Three Top Tips To Operate Your Online Business LLCAug 01, 2023
When you’re running an online business, you’re juggling a lot of balls in the air every day. Sometimes when you’re working on content, or marketing, or ways to expand your business and earn more profit, it’s easy to forget some of the important day to day basics that help keep your business and your legal entity legit and legally protected. If you formed an LLC for your business (or a corporation if that was a better choice for you) - great job! Forming a legal entity to operate your online business is one of the most important first steps you can take when getting your online business set up. If you need more information about forming your LLC you can read more on my blog Two Step Process to Choose a Legal Entity to Conduct Your Online Business. Now that you have your LLC, or maybe you’ve even been operating it for a while, let's review three key considerations you should keep in mind as you operate your online business.
LLCs provide you with limited liability protection and act like an accordion file to expand with you and accumulate your activities as you grow your business. But maintaining that liability protection does take some thoughtful action on your part as the business owner. First, you’ll want to make sure that your LLC is the party to all of your contracts and obligations and is properly referred to everywhere you use your business name. Second, if you are expanding your business into a different line of business than what you currently operate, you might consider setting up a second LLC to handle the new load. Third, if you move from your current state, you’ll want to be sure you properly move your LLC with you to avoid penalties and taxes.
When You Operate Your Online Business with an LLC, Make Sure the LLC Operates the Business
When you formed your LLC, you most likely took several steps to properly set things up. You probably did the following:
- obtained an EIN (Employer Identification Number) for the LLC
- set up bank accounts in the name of the LLC
- segregated your personal accounts from your business accounts
- put the legal name of your business on your forward facing marketing materials, like your website.
You can learn more here about these steps and how to operate your LLC to maximize your limited liability protection: Maximizing Limited Liability Protection: Tips for Running an LLC as an Online Entrepreneur. Once your business is set up, you can put a big check mark next to helping your online business be legally protected. But the work isn't quite over yet, and you'll need to continue to pay attention to operating your LLC as long as you have it.
When you are entering into contracts and registering for other online events and activities, as is common in the online business space, be sure to always use the name of your legal entity and not your personal name. Although you are the one operating your LLC, it is the LLC that is the business. Operating through an LLC, or other legal entity, like a corporation, gives you limited liability protection. If you are sometimes doing things in your personal capacity, or switching back and forth, this will weaken that protection.
Over time, it’s also easy to become a bit lax about referring to your LLC. The words “LLC” (or similar words you used when naming your legal entity) can feel burdensome, and it’s often easier to refer to your business without the LLC suffix. For example, if your business name is Morning Horizon Marketing LLC (I have no idea if this is a real name, and if it’s yours, I hit on a lucky guess), over time you may start referring to it as MH Marketing, or MHM, without the LLC on the end. You may do this in emails or on social media posts. Before long, you may continue to abbreviate your name in other situations, including on contracts, again leaving off the words LLC.
As the legal name of your business includes the words LLC, you should always refer to your business by its legal name. By using the LLC as part of your name you are putting the world on notice that you are operating your business through an LLC, and not as yourself individually, as a sole proprietor. This is extremely important to maintain your limited liability protection. When legal claims are made against a legal entity, such as an LLC, the plaintiff (the person bringing the lawsuit) will often try to “pierce the corporate veil” in an attempt to reach more assets.
If the “pierce the corporate veil” strategy is successful, then the person suing you may be able to reach your personal assets. In the lawsuit, they may have successfully convinced the court that your LLC was a “sham,” and that you were in fact operating as a sole proprietor and all of your personal assets should be available to satisfy any judgment against you determined at the end of the lawsuit. To protect yourself against this, be consistent and diligent in using the LLC when referring to your business name. This gives you the best defense against any “piercing the corporate veil” argument.
If you feel strongly that you don’t want to use the LLC when referring to your name, you can make a trade name filing (also called a fictitious name or “dba” - doing business as). The trade name filing would be the name of your business, without the LLC included. Using our example from above, Morning Horizon Marketing LLC, this business could file a trade name as follows: Morning Horizon Marketing LLC dba Morning Horizon Marketing. By registering the “dba,” short for “doing business as” you are notifying the world legally that your LLC is also using this shortened name.
When You Are Adding Products to Your Business Lineup, Know When to Form a New LLC
Food manufacturing company Heinz is famous for its 57 varieties, including Heinz 57 Sauce and of course, Heinz Ketchup. Heinz actually manufactured more than 57 varieties at the time the 57 Varieties slogan was adopted, but 5 and 7 were lucky numbers of Heinz and his wife. All of these food products were produced under a single company, even though there were many of them. If you’re interested in the history of Heinz, you can read more at this link about the The Heinz Company.
Fast forward to your online business. Similar to Heinz, you sell products, but as an online business they are digital products. Your product may be an online course, coaching program, membership or even 1:1 services. And most likely you have more than one product, just like Heinz. When you are developing your product line in your business, you’ll want to keep your business products generally in the same category.
Now there’s definitely some room here to maneuver. Not all of your products are necessarily going to be on exactly the same topic, but there should be a general theme or category to your offerings. Again using our example from above, Morning Horizon Marketing LLC, this business might offer courses on messaging, email marketing and copy conversion. And it may have a group coaching program to help business owners improve delivery of their marketing communications in different contexts, such as on landing pages and emails. And Morning Horizon Marketing LLC may also offer 1:1 services for certain clients, specializing in writing copy for “About Me” pages on websites. All of these services are generally in the same category of marketing.
Let’s look at a couple of examples where our fictional company, Morning Horizon Marketing LLC, might consider setting up a second LLC to operate part of Morning Horizon Marketing LLC’s growing business.
