk and get all the boring stuff — taxes, paperwork, fees — in line. There are a handful of business structures that can work for a startup video production company, but the LLC is at the top of the heap. Here’s what you need to know.
An LLC, short for Limited Liability Company, is defined by the New York Department of State as “an unincorporated business organization of one or more persons who have limited liability for the contractual obligations and other liabilities of the business.” In other words, it’s a business structure that acts like a corporation in that it limits the liability of its owners (i.e. if something goes awry, the owners of the business won’t be personally liable) but with a relatively short list of requirements.
You might be thinking, “why do I need this at all? Why can’t I simply choose a name for my business, make a website and go to work?” Well the truth is, you can. You can go into business right now as a Sole Proprietor if you’re on your own or, if you have a business partner, as a Partnership. And while the laws on the establishment of these legal entities might differ from state to state, very often it’s as simple as just getting to work. Even taxes are fairly straightforward; profits are filed as your personal income tax, meaning there’s no separate tax for the business.
Reasons to set up an LLC businesses
So, why even bother creating an official business structure when you can just go to work with a Sole Proprietorship or Partnership?
The main reason is liability. From the perspective of the law, business owners who operate a Sole Proprietorship or Partnership are not separate from their company. If you operate a Sole Proprietorship or part of a Partnership, you will be personally liable for everything your business does, including accidents or mistakes made by you. For example, if you’re filming a commercial for a brand agency and don’t complete it on time, costing them business, they may sue you for damages for the amount their contract was worth. If you operate a Sole Proprietorship or Partnership, that agency can come after your personal bank account or assets since there’s no barrier between you and your business.
With an LLC, however, you get the benefit of limited liability where you as the business owner cannot be held personally liable for your business’s obligations and debts. (Of course, there are some exceptions — because what’s a law without exceptions?) Taking the previous example of the brand agency commercial; if you have an LLC and don’t complete the project on time, your client can’t come after your personal assets. In such an instance, especially if you have business insurance, your car, house, life savings, etc. will be safe.
While legal liability is probably the most commonly cited benefit of a creating an LLC, taxes comes in a close second. LLC owners can apply for an Employer Identification Number (EIN) from the IRS that would allow them to be taxed as a corporation. The benefit here is that instead of your business earnings being taxed at the personal income tax level, you can be taxed at a lower, corporate tax level and at the same time write off business expenses. This last part is important since business expenses can including things like your camera, laptop and editing software, travel costs, and even the spare bedroom you use exclusively as your editing studio.
Additionally, if you have a partner, you don’t have to worry about disputes causing your business to go under. LLCs do require some level of paperwork, and one of those documents is the Operating Agreement which stipulates, among other things, how disputes between partners ought to be settled. You might be thinking, “No way. My partner and I get each other. We’ll never argue.” But what are lawyers for if they don’t consider the worst case scenario? Things might seem peachy today, but you wouldn’t want to jeopardize your business tomorrow if a disagreement comes up. An LLC’s operating agreement ensures civility and some piece of mind if (or rather, when) partners simply can’t agree on something critical to the business.
Things might seem peachy today, but you wouldn’t want to jeopardize your business tomorrow if a disagreement comes up.
Adding “LLC” to the end of your business name can also give your company some additional credibility. It indicates that you’ve registered with a state and shows a level of both permanence and seriousness that may make potential clients more willing to do business with you. Sometimes sounding fancy can be a good thing.
Operating your business as an LLC does have some downsides. For example, you must ensure that your business records are kept separate from your personal records, including financial records as well as things like meeting minutes, if you have a partner and hold official meetings.
Additionally, creating an LLC is more expensive than creating a Sole Proprietorship or Partnership since there is a filing fee and annual fee that differs from state to state. For example, California charges $70 to file for an LLC but then requires over $800 a year to keep that LLC alive. Delaware, a popular LLC filing state, charges $90 to file an LLC and a $300 annual fee. Each state treats LLCs differently, so where you file your LLC may depend on factors such as where you live, where you intend to do business, where corporate laws are most favorable to your line of business, etc. It may be best to talk to a corporate lawyer about how and where to set up your LLC.
How to Get Started
Actually, forming an LLC doesn’t require you to be a lawyer — with a little research about your state’s LLC procedure and the right documents and information, you can file all the paperwork on your own.
But if you’re in the process of starting your own production company, you probably have enough to do. Outsourcing LLC formation to a business incorporation service is a great way to be confident that your LLC will be formed properly without having to spend your precious time pouring over a state incorporation website. The best part is, these services are very reasonably priced, provide great customer service and send you all the paperwork and information you need.
SIDEBAR: Four well-known Incorporation Services to consider when forming an LLC:
- IncFile ($49 + state filing fee)
- LegalZoom ($79 + state filing fee)
- Bizfilings ($99 + state filing fee)
- Rocket Lawyer ($149 + state filing fee)
Roman Zelichenko is a NYC-based writer, lawyer and entrepreneur. Follow him on Instagram: @rzelichenko. Mark Levy is an award-winning amateur movie maker and intellectual property attorney based in Colorado.