Do I need an LLC & who cares?
TLDR: Yes, take the time to fill out the forms and pay the fee…
Top 5 reasons:
Numerous owners
If you pay them = ask for W-9
Legal protection of personal assets
Taxes bruh
One: If the entity/business has more than one owner
Set it up.
Even if you’re starting a business with your spouse, best friend, cousin, sibling, mom, dad or grandparent. Whenever the entity has more one owner you should def set up an LLC. Write it down and follow up. There are business dedicated to mitigating conflict amongst business owners because they don’t make an agreement upfront:
LLCs offer flexibility in allocating profits and losses among members according to their agreement, ensuring fairness and transparency. Additionally, an LLC can accommodate various ownership interests, allowing for a diverse range of stakeholders with different roles and contributions.
Two: Paying anyone from your business
Get on those 1099s folks.
Securing an Employer Identification Number (EIN) becomes even more crucial when you operate as an LLC and pay individuals from your business. As an LLC, helps separate your business finances from personal ones for legal and financial clarity. An EIN accomplishes this by serving as your business's distinct identifier for tax purposes, ensuring accurate reporting and compliance with employment tax laws. It facilitates smooth payroll operations, including withholding and remitting taxes, which are essential responsibilities for any LLC with employees or contractors.
Moreover, having an EIN strengthens the legitimacy of your LLC, bolstering credibility with clients, partners, and financial institutions. It's a foundational step in establishing your LLC's identity, reinforcing its professionalism, and laying the groundwork for sustainable growth and success.
You should ask vendors and contractors for a W9 to accurately report payments made to them and comply with tax regulations. Plus it’s helpful to see who and what you’ve been spending your money on 🤑
Three: Legal Protection
…what’s mine is mine &
what belongs to the business
belongs to the business.
As a small business owner, protecting your personal assets is the separation between you and your business. For many, especially small business owners, their business is their everything. However, your personal assets should not be affected by the actions of the business, I’ll explain:
Forming an LLC limits any potential exposure your business may have to unnecessary additional liability. Lots of lingo in that last sentence, what I mean is: people can’t take your personal property if under the protection of an LLC. This means that your personal assets, such as your home, car, and savings, are shielded from the liabilities of your business. This is important in the event of lawsuits, debts, or bankruptcy, your personal finances remain safeguarded.
Some people think about their business and discern that there is a limited threat of lawsuits, or other liabilities. Legally, that’s a fair conclusion, the next factor to consider is the tax benefit.
*Four: Tax -ish
With an LLC, you can enjoy the benefits of pass-through taxation. This means that the business itself does not pay taxes; instead, profits and losses are passed through to the individual owners and reported on their personal tax returns. This simplifies the tax process and often results in lower overall taxes compared to corporations, where profits are taxed at both the corporate and individual levels. In layman terms:
Taxes with Your SSN (Sole Proprietorship):
In a sole proprietorship, the business and the owner are considered the same legal entity. This means all business income and expenses are reported on the owner's personal tax return using their Social Security Number (SSN).
The business income is taxed at the owner's individual tax rate, which can include federal income tax, self-employment tax (which covers Social Security and Medicare taxes for self-employed individuals), and potentially state income tax.
The owner is personally liable for any business debts or legal liabilities. If the business is sued or cannot pay its debts, creditors can go after the owner's personal assets, such as their home, savings, and investments.
Taxes with an LLC:
An LLC is a separate legal entity from its owners, known as members. The LLC itself does not pay taxes; instead, its income and expenses "pass through" to the members' personal tax returns.
Similar to a sole proprietorship, the income from the LLC is taxed at the individual members' tax rates. However, members have more flexibility in structuring their tax situation.
LLC members may choose to be taxed as a disregarded entity (for single-member LLCs), a partnership, an S corporation, or even a C corporation, depending on their specific circumstances and tax goals.
By default, single-member LLCs are taxed as sole proprietorships, while multi-member LLCs are taxed as partnerships. However, LLCs can elect to be taxed as an S corporation or C corporation if it benefits the members from a tax perspective.
Choosing to be taxed as an S corporation, for example, allows LLC members to pay themselves a reasonable salary and then receive additional income as distributions, potentially reducing their self-employment tax liability.
Additionally, having an LLC provides liability protection for its members. This means that, in most cases, the personal assets of LLC members are protected from business debts and legal liabilities.
Registering your LLC is a step towards committing to your business and to your passion. By establishing an LLC, you're not merely creating a business entity; you're protecting your assets, unlocking tax advantages, and paving a smoother path towards growth and success.
Think of an LLC as a declaration of confidence in your business. You're not just building a business; you're constructing a legacy, leaving a mark on the world, empowering yourself to do the things that scare you.
Seize the opportunity, embrace the possibilities, and embark the journey where you plant your own seeds and grow your own garden 🌱
*Please note: the above is my interpretion of the tax code in March 2024, this is not tax advice and you should consult with a CPA and lawyer.
