In the ever-evolving landscape of entrepreneurship, YouTube has emerged as a platform that not only entertains but also provides a viable path to making money. As the professionalization and monetization opportunities on YouTube continue to grow, a common question by many content creators is which legal structure is best for them.
Traditionally, YouTube channels have been owned by individuals (formally called sole proprietorships); however, as the platform has matured and the potential for significant income generation has become realized, the notion of formally creating a YouTube channel as a business entity has gained in popularity.
There are four main business structures to choose from (sole proprietorship, general partnership, corporation, and Limited Liability Company). To help you make this decision, we will get into the pros and cons of forming an LLC for your YouTube channel and explore the legal and financial implications of this decision.
The Advantages of an LLC for a YouTube Channel
Establishing a Limited Liability Company (LLC) for your YouTube channel offers content creators several significant advantages. Let’s look at some of these benefits.
Limited Liability Protection: One of the primary advantages of forming an LLC for a YouTube channel (or any small business, for that matter) is the personal liability protection it provides the owner(s). By operating your channel as an LLC, you create a legal separation between your personal assets and the business’s debts and liabilities. This layer of protection means your personal finances typically remain safeguarded if your channel encounters legal issues or financial obligations. Whether you operate a simple channel with occasional video posts or have a more extensive YouTube presence and selling products on your e-commerce website, the limited liability protection offered by an LLC shields your personal assets.
For instance, if you inadvertently use copyrighted material in one of your videos and face a lawsuit from the copyright owner, an LLC structure would typically limit the scope of the lawsuit to only your business assets, which would protect you from having to use your personal assets (think savings, vehicles, etc.) to pay any judgments.
Potential Tax Benefits: Another advantage of forming an LLC for your YouTube business is the flexibility it offers in terms of tax treatment. Unlike a sole proprietorship, an LLC can choose how it wants to be taxed, choosing from a sole proprietorship, partnership, C corporation, or S corporation, allowing you to select the most efficient tax structure for your business.
By default, the Internal Revenue Service (IRS) considers a single-member LLC (SMLLC) as a “disregarded entity” for tax purposes, meaning it is taxed as a sole proprietorship. In this case, the LLC is not recognized as a separate entity by the IRS, and the profits or losses from the business are transferred directly to the member’s personal income tax return. This pass-through taxation is the simplest to file and often results in the lowest tax burden for smaller businesses (generally those with profits under $40,000, but check with your accountant as everyone has a unique financial situation).
However, as your YouTube channel grows and generates higher profits, you can change the election to be taxed as a corporation (usually the S-corporation) may provide additional tax benefits. By taking a reasonable salary, you can distribute the remaining profits as dividends, which are not subject to self-employment taxes which are 15.3%. This can result in significant tax savings compared to a sole proprietorship.
It’s important to note that electing corporation tax status comes with additional responsibilities. As an owner-operator, you would need to become an employee of your LLC, and your wages would be subject to payroll taxes and unemployment taxes. This also involves additional administrative tasks, such as filing payroll forms and ensuring compliance with relevant tax regulations.
Regardless of the tax election you choose, forming an LLC for your YouTube channel provides the added benefit of liability protection for its members. The LLC remains a separate legal entity, shielding your personal assets from potential business liabilities.
Related: How can an LLC be taxed?
Professionalism and Credibility: Establishing your YouTube channel as an LLC not only provides legal and tax benefits but could also enhance your channel’s professionalism and credibility to potential partners, sponsors, and advertisers.
When you form an LLC for your YouTube channel, you essentially show that your channel is not just a hobby but a legitimate business. This distinction can make an impression on those considering collaborating with you or investing in your channel, as it indicates a higher level of accountability and stability.
Related: State guides for forming an LLC
The Disadvantages of an LLC for a YouTube Channel
While forming an LLC for your YouTube channel offers several benefits, there are a few drawbacks to consider before making this decision. Here are some common disadvantages.
Cost Considerations: Starting and operating an LLC for your YouTube channel comes with financial costs. Unlike the sole proprietorship, which is free (with the exception of possibly a DBA registration), there are expenses with the formation process, such as filing fees, which can vary depending on the jurisdiction. Depending on the state, the cost to start an LLC can range from $40 to $500. Some states also require LLCs to publish a notice of formation in local newspapers, which can add to the overall costs.
In addition, LLCs have ongoing expenses, such as annual report fees, state taxes, and fees for maintaining the LLC’s good standing, which can range from $0 to $500 each year.
Additional Paperwork: Another downside to forming an LLC for a YouTube channel is the additional paperwork and administrative tasks required. As an LLC owner, you’ll have paperwork to create the LLC (usually called the Articles of Organization), an operating agreement (only required in some states, but these are the rules for how the LLC will operate), and typically the annual report filing. This paperwork isn’t a huge burden but isn’t required when operating as a sole proprietorship.
Related: State guides for starting a sole proprietorship
It’s also worth noting that federal, state, and local registrations may be needed. Even as a YouTube channel operating from home, there will likely be business licensing and other registrations to take care of so the business can operate legally. This is the same regardless of which business structure you do with.
Depending on the nature of their content, creators may also have additional needs when starting their YouTube channel they shouldn’t overlook. These may include securing appropriate insurance coverage and complying with copyright and intellectual property laws to protect original content.
Related: State guides for registering a business
Should You Establish an LLC for Your YouTube Channel?
Deciding whether to establish an LLC for your YouTube channel is a decision that revolves around several factors. While forming an LLC can offer several potential benefits, weighing these advantages against your specific circumstances and goals is essential.
One of the primary reasons I think an LLC is a good choice for a YouTube channel is the limited liability protection it provides. By separating your personal assets from the debts and liabilities of your business, an LLC safeguards your personal finances in the event of legal disputes or financial obligations related to your channel. This protection can provide peace of mind and help you manage potential risks associated with content creation and online presence.
Another important pro is that the LLC can offer potential tax advantages, but these advantages don’t really come into play until the business is making over $40,000 in profits. You have to weigh this with the cost of setting up the LLC.
Last, establishing an LLC can add a layer of professionalism and credibility to your channel. While the value of this is hard to pin down, operating as a registered business entity can send a positive signal to potential partners, sponsors, and advertisers.
Ultimately, the decision to establish an LLC for your YouTube channel depends on your specific situation, goals, and risk tolerance. If your channel is generating significant income, has a growing audience, and/or involves potential legal risks, forming an LLC can be a great choice. On the other hand, if your channel is still in its early stages or generates modest revenue, the costs and complexities of forming an LLC may outweigh the immediate benefits.
How To Register an LLC with YouTube
If you decide that the LLC is the right structure, how do you go about getting it set up with YouTube? This is a question we’ve heard several times, and you actually won’t register it until the channel is monetized. When this happens, you will get set up in Adsense and provide the details of the business structure, including the business name, address, employer identification number (EIN)/SSN, etc.