Suppose Morning Horizon Marketing LLC decides to build out the agency side of the business. Its owner, Maddie Smith (also fictitious) wants to hire several employees to do done-for-you services. Maddie has decided that she likes the online coaching and course launching and wants to continue to work primarily on that aspect of the online business. Now, because of the significant expansion of the done-for-you services, it may make sense for Maddie to form a new legal entity, for example a second LLC, to operate the agency. The liabilities with the employees, the branding, and the types of clientele Maddie has the potential to reach is different from the online course and coaching space.
A second consideration for our fictional business owner Maddie, is that one day she may want to sell the agency business. It will be much easier to offer the agency business for sale as a discrete unit if it is operated independently from the online course and coaching business. This way, the liabilities, income and assets can more easily be associated with the agency portion of the business. The online course and coaching business is likely very dependent on Maddie as the front face of the business. Her community will purchase from her because they know-like-trust her, and her courses and coaching programs may not be as valuable if she is not the one running them. The agency side, although also dependent on Maddie as the front face of the business, will also have other employees servicing clients and so the business will not be as dependent on Maddie individually, With the agency portion of the business separated out, Maddie is in a better position to sell it, keeping the course and coaching side of her business, which is her true passion.
A second example where Morning Horizon Marketing LLC might want to form a new LLC to assume operations is if Morning Horizon Marketing LLC expands into territory that doesn’t involve marketing services. Suppose that Maddie, whose soul has always flowed with creativity, decides to offer a physical product line of Morning Horizon Marketing LLC branded merchandise. She has designed t-shirts, sweatshirts, mugs, planners, cell phone cases and other physical products displaying her creative designs, and wants to sell these products.
In this example, it might also be a good business and legal decision for Maddie to set up a new legal entity, again perhaps a new LLC, to operate the business for the physical products. The processes for running a physical product business are distinct from those of an online service business. Now that she is offering physical products, Maddie will need supply contracts, a delivery method, potentially physical space for storage, different personnel needs and expertise to operate this business and a different sales model for her e-commerce store. Maddie should also consider separating the businesses so that the liabilities of one do not impact the other. For example, in the case where Maddie expanded into physical products, if that business were to run into financial trouble, the assets of her original online course business would be separate and not at risk or available to satisfy debts of the physical product business. Given these differences Maddie should seriously consider setting up a separate legal entity.
Like the first example where Maddie set up an agency, the second example - the e-store for physical products - Maddie also has the potential to sell this second business as a unique business unit down the line. It will be much easier for Maddie to do this if the physical products business is discrete and separate from her online course and coaching business.
There are going to be exceptions and specific facts of every case that dictate which direction to go in when considering whether you need a second LLC to operate part of your business, and you should consult with legal counsel in your state familiar with your business and goals to help you decide.
Changing Your State of Residence? Make Sure Your Online Business LLC Changes, Too
There may come a time during your business life when you move from one state to another. When you first set up your LLC, you most likely formed it in the state where you live. If you are moving, you may be making a permanent move, not expecting to return to your current state of residence, or a temporary move, where you intend to return in a few months or maybe a year.
These two different scenarios will require two different courses of action by you regarding your LLC. In the first scenario, where you are making a permanent move, you’ll most likely want your LLC to make a permanent move as well. Although you’ll incur some legal costs and fees initially to get your LLC transferred over to the new state where you are moving to, in the long run you’ll save on taxes and filing fees because you won’t be reporting to 2 different states.
The process by which you accomplish the move of your LLC from one state to another depends on the laws in both the state you started in and the state you are moving to. You’ll either domesticate or convert your LLC in the new state, or you may have to set up a new LLC in the new state and then merge the 2 LLCs together so that you have one LLC remaining in your new state. The specific details will depend on the applicable laws and every state is a little different. Your best bet is to hire an attorney familiar with the laws in your new state, and that person will assist you from there to get all of the paperwork and filings done. You’ll also want to speak with your CPA to make sure that you are addressing any tax issues that might arise with relocating your business. Depending on the scope of practice of your CPA, you may need to find a new one in your new state.
You could keep your LLC in the original state of formation, and qualify your LLC in the new state, keeping both registrations active and current each year. In the long run this strategy will likely be more expensive with filing fees and accounting fees, and be more time consuming, but it may be a short term option until you can get everything squared away to move your LLC to the new state.
If your move is temporary, for example you are living the laptop lifestyle and spending many months or longer in a different state while you are running your business, you’ll need to approach things a little differently with your LLC. In this case, when you are operating your business in a different state, depending on the nature of your business operations you may need to qualify as a foreign business entity in that second state. The word “foreign” here is a little misleading, as it refers to a business from a different state and not a business from another country.
You don’t need to qualify if you are simply operating your business while you are on a vacation, say for a month or so in a different state. But longer, more semi-permanent stays will require a different analysis. Each state has an interest in knowing which businesses are operating in their state. The rules for what kinds of activities require a business to register with that state as a foreign entity also vary from state to state.
In order to determine your compliance, you’ll want to consult with an attorney familiar with the laws of the state you are going to live in temporarily to determine your registration requirements. Some state’s laws are lenient and may not require a business to register, while other states are quite strict and may impose fines or criminal penalties for failing to qualify as a foreign entity.
Keep Your Online Business LLC Legally Protected
Paying attention to the operational details for your LLC is critical to maintaining the limited liability protection afforded to you by your LLC. Using the correct legal name everywhere, setting up a new LLC if your expansion plans warrant it, and moving your LLC to a new state are three important operational details you’ll need to be mindful of. Staying legally protected as an online business doesn’t stop with forming the entity. Sound business and legal decisions need to be made at every step of your business life cycle.
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