Do you have a pressing financial question on which you could use a bit of expert help? Email firstname.lastname@example.org. Today’s expert is Nicole Lapin, New York Times best-selling author and founder of The Boss School.
“My floral business has really gotten off the ground, but I’m still using money from my personal account to fund it—and have to put expenses on my personal credit card. Should I set up an LLC? What even IS an LLC?”
Yay! So exciting that your flower business is, well, blooming. (Couldn’t help myself.)
You’re in the position a lot of people find themselves in when they are crushing their side hustle or the business they finally had the courage to start. It’s a high-class financial problem to have (like paying higher taxes because you make a killing) since the reason you're considering it at all is because you're bringing in real money.
If you want a quick diagnosis, then I would say that an LLC—Limited Liability Company—is a good option for you. Why? Because you’re in the consumer business and it protects you if, say, someone sues you because they poked themselves too hard with a thorn or dropped a vase on their foot or something like that. Obviously, those are ridiculous hypotheticals, but I've seen weirder lawsuits in my life. With the way you’re doing it now, those folks could go after your personal assets. With an LLC in place, they can’t.
Other “pros” of becoming an LLC are that it’s not as costly as you think (usually a couple hundred bucks, depending on the state) or difficult to set up. You also don’t need a separate tax filing for the business. You simply report it on your personal federal tax return and have better tax advantages than other entities (i.e., you're not “double taxed” on your net income and on an individual basis). You may even be perceived as more “legit” if you are registered in this way.
On the “cons” side, if you have one or more partners in your business and one leaves, it could bring down the whole structure (in which case you’ll want to look at an LLP or Limited Liability Partnership, which makes partners liable for their own actions vs. the actions of the group). Also, investors don't love this structure because of the tax implications, so if you’re planning on raising money, it might not be for you. And, while the filing costs are low, the renewal fees and publication requirements (applicable in select states) can get pricey. Finally, you can’t pay yourself a wage. Instead, you pay yourself by taking money out of the LLC’s profits as needed.
Bottom line: The biggest value of an LLC is the personal protection it grants you.