If you are considering getting involved in the world of NFT, you might need to consider how to use LLCs for liability protection in your NFT business.
This will save you from any form of a copyright lawsuit, help you reduce taxes, and limit your liability to some point. This guide will teach you everything you need to know about the subject.
Issues With NFTs
While NFTs are the most trending development in the world of cryptocurrency, many may not know that NFT drops are laden with legal, financial, and copyright vulnerabilities.
Our legal and trading experts have witnessed several lawsuits and claims in recent years and believe that it can be a major problem in the next few years. Artists and creators will likely have their important assets, retirement plans, and banking accounts overran without the right legal counsel.
This all comes down as a result of the liabilities attached to NFTs. Despite this, there are ways to protect yourself from financial setbacks and liabilities.
The first thing you need to do is to utilize corporate entities as your business legal structure. A common form of corporation that has tax benefits and liability protection is an LLC. To know the advantages you can reap from it, here’s what you need to know:
LLCs for NFT Businesses
Benefits of LLCs for an NFT Business
There are many benefits to yield when you use an LLC for your NFT business. With different types of risk exposure of NFTs, you need this structure to strengthen your business and safeguard your assets from potential liabilities. Some of the advantages are:
- It increases the credibility of your business
- Limited liability protection will allow your NFT business to experience better tax benefits and options.
- With an LLC as a business structure, you can protect your or your business’ major assets [1] if they are sued. This includes your house, car, savings, and other assets.
How It Works
As mentioned, an LLC is a type of corporate entity with the taxation of a sole proprietorship. To elaborate on this, here is how it works:
Step #1: Form an LLC
If you intend to operate online buying, selling, or investment platforms like OpenSea, Nifty Gateway, or NFT Drops, you must establish your company as a Limited Liability Company or LLC.
To do this, check your state’s requirements and prepare them for submission. You can also get assistance with LLC formation and registered agent services for a smooth transition.
We highly recommend you establish your business as an LLC in its inception. If you have not, it’s not too late to adopt it now.
Step #2: Start Your NFT Project
Once your LLC business has been recognized by your state, your next step is to create and release your NFT project. Your company will then need to create another legal entity to carry out operations for this project.
This company will involve itself in the design, promotions, and social media platforms that will host the project. Written agreements and transactions will link your company and this project company.
Step #3: Start Your Next NFT Project
Should you release another NFT project, you must do the same with your first and previous project.
Establish another legal entity through your primary company. You will also operate this business similarly to your first drop. Likewise, you will also do the same for your next succeeding drops.
Other Things to Take Note of
1. Ensure that you are organized and in compliance with all state and reporting guidelines to avoid penalties.
2. Run your company professionally. It would be best not to mix your personal and professional affairs and practices.
3. Make arrangements with your accountant or registered agent service to acquire a Tax ID number for your new organization/s. Also, familiarize yourself with the annual State and Federal tax reporting requirements and dates. Your business won’t operate if you have not complied on time.
4. Do not sign as co-guarantor of entities.
5. Purchase suitable business insurance for your business. Your private coverage might not cover you, and you will need one for your business in worst-case scenarios.
6. Carefully maintain a clear separation of all financial accounts and transactions and any personal or unrelated commercial endeavors.
7. Keep track of all the documents that must be filed annually in a calendar.
Conclusion
Learning how to leverage LLCs for your NFT business’ liability protection is important as a business owner. Aside from its undeniable advantages on taxation, its legal safeguarding of personal assets is paramount to combat the market volatility attached to NFTs. Hopefully, this guide has outlined the methods for applying them in your business.
