If you own a business, you may be concerned about personal liability. For example, if you are operating as a sole proprietor or partnership, you can be personally liable for your company’s debts in case of default. If you want to enjoy pass-through taxation but need to protect your personal assets, such as your car or home, you need to ask the following:
- What is an LLC?
- How can this business structure benefit me?
Once you answer the above questions, you will understand the importance of registering your start-up as an LLC.
So, let’s answer the question: What is an LLC?
An LLC is a limited liability company. It features the pass-through taxation of a partnership or sole proprietorship while protecting your personal assets, such as your car or house. That is because an LLC is considered a separate entity.
If someone sues you and your business is an LLC, they are suing the LLC, not you, as a person. You don’t have this type of latitude when you are set yourself up as a partner in a business or work on your own as a sole proprietor.
If you don’t want a business creditor coming after your car and home, it pays to answer the question, “What is an LLC?”
LLC Basics – How to Set Up a Limited Liability Company
Unlike a corporation, an LLC is fairly easy to set up and operate. You will need to do the following to get your LLC up and running.
- Check the Secretary of State’s data base in the state where you plan to form your LLC and check on a name. You must register your LLC under a unique business name.
- Once you have a unique businessname, you need to obtain the services of a registered agent – someone or a company that can accept LLC-related correspondence during regular business hours.
- Fill out the application at the Secretary of State’s website to register your LLC., and submit the proper information, forms, and fees.
- Draw up an Operating Agreement. This form does not have to submitted when you register as an LLC. An operating agreement should be created to resolve any internal disputes about the operation or management of the business.
Filing Your Business as a Domestic or Foreign LLC
It is generally best to register your LLC where you plan to do your primary business. For example, you can save on the cost of filing if you register as a business in states, such as Delaware, Nevada, or Wyoming. However, you will also have to register as a foreign LLC in any of thesestates, if the state isoutside of your normal business hub. If you take this approach, things can get expensive. Filing your papers for an LLC, where you primarily do business, is called a domestic LLC registration.
Do you plan to do business in several states? If that is the case, you may benefit from registering in states, such as Wyoming, Delaware, or Nevada. You will need to sit down with a business lawyer to figure out the best course of action to take.
LLC Tax Advantages
Besides protecting you against personal liability, an LLC provides some great tax benefits. For example, as one owner of a business, you can receive profit distributions that are taxed at your own, typically lower, tax bracket. You can also pass through any business losses, which can be used to offset your non-business or personal income.One owner and multiple owner LLCs can enjoy these advantages.
LLC Taxing Options
If your LLC has more than one owner, you can treat your LLC as a partnership, in which case you don’t have to do anything. You can also choose to be taxed as an S corporation or C corporation. If you wish to keep the profits in your company so you can grow and expand, you should set yourself up, tax-wise, as a C corporation.
Maybe you and the other owners of your company wish to be paid from your business’s earnings. If so, you should set up your LLC as an S corporation. By using this approach, each LLC member or owner receives his or her share of the company’s distribution of profits. This share can be taxed at each individual’s income tax rate, and is not subject to self-employment tax.
What is nice about an LLC is that you can receive the benefits of being incorporated, but you don’t have to go through the formalities. For example, you don’t have to hold formal meetings or follow some of the prescribed guidelines that go along with incorporation. However, you can still reap many of the advantages associated with asset protection and taxation.
That is why it is important to answer the question, “What is an LLC?”
Doing so will allow you to see how this type of business set-up can add credibility to your business brand and operations and keep your personal assets safe. Plus, you can deduct the costs of running your business by forming an LLC.
LLC Common Tax Deductions
What you write off or deduct will depend on the nature of your operations. However, common deductions include the following:
- The rental expense for renting an office or retail space. If you operate out of your home, you can deduct a portion of what you spend on your house each month.
- Any necessary insurance can be deducted, such as professional liability insurance. You can also deduct the costs associated with disability insurance. However, what you can deduct depends on the type of policy.
- Any property that is tangible and used for the LLC can be deducted from the taxes in the year the item was bought.
- Deductions can also be made for the costs related to maintaining a professional license. In addition, you can deduct any costs related to your professional development, such as industry journal subscriptions or webinars.
- Half the cost of what you pay for business-related meals and entertainment may be deducted as well. This type of deduction is highly abused. Therefore, make sure these tax write-offs are proportional to what you receive in income and your other deductions.
- If you are a manufacturer or reseller, you may also deduct the cost of goods sold for your business. This is usually done by adding the cost of goods sold, and subtracting that amount from your gross receipts.
As you can see, becoming an LLC is highly beneficial, especially if you are beginning a business and need a structure that will help you separate your personal assets from your business expenses and assets. Ask, “What is an LLC and how can it benefit me?” Once you realize the advantages, you can enjoy increased earnings, gain a better business reputation, and attract more customers.