The Benefits of Forming an LLC for App Developers

Nothing beats the feelings of excitement and optimism of conceiving an app idea. Your mind is buzzing with the possibilities and potential of your app, and you’re eager to get started.

But before going full steam ahead, several business considerations must be considered. When you develop an app, you’re effectively creating a business with the app as your product.

As a result, you need to treat the entire app development process through a business lens, which includes formally creating and incorporating your business. 

The type of business entity you choose is essential, and we recommend an LLC.

If this is news to you, don’t worry; you’ll be empowered after reading this blog.

1. What is an LLC?
2. What are the different types of LLCs?
3. How does an LLC differ from other business models?
4. Do I have to create an LLC?
5. How do I create the LLC?
6. Does creating an LLC cost money?
7. The five advantages of forming an LLC
   1. Limited liability protection
   2. Tax flexibility
   3. Professional Credibility
   4. Better financial management
   5. Easier access to business loans

What is an LLC?

LLC stands for a Limited Liability Company. LLC is a business structure that protects business owners’ personal assets from business liabilities. In layman’s terms, in the case of business debt, your creditors can’t extract what they’re owed through your money and assets (like your car or house.)

What are the different types of LLCs?

LLCs are multifaceted. The type of LLC you choose will depend on your circumstances and preferences.

1. Single-member LLC is an LLC with only one member. Choose this if you’re going to be the business’s sole owner (even if you plan on hiring employees.)
2. Multi-member LLC is an LLC with two or more members. Choose this if you’re starting the business with others, like software development partners.
3. Member-managed LLC is an LLC where all members (whether one or more) are actively involved in the day-to-day management of the business.

A member-managed LLC is your best option if you will be directly involved in developing your mobile app (which is likely the case). This is the default structure that comes to mind when people mention LLCs.

How are LLCs different from other business types?

Your other options when starting an app business include the following:

1. Sole proprietorships 
2. Partnerships
3. Corporations

The key vulnerability you’ll face as a sole proprietor or in a partnership is the lack of liability protection. Your creditors can legally obtain what they owe through your assets in these structures. As a result,  the effects can be more devastating for you and your family.

Corporation structures are reserved for large companies that shareholders own. The quantity of shares someone buys determines how much ownership (and subsequently influence) they have on a company’s direction.

As an app developer, a corporate structure is excellent for securing funds, but it dilutes your ownership and influence over the company.

Do I have to create an LLC?

You might wonder whether you need to have a conversation about business structures. Why can’t you just develop your app?

While it’s technically possible to develop an app as a freelancer, void of any structure, we wouldn’t recommend it for the following reasons:

1. You miss out on tax benefits and deductions available to a structured business.
2. Employers, partners, and investors prefer to work with companies with a formal business structure.
3. Having a structure gives you an air of credibility and professionalism.

Overall, it’s worth your time and effort to build your foundation via an LLC. Your future self will thank you for this.

How do I create an LLC?

There are several steps to follow. It’s a bit of a process but not rocket science:

1. Choose a business idea and name and an agent who will receive all legal documents for your LLC.
2. File the following Articles of Organization with your state’s Secretary of State office:
   1. Name and physical address
   2. Names of all members
   3. Registered agent name
   4. Business purpose
   5. Management structure (if opting for member-managed LLCs)
3. If you do opt for member-manage LLCs with multiple members, a legal requirement requires you to stipulate additional documentation that outlines the following:
   1. Each member’s ownership percentages
   2. Their voting rights
   3. Profit distributions
   4. Decision-making processes
   5. The roles and responsibilities of each member
4. Obtain an Employer Identification Number (EIN) from the IRS
5. Open a business bank account and obtain a business credit card
6. File a Beneficial Ownership Information (BOI) report with FinCEN, providing details about the individuals who own or control the business.

Getting an LLC formally approved does not take long–sometimes as early as three days! While awaiting approval, you can still start working on your app.

Does creating an LLC cost money?

The filing fee varies by state and can be as little as $35 to $500. Check filing fees by state.

5 advantages of forming an LLC

Any type of LLC is your best bet because it brings a nice blend of business, personal, and tax benefits.

1. Limited liability protection

An LLC treats you as a separate legal entity from your business.

Unfortunately, nobody can touch your money if you run into debt. This means your house, car, and other assets you rely on in your personal life are safeguarded because you are not your business; you just run a business, and therefore, only the business is responsible for its upkeep.

You and your business are one entity in sole proprietorships, voiding any personal liability protection.

Although you shouldn’t take advantage of this protection recklessly, it does give you more freedom to take calculated business risks–risks you might not take as a sole proprietor. 

Limited liability protection isn’t just protection from debt. Additionally, protect yourself from:

• The consequences of any irresponsible actions your partners/members may take. This one’s important because limited liability protection can be lifted from a member who acts with gross negligence (in cases like breaking the law and fraudulent behavior.) This means people can go after his/her assets. If they do, you’ll still be protected.
• Personal liability in contract disputes.
• Personal liability from any lawsuits.

Essentially, limited liability protection frees you from unwanted worry and lets your mind focus on growing your app. 

2. Tax flexibility

An LLC’s default tax position is known as ’pass-through taxation.’

Pass-through taxation means all your business profits and losses go on your tax returns (called self-employment tax.) This means you are only taxed once. It’s like taxing as a sole proprietor while enjoying the limited liability benefits described above.

On the flip side, C-corporations are taxed twice: once on the business’s income (because the business is treated as one entity) and then on the dividends a shareholder reaps (as the shareholders/owners are treated as the second entity).

So, although you’re also a separate entity from your business, your LLC structure still saves you from double taxation!

What’s even better is that you can change your tax status to a C or S-corporation if those structures ever become more favorable as your business grows.

In what circumstances would C/S-Corporations become favorable?

To attract outside investment

Even though C/S corporations are subject to double taxation, you might need to switch structures to scale your app business and attract outside investors.

Investors are inclined to invest in Corporations because:

• It issues different classes of stock, like common or preferred stock. Common stock gives every investor a baseline right to vote and enjoy dividends. Preferred stock costs more but gives the investor more influence over business decisions. Investors like to choose their class of stock.
• Investors can reinvest their earnings without immediate tax consequences.

3. Professional credibility

LLC companies are self-evident because the letters LLC will be part of the business name, e.g., ABC App LLC.

By becoming an LLC, you’re telling customers, investors, and employers that you’re legitimate and serious about your business and not some informal sole trader trying to build a side hustle. They’re more likely to invest/buy/work with you.

4. Better financial management

With an LLC, you can open a separate business bank account, ensuring that all income, expenses, and liabilities fall under the business’s name, not yours.

This separation makes tax preparation more straightforward and improves the accuracy of your financial records, allowing you to better understand your business’s economic health.

5. Easily access business loans

One great benefit of forming an LLC for app developers is the access it provides to business loans. 

By establishing your business as an LLC, you can apply for business-specific loans, which can be necessary for funding your development projects. This allows you to keep your finances separate and avoid relying on personal loans to fund your business, reducing your financial risk.

Starting an LLC is worth the effort

As this blog has demonstrated, starting an LLC is worth the time, money, and effort.

LLCs remove legal headaches, protect your assets, and offer tax flexibility. With the ’business’ side of things managed through simple LLC registration, you only have to worry about building that killer no-code app!