It costs $500/yr to run an LLC (Incorporation/renewal fee, registered agent, and a P.O. Box), unless you have no assets and don’t plan to have any assets in the next 2 years then I would strongly recommend incorporating before you have any sort of liability.
All it takes is one oops at a client to have a $1m judgement hanging over your head. LLC (in your state, don’t get fancy) sooner than later. Business insurance is typically another $500-800/yr for software startups, but I wouldn’t recommend that until you have something to protect (like money in the bank)
Your advice to register an LLC is very good. I’ll add:
1) Costs are very state specific. And if you register in the state you live in you can act as your own registered agent and eliminate a lot of the yearly fees. In my state I can register directly for $90 with the Department of State (of my state, not federal) and there are no recurring fees.
2) Follow the rules by keeping all finances separate or you might as well not have registered the LLC.
Do not skimp on your llc. I said $500 to protect yourself. You can go the cheap route but then your name is associated with your business and scams come out the woodworks. Plus it’s hella unprofessional and You may miss out on contracts because you don’t meet their vendor reqs
You also need to maintain out-of-state business registration in the state you reside. I would not get fancy until you can afford a CPA to ensure this is all up to date
Unless you’ve studied it, you might be surprised to learn that as a principal an LLC is not offering you the kind of protection you imagine. It basically protects investors. IANAL but was surprised myself when one explained it to me.
Maybe you misunderstood? The LL in LLC stands for limited liability after all. Other than your capital contribution, and assuming no fraud or incompetence, there will be personal liability protection.
I don't know about LLC but in Germany there is something very similar called GmbH. Which does provide you with limited liability for many _but not all aspects_. So always consult a lawyer with specialization in that area about liabilities not covered.
I have heard about startups which founders did run into some of the non covered liabilities leaving them with a large amount of dept which they could have partially avoided as far as I heard.
The core of this is financial liability. Whether that is extremely helpful, or just somewhat helpful depends on the context. I can't think of many cases where you wouldn't want to have an LLC, or Limited Company (UK), or whatever the equivalent is.
Creating one can help enforce some separation too: different bank accounts, different AWS accounts, etc. This feels pretty good, unless the company is some tax dodge which also places increased transparency on some things.
Whatever someone does, they can make a fair attempt at running their business professionally and it will limit significant risk and liability. This means taking boring paperwork and bureaucracy seriously. It means recognizing mistakes and fixing them before they get serious. Good companies don't generally get sued and lose. You can also seek outside advice so that you make better decisions. When you take reasonable measures these will get recognized when you are in a situation.
Ok, I’ll google it for you. But I do encourage you to talk to your attorney so you can pay for her bad news like I did.
“ Personal Liability for Your Own Actions
There is one extremely significant exception to the limited liability provided by LLCs. This exception exists in all states. If you form an LLC, you will remain personally liable for any wrongdoing you commit during the course of your LLC business. For example, LLC owners can be held personally liable if they:
personally and directly injure someone during the course of business due to their negligence
fail to deposit taxes withheld from employees' wages
intentionally do something fraudulent, illegal, or reckless during the course of business that causes harm to the company or to someone else, or
treat the LLC as an extension of their personal affairs, rather than as a separate legal entity.
Thus, forming an LLC will not protect you against personal liability for your own negligence, malpractice, or other personal wrongdoing that you commit related to your business. If both you and your LLC are found liable for an act you commit, then the LLC’s assets and your personal assets could be taken by creditors to satisfy the judgment. This is why LLCs and their owners should always have liability insurance.”
That makes sense though, and is what I always thought. Proctects you as an honest and competent employee of the company from liability, assuming you're acting in good faith, from the actions of the company. Why on Earth would anyone think it's a blank check for any behavior?
This is not just about breaking the law. Being negligent can cause personal liability. This is the kind of liability people often think the “LL” protects them from.
Piercing the corporate veil is a thing, though. I don’t know the details as I’m neither a lawyer nor a company owner, but my understanding is that you have to keep your and your company’s assets and activities completely separate, which requires a level of discipline that many people don’t have.
Similarly, as a single-person company, any action that could cause liability was presumably performed by you, personally. That makes it much easier for a litigant to sue you personally instead of/in addition to your company.
If none of the more complicated strucures will provide the liability protection that you're going to need, there's also the possibility of doing business as a sole proprietor/DBA. You get no protections at all, but the reporting requirements are much reduced (in some cases, just filing a 1040).
All it takes is one oops at a client to have a $1m judgement hanging over your head. LLC (in your state, don’t get fancy) sooner than later. Business insurance is typically another $500-800/yr for software startups, but I wouldn’t recommend that until you have something to protect (like money in the bank)