Launching a new app is one thing. Launching a business to support that app is something else altogether, requiring a complex balance of legal and business skills. In establishing your app development company, you’ll need to navigate several key decisions, not least the decision over how to structure your business.
App development entrepreneurs have a few options to choose from here, but in most instances, the ideal structure is the LLC, or Limited Liability Company. Indeed, before getting too deep into the app business, it may be helpful for developers to learn more about what an LLC is, how it’s helpful, and how to form one.
LLCs at a Glance
To begin with, then, what is an LLC?
Every for-profit business has a legal structure. The default position is Sole Proprietorship. When you start generating revenue on the basis of self-employed work, the IRS automatically considers you to be a Sole Proprietor.
One thing to note about Sole Proprietorships is that they do not create any distinction between the business and the business owner; in fact, a Sole Proprietorship does not create a new legal entity whatsoever.
That’s different with LLCs, which actually do establish new legal entities. The upshot of this is that you can keep your personal assets and liabilities separate from your business assets and liabilities. And that’s just one of several advantages of the LLC structure, making it a popular option among business owners everywhere, and app developer entrepreneurs in particular.
Why LLCs Make Sense for App Companies
That raises the next question: What makes the LLC format such a prudent option for app development companies?
Limited Personal Liability
One of the most notable benefits of the LLC is that it provides safeguards for personal liability. This stems from the fact that LLCs allow you to maintain a clean line of separation between personal assets/liabilities and business ones. Essentially what this means is that, if your app development LLC gets sued or runs afoul of an aggressive creditor, your personal assets are off the table. So, you can invest in your company while maintaining some peace of mind about your personal and familial wealth.
Another reason to choose the LLC format is that it provides you with plenty of options for how you actually run your company. This can be invaluable for app developers, in particular, who may wish to create a structure for adaptability and change. For insurance, you may run a solo shop at the beginning, but decide to bring other partners on board as your business booms. An LLC will allow you to do so, or even to enlist a third-party management team.
LLCs convey a sense of professionalism and legitimacy, precisely because of the legal requirements for forming one. In other words, an LLC doesn’t come across like a side hustle or a hobby. It comes across like a “real” business. This can be helpful for earning the trust of customers but it can be especially useful for securing investors. And, LLCs can actually take out business loans or business lines of credit, something that’s much more challenging for Sole Proprietorships.
One more note: When you start an LLC, your default tax status is pass-through, which means you just declare profits on your personal tax return. This is usually easy and financially advantageous for app entrepreneurs, but if your business really booms, an LLC will allow you to opt into corporate tax status at any time.
How to Launch an LLC
Clearly, there are a number of ways in which LLCs benefit app development companies. Now the question is, how can you start one?
The steps involved can vary from state to state, but generally speaking, the process unfolds like this:
- Choose a name for your app development LLC. You’ll need to register a name that isn’t already in use by another LLC in your state. However, you can also select any number of DBA (“doing business as”) names, allowing you to sell apps under whatever brand name you like.
- Select a Registered Agent. All LLCs need a Registered Agent, which can be either an individual or an organization that received legal correspondence on the company’s behalf. In most states, you can hire a third-party LLC service for between $50 and $300 annually.
- File Articles of Organization. With any legal process, there’s bound to be some paperwork. Your Articles of Organization will mostly just entail basic details like your name, contact information, Registered Agent, the purpose of your business, etc. You’ll also need to pay a nominal filing fee. (And just how long does it take for an LLC to be approved? In most states, you can be up and running within days.)
- Get an EIN and bank account. You’ll want to apply for a free employer identification number from the IRS, and establish a bank account that’s separate from your personal ones.
- Create an Operating Agreement. It’s also advisable to establish the basic rules and management structures of your app LLC, using a document known as the Operating Agreement.
Establish Success with an LLC
The bottom line? LLCs provide the foundation you need to grow and scale your app development company. Use these guidelines to get started.
Amanda E. Clark is a contributing writer to LLC University. She has appeared as a subject matter expert on panels about content and social media marketing, along with topics related to small business ownership.