LLC for Clothing Brand

Having a thriving business is the American dream, but it takes dedication and hard work to start a successful enterprise.

If you have prepared a solid plan for a startup clothing business, you are on your way to making the dream a reality. By establishing a clothing line and selling your own clothing in online stores like Etsy or Shopify, you profit financially from your creativity. You'll also enjoy the thrill of seeing your brand becoming increasingly well-known and popular on e-commerce.

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But the downside to starting up a new clothing line is that financial success is not guaranteed. And if you start your small business as a sole proprietor, creditors can sue you for unpaid business debts. You could lose your house, car, or savings if the company is not able to meet its debts, loans, or obligations.

Forming a limited liability company (LLC) to market a clothing brand protects you from this outcome. By starting your clothing business as an LLC, you eliminate the threat of losing personal assets and funds if the business isn't profitable. In addition, forming an LLC offers flexible tax options.

Should You Open Your Clothing Brand as an LLC?

If you are ready to start producing and marketing your own clothing brand, you are probably eager to write up your business plan. Perhaps you've already hired a fashion designer and mapped out a strategy for your company.

It pays to slow down and take time to consider which business structure would be preferable for your clothing line. Here's what you should think about re: forming an LLC:

1. Consider Personal Liability

Prospects might look bright for your clothing brand, but nobody can see into the future. That's why it is important to select a business structure that limits your personal liability.

Personal liability means that a business owner is personally responsible for their company's debts. If you open a sole proprietorship, you have personal liability for all company debts. When you don't pay the business debts, creditors have the legal right to go after your personal bank accounts. Your home or vehicle may be sold to pay outstanding business obligations.

Even if you always pay your company's operating bills, your clothing brand might be involved in a lawsuit. For example, if one of your popular items is a jacket with a large red check mark on the pocket, a company might sue you, claiming you copied the pattern from them. If they win the litigation, you'll have to pay that judgment out of pocket.

Forming a limited liability company for your brand safeguards your personal assets from liability for company debts. Creditors of your clothing LLC cannot sue you personally or access your personal assets for company obligations. Because of its liability protection, a limited liability company is an appealing business entity for entrepreneurs to consider.

2. Understand Other LLC Benefits

In addition to liability protection, an LLC offers business owners considerable flexibility. One person can own a limited liability company by themselves (termed a single-member LLC). But the owner can also bring in new business partners to the LLC. All owners of an LLC are termed "members." Most states allow any individual or entity to become members of an LLC. That means that corporations, other LLCs, foreigners, and foreign entities can be members.

In addition, an LLC structure will give a clothing business flexibility when it comes to taxation. As a sole member, you report all profits as income on your personal tax return, if that works best for you. However, it is also possible for LLC members to opt to file taxes with the IRS as an S corp.

3. Weigh the Downsides of LLCs

There are some downsides to using an LLC to open your new clothing brand. One involves fundraising. Since LLCs cannot issue stocks, raising capital to expand the business is more difficult than for a corporation.

In addition, selling an LLC membership presents legal challenges. Some states make it difficult or impossible for members to sell or transfer LLC shares.

But each state enacts its own laws about LLCs. You'll need to do some research about how your state regulates LLCs before proceeding. It can be a good idea to consult a local attorney to give you an overview.

6 Steps to Opening a Clothing Brand LLC

Ready to take the steps needed to open your business? Here's how to start your clothing LLC.

1. Pick a "Doing Business As"

Have you picked a name for your clothing brand? A catchy name may be important for getting noticed online. If you are already famous, you can simply use your own name with "Limited Liability Company" after it. But for all others, it's preferable to choose a fictitious business name for your clothing line. This is also called a "doing business as" name, or DBA.

It is important to follow your own state's rules when choosing a DBA. Most states include these mandates:

• The DBA must include the words "limited liability company" or "LLC" in the name.
• You'll need to choose a DBA that hasn't been used by another company.

State laws often prohibit using a fictitious name that an existing business is already using. Anyone forming an LLC under a DBA is generally given the exclusive right to use that business name in a particular state.

When you've picked a name for your LLC, run it through your state's database of business names to make sure it has not been taken. You might also want to see if your chosen DBA is available on social media sites as well since e-commerce is such an important market for clothing brands.

2. Prepare Articles of Organization

Forming an LLC is easier in some states than others, but most require that new business owners file a legal document called the articles of organization.

The articles of organization set out basic information about the company, like your DBA, the LLC's business address, the business purpose (here, that it will market a clothing brand), and the name and contact information for a registered agent. The agent is an individual who lives in the state and agrees to accept legal documents on behalf of the company.

The articles of organization must be filed with the state. In some states, you can do this online. Expect to pay a small filing fee for this.

3. Decide How You Will Operate Your LLC

Your state may also require you to draft an operating agreement. This document sets out internal operating regulations. The purpose of the operating agreement is to advise all members about how the LLC will operate.

Even if your state doesn't require an operating agreement to form your clothing company business, it's a good idea unless it's a single-member LLC. If you are not the only owner of the clothing business, it's important to have a set of business rules for members to follow.

4. Get an Employer Identification Number

Your clothing brand LLC may need an EIN, short for employer identification number. The IRS requires this for businesses that have employees, so if hiring help is part of your business plan, head to the IRS website.

Few tasks will be easier than getting an EIN. You can apply online and have the unique nine-digit number in minutes. It serves the same purpose for a business that a Social Security Number serves for individuals: providing immediate identification to the taxing authorities of the taxpayer involved.

Even if you aren't planning on hiring employees for your clothing line LLC, it's not a bad idea to get one. You may need it to open a business checking account.

5. Keep Your LLC in Good Standing

Just like you'll need to keep on putting in hard work to improve your clothing brand's market share, forming an LLC is not one and done. Once your LLC is set up and you are operating your clothing brand business, you still need to keep the company in good standing with your state.

Exactly what you need to do to accomplish this depends on your state's laws, so research LLC filing requirements or consult an attorney. In more than a few states, LLC members must file an annual report with the state. The report contains updated information about the operations of the LLC. And, of course, involves a filing fee.

6. Get Help if You Need It

If you don't want to walk through these steps by yourself to create your LLC, consider using our trusted, simple-to-use online business formation tool. It will help you take one step at a time to get your LLC formed in a way that meets all the legal requirements.

For legal or tax questions, you'll want to seek advice from a local business attorney.