I recently posted an illustration I was getting made for a holding company I’m creating for my side projects. One of the comments asked me what the benefits were for creating a holding company for side projects. It’s a great question and I thought would make a good post for other nerds to think about.
I’m operating under two assumptions:
- You, the creator of said side projects, have assets you wish to protect. Houses, laptops, cars, bank accounts, other side projects, etc.
- You have side projects which are actually used by other people. A lot of people have side projects that only they use or a small group of friends engage with. For instance, my tweetimag.es project services over 10m Twitter avatars in a single day.
When I was in business school, one thing was hammered into my head: limit yourself to “exposure.” Exposure, is a business term that basically encompasses the things you do that could get you sued. Unfortunately, the US is a litigious country and any idiot can sue you for anything. Getting sued costs a lot of money; even if you’re totally innocent.
In the US, and I assume other countries, we have LLCs. LLC stands for Limited Liability Corporation. It’s what business people call a “passthrough” entity. This means that you don’t get double taxed like you do with corporations. In other words, it’s like a fake version of yourself as far as the IRS is concerne. It can also own property and enter into contracts on its own.
That last tidbit is what you should be most concerned about. If you create a side project that gets used by lots of people, you are at a risk for getting sued directly. If your LLC owned said side project, you are not personally at risk of anything. The LLC could get sued and all associated assets could be taken, but your car, house, etc. should be fine … unless they’re owned by the LLC.
And this, my friends, is why I’m creating an LLC for my side projects. I have assets, outside of tshirts featuring the word fuck, that I’d like to protect. By creating an LLC for my side projects, having the LLC engage consultants on its own, and having the LLC own all of the IP for said projects, I’m greatly limiting my personal exposure.
NOTE: I am not a lawyer or a tax advisor. I think having an LLC is a good thing for me personally, but it could be a really dumb idea for you. Everyone’s miles may vary.
UPDATE: Marco Tabini has a great followup noting that an LLC is not necessarily a silver bullet. A must read if you found this post interesting.