At What Point Should I Turn My Website Into an LLC?
This post is part of the Friday Q&A section. If you want to ask a question, just write a comment below.
Tim Schmoyer asks:
I’m trying to figure out when/if it’s appropriate for my blog to turn into an LLC. The income my blog generates from advertising and Adsense is adding up, plus I have two other sister-sites (not blogs) that generate an income to help support my main blog. Right now I do it all as a sole proprietor, but it’s getting complicated to differentiate income from expenses for tax purposes. Plus, I want to hire some on-going help/contributors for my blog. So, at what point is it best to become an LLC both for practical and tax purposes?
Disclaimer: I am not an accountant, so the information below has educational purposes only and should not be taken as legal advice.
First of all let’s clarify the terms involved. LLC stands for “Limited Liability Company,” and it is a business entity that stands in the middle between a sole proprietorship (i.e., the smallest/simplest business form) and the corporation (i.e., the largest/most complex one).
Sole proprietorships don’t require registration, so if you are already making money with your websites and paying your taxes, you already have a sole proprietorship business.
This reader, therefore, is asking when it would be worth while to step up and register an LLC.
In my opinion you should only take this step when your running costs (i.e., administrative expenses plus taxes) for the LLC will be the same of the sole proprietorship. Why do I say the same and not lower? Because the LLC has a big legal advantage over the sole proprietorship form: it has limited liability, so the personal assets of the owner are not at risk.
Once your income grows enough, however, you should be able to make your running costs actually lower with the LLC. This happens because the LLC has a more flexible tax structure (you can pretty much choose any type of taxation, from “Partnership” to “C Corporation”) and it also has a feature called “pass-through” taxation, which removes the risk of paying taxes twice on the same income (e.g., paying the company tax and then personal income tax on top of that).
In some places around the world making this decision becomes even easier, because the tax burden on personal income is much higher than the tax burden of companies. Here is an example with numbers to illustrate the point.
Suppose that the personal income tax (or sole proprietorship tax) on your country is 30% of the profits you make. The LLC tax, on the other hand, is 15% of profits. Running an LLC will have $300 in additional monthly costs, however (e.g., accountant, federal and state registrations and so on). With this scenario, when does it become worth while to form an LLC?
First of all we calculate the additional annual costs of running the LLC, which are $3,600. We also know that the tax burder of the LLC is 15% instead of %30, so to balance the additional costs out we would need an annual profit of $24,000 ($3,600 divided by 0.15).
Here is the test: with an annual profit of $24,000 a sole proprietor would pay $7,200 in taxes. An LLC, on the other hand, would pay only $3,600, but it would also have administrative expenses of $3,600, so the overall cost would be the same.
In other words, as long as you are making at least $24,000 in profits annually, it becomes worth while to have an LLC instead of a sole proprietorship, because you’ll have limited liability.
Each country and state is different, however, so you’ll need to research your local law and run the numbers to find what is the right point for you.
Finally, keep in mind that in some U.S. states LLCs actually have a higher tax burden, and in those cases going directly for a Corporation might be the best option.
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24 Responses to “At What Point Should I Turn My Website Into an LLC?”
Belize Real Estate Expert
Here is a question I’ve been trying to figure out but I’m still not sure of the answer.
I’ve noticed recently that one of my competitors has begun buying up many related domains for our niche (Belize real estate) and putting up similar sites with slightly different templates but all drawing from the same database of articles and properties for sale.
I thought that this would hurt them in the eyes of Mr. Google (duplicate content) but they seem to be holding their position in the SERPS while potentially confusing the buyers with all of these shell sites.
My questions is: Is this a normal, recommended tactic, and should I follow them and do it too? (If you want the name of the competitor for research purposes let me know…..)
Hi, Daniel. Thanks for the post.
I just wanted to add (as a practicing CPA and blogger) one thing: if you are a single-member LLC, then you also have the option of filing your taxes on the sole-proprietorship tax return, in addition to the other options, Partnership, Corp, or S-Corp.
But whatever the choice, it’s all got to be done correctly with the right IRS elections at the right time. So yes, I agree, professional help is a necessity, at least in the beginning.
This is a very easy to understand comparison. Thanks for the explanation. I agree that it is important to check the specific laws regarding businesses in your country.
Paula Neal Mooney
Yeah, all my websites and writing income is under my LLC called Plunder, LLC.
We file taxes like normal using Turbo Tax — all on the up and up and honest.
I live in the US and made $44k last year, and combined with the other tax factors in my household, I paid $9,500 to the Fed. Govt in taxes on it, and $1,581 to the State.
