We recently got a question from a reader who was curious about when to formally turn his blog into a business. He writes:
So say I start making money via google adsense, youtube or blog. Say it becomes substantial, at what point would I create a business, DBA, etc?
Let me start by saying that I feel like I know very little about all this business structure/tax stuff, so I suggest finding a good blog on that to get the best answer (and send me the URL when you find one) 😉
Nevertheless, here is my experience…
I started my first blog as a hobby back in 2007, and I only made about $100 total with it the first 6 months – so a sole proprietorship was the perfect business entity. By the way, if you do nothing, you are automatically a sole proprietor. I didn’t realize this when I started, but if you just start a business and don’t form an LLC, Partnership, etc, then by default the IRS considers you a sole proprietor.
Running the biz as a sole proprietor is the cheapest and simplest – because you don’t have to do anything different. You just mark your business earnings on your tax return along with your income from your day job, etc.
I ran my business as a sole proprietor for about a year and a half until I formed a single-member LLC. There are a few different options when choosing your business entity, but I chose the LLC for a couple reasons.
1. It was simple to run
As a single-member LLC, no % of ownership needed to be divided up. Really, not much changed from running the sole prop as far as what I needed to do to maintain it. I still get to use a single tax form, instead of one for the business and one for personal.
2. Legal Protection
I am not a lawyer and don’t fully understand the legal protection that is provided. But after doing a bit of investigating, it became pretty clear that an LLC would be safer than a sole prop. From what I understand the biggest downside of being a sole proprietor is that you don’t have much legal protection. So if your business get’s sued, they can take your house. That’s no fun.
3. It proves to the IRS that you mean business
Apparently, there are a lot of people who create home-based “businesses” just so they can write off expenses like a computer, desk, etc. The IRS is good at what they do (i.e. spotting illegitimate businesses) and I remember from an article I read that the likelihood of an audit is decreased by 90% for LLCs vs. sole proprietors.
Tomorrow we will talk about how and where to create an LLC without spending too much.