Should I Start an LLC for My Advertising Agency?

Starting a limited liability company (LLC) for your advertising agency can provide several benefits.

Most importantly, an LLC structure offers limited liability to its owners, which can protect their personal assets from lawsuits and creditors.

For an advertising agency, lawsuits can arise from things like slander accusations and copyright infringement.

LLCs are also affordable, highly flexible (from a tax point-of-view), and can make your advertising agency seem more credible.

Recommended: Use Northwest to form an LLC for $29 (plus state fees).

Do I Need an LLC for an Advertising Agency?

LLCs are a simple and inexpensive way to protect your personal assets and save money on taxes.

You should form an LLC when there's any risk involved in your business and/or when your business could benefit from tax options and increased credibility.

LLC Benefits for an Advertising Agency

By starting an LLC for your advertising agency, you can:

Protect your savings, car, and house with limited liability protection
Have more tax benefits and options
Increase your business’s credibility

Limited Liability Protection

LLCs provide limited liability protection. This means your personal assets (e.g., car, house, bank account) are protected in the event your business is sued or if it defaults on a debt.

Advertising agencies will benefit from liability protection because of the risk of being sued for personal injuries that occur on their property, libel, or trademark infringement.

Example 1: One of your clients is unhappy with your premium service package and decides to ask for a refund. After you refuse, they decide to bring a case against your company in the small claims court. Limited liability will protect you from having to personally indemnify a client if a case does not go in your favor.

Example 2: Your LLC purchases a large amount of business hardware in installments and then fails to keep up with the agreed payment schedule. After a few months, the hardware seller sues your LLC for the full amount of the hardware you purchased. Here, you will not be personally responsible for paying back anything out of your own pocket.

Example 3: After a difficult three months, you decide you have to cut back on your employee’s wage, who had a fixed contract until the end of 2024. If they decide to sue you for breach of contract, your personal assets will be protected as long as your advertising agency is registered as an LLC.

Example 4: One of your competitors has sent you a letter claiming that your advertising agency has libeled their business, and they sue you for damages.

An LLC will also protect your personal assets in the event of commercial bankruptcy or loan default.

To maintain your LLC's limited liability protection, you must maintain your LLC's corporate veil.

LLC Tax Benefits and Options for an Advertising Agency

LLCs, by default, are taxed as a pass-through entity, just like a sole proprietorship or partnership. This means that the business's net income passes through to the owner's individual tax return.

The business’s net income is then subject to income taxes (based on the owner's tax bracket) and self-employment taxes.

Sole proprietorships and partnerships are taxed in a similar way to LLCs, but they do not offer limited liability protection or other tax options.

S Corp Option for LLCs

An S corporation (S corp) is an IRS tax status that an LLC can elect. S corp status allows business owners to be treated as employees of the business (for tax purposes).

S corp tax status can reduce self-employment taxes and will allow business owners to contribute pre-tax dollars to 401k or health insurance premiums.

The S corp status requires that the business pay the employee-owner(s) a reasonable salary for the work they perform.

In addition, the business might need to spend more on accounting, bookkeeping, and payroll services. To offset these costs, you'd need to be saving about $2,000 a year on taxes.

We estimate that if an advertising agency owner can pay themselves a reasonable salary and at least $10,000 in distributions each year, they could benefit from S corp status.

You can start an S corp when you form your LLC. Our How to Start an S Corp guide will lead you through the process.

Credibility and Consumer Trust

Advertising agencies rely on consumer trust. Credibility plays a key role in creating and maintaining any business.

Businesses gain consumer trust simply by forming an LLC.

A growing business can also benefit from the credibility of an LLC when applying for small business loans, grants, and credit.

Northwest will start an LLC for you for just $29 (plus state fees).

Get Started

How to Form an LLC

Forming an LLC is easy. There are two options for forming your LLC:

You can hire a professional LLC formation service to set up your LLC for a small fee
Or, you can choose your state from the list below to start an LLC yourself

Select Your State

For most new business owners, the best state to form an LLC in is the state where you live and where you plan to conduct your business.