Needless to say, next year I want to spend more on advertising expenses. But it’s working well.
I used “The Company Corporation” to form the LLC, and they charge me about $250 or so per year for $50k or more worth of litigation protection.
How did you come up with such an expense for LLC? It should not be more expensive than few hundred dollars when filling with your state, in the US at least?.
I was wondering that, too. In my state it’s only about $265 or something to file, and the form looked super-easy to complete.
I just used an abstract number that would make the example clear.
In many countries it is obligatory for LLCs and corporations to have an accountant, though, and that adds a monthly cost. Plus there are the registrations, the costs with the social security (which can also be obligatory for the LLC and up), and so on.
- Daniel Scocco
- Tim Schmoyer
Useful post but there is still some time for me to get there. And by the way, when is DBT turning into LLC or is it in the process already?
I already have an LLC. It is called “Online Profits Web Development LLC”. That company owns all my sites, including Daily Blog Tips.
Really I didn’t know that till now. Don’t see that in the footer too..
Well I prefer to keep this kind of information private, that is why I don’t even put it in the footer.
- Daniel Scocco
Thanks Daniel, this clarified some of my doubts about company taxing. I will surely look into tax system of my country to find how this can help me.
Jarrod @ Optimistic Journey
This was very educational. I loved how you broke down the difference between LLC, Sole Proprietorships and corporations. Thanks for sharing!! At some point in the future I may be considering going LLC
Thanks for much for answering my question, Daniel! A friend of mine is an accountant and has worked with other organizations to setup corporations, non-profits, and such. When tax season slows down, we’re gonna get together to talk more about this and pull in some legal contacts he knows.
I don’t make $24k yet, but I don’t keep any of the income my sites generates anyway — I just pay taxes on it (grrr). After my web expenses are paid, I save it in a separate bank account and invest it all back into my sites (paying designers, developers, launching new ideas, etc.). Some of the services one of the sites provide could bring in some charitable donations, so a non-profit would be an incentive for people to do that tax-free. Since that’s how I’m practically operating anyway, I may explore that route, too. But then I have another site that’s definitely for-profit that exists to generate an income to support what I’m doing for free on my other site. So, it’s kinda complicated.
There’s just so many options to consider, so thanks for taking the time to explain the LLC route so clearly!
Great information. At what point should your web site even considering turn it into a company?
I’ve also done a lot of research on this subject. While it would seem quite intimidating, an S-Corporation might also be a good answer to this question. Again, it depends on local, state, and federal law, but S-Corporations potentially have a lot of benefits over both sole proprietorships and LLC’s. It is all about the tax structure that you must follow and the costs of professional fees and time…In otherwords, if you are serious about blogging and other online business then get seious about hiring professional services when it comes to legal and accounting issues.
$24,000 is a dream for me. But for an LLC, doesn’t it mean you have to sell something or offer some services on your blog? But as a blog like DBT, what products or services does it sell indeed?
You can sell advertising, consulting services, and so on.
Ah, I see, thank you, Daniel!
- Daniel Scocco
Tax issues can be so confusing… I’ve been online for years with one project or another, and I’m only this year starting to feel confident about the financial structure of my business. I’ll tell you, it isn’t a good idea to overlook starting your business with the right structure because it can cause you a lot of headache down the road.
It would be great if more online ventures and independent bloggers had a much higher income, but the truth for many is that they simply don’t have an income that requires them to need anything more than a sole proprietorship.
Thanks for the clear example, Daniel. =D
The last point is important. In the US, an LLC is a pass-through entity for taxes, which means the income from it goes onto your tax return. Even if you pay yourself a salary you must still declare the profits (above the salary) on your return.
For the above reason, an LLC is primarily an Liability Protection mechanism and not a finical benefit mechanism. You get the liability protection of a corporation and the administrative simplicity of a sole proprietorship. For liability AND financial benefits you’ll want to investigate incorporation.
On a practical level, a blog doesn’t seem to be a high-risk business in which you might be sued for publishing something. However, if you enter business contracts as an LLC and then go bust, the people/firms holding the contracts would have to go after the LLC instead of your personally. In other words, you are nor personally liable for the dealings of the LLC.
There are so many permutations and nuances of structuring a company that fits your situation that you really should consult a pro.
Daniel – Is there anything to be said for protection from litigation?
I would just be careful to not infringe on the trademark of a big company, and to not violate the copyrights of other companies/people.
Ah, and there are also the new FTC rules if you live in the U.S., which affect most online marketers.
- Daniel Scocco
This is great! Thanks for sharing with the rest of us…
Chat with you later…
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