Do LLCs Need Insurance?

All LLCs should purchase insurance, including advertising agencies. This is because the limited liability that they offer only applies to the owners’ assets. This means that business insurance is a requirement if you want to safeguard the business’s assets as well (e.g., company vehicles, land, etc.).

There are several instances in which an advertising agency may need insurance (or multiple types of insurance).

Common Situations Business Insurance May Cover for an Advertising Agency

Example 1: A potential client is meeting you at your office to discuss an ad campaign. While he is walking up the steps to the entrance, he slips and falls, breaking his wrist. He asks that you pay for his medical treatment, claiming that your steps are unsafe. Your general liability insurance policy would likely cover this expense.

Example 2: One of your competitors has sent you a letter claiming that your ad agency has libeled their business. You are fairly certain that the case has no merit, but you also realize that you need to hire an attorney regardless to protect your business. Your general liability insurance policy will cover the cost of hiring an attorney and pay for a settlement if one is necessary.

Example 3: An employee at your ad agency is late for work. She comes rushing into the office and fails to see a client. She knocks the client to the ground, and he breaks his arm. He decides to sue your business for damages. The general liability insurance policy you carry will pay for your legal defense costs as well as the cost of a settlement if needed.

Other Types Of Coverage Advertising Agencies Need

While general liability is the most important type of insurance to have, there are several other forms of coverage you should be aware of. Below are some other types of insurance all ad agencies should obtain:

Workers’ Compensation Insurance

Workers’ compensation insurance provides financial protection for employees if they are injured performing work duties. If an employee is hurt, they can get medical treatment through workers’ comp. They can also get help with lost wages if they have to take time off of work to recover. Workers’ comp is required in most states for employers.

Professional Liability Insurance

A professional liability insurance policy will help to protect your business against claims of negligence due to errors or failure to perform. If a client sues your business over mistakes you made, or mistakes they claim you made, your policy will pay for your legal defense fees. It will also pay for the cost of a settlement if one is required to resolve the lawsuit.

Commercial Umbrella Insurance

The general liability insurance policy you carry will be sufficient to protect your business in many situations, but it is possible for the limits of your policy to be exceeded—like if you lose a major lawsuit. If your general liability insurance runs out, you are left to pay the remaining damages out of pocket. However, if you have a commercial umbrella policy, it will cover excess damages when your general liability policy’s limits are exceeded.

Commercial Property Insurance

All of the equipment and supplies you have invested in to run your business would be costly to replace if it were damaged or destroyed, such as if a fire broke out and destroyed your office. A commercial property insurance policy provides financial protection against such situations if your property is damaged by a covered event.

Should I Start an LLC FAQ

Choosing the right business structure depends on your business’s unique circumstances and needs. However, unless your business is very low risk (like a hobby), an LLC is likely the better option.

Visit our LLC vs. Sole Proprietorship guide to learn more.

At a minimum, you’ll need general liability insurance. You also may need workers' compensation insurance and professional liability insurance.

Read our Advertising Agency Business Insurance article for more info.

Starting and maintaining an advertising agency can be done very affordably. Ideally, you will need to get an office in order to meet clients, computers for your projects, and a fast internet connection.

You will also need a solid business website and an advertising budget which you will be able to use for PPC ads.

Visit our How to Start an Advertising Agency guide to learn more about the costs of starting and maintaining this business.

An advertising agency will need to rent office space and purchase computers, additional office equipment, and internet access. Employees’ salaries will be another regular expense.

Learn more about running an advertising agency.

An advertising agency charges clients to create and plan advertising campaigns. Most of the time, the agency pitches various ideas to a client for free, and the client only pays if it likes one of the suggestions.

Learn more about starting an advertising agency.

Advertising agencies plan and create marketing campaigns for their customers to help them differentiate themselves from their competition.

Although large advertising agencies can earn billions of dollars every year, most earn quite a bit less.

Learn more about starting an advertising agency.