As an entrepreneur, you will have to make many important decisions – one of the first being what business structure to use. While many countries allow a limited selection, allowing sole proprietorships and corporations, in America it’s possible to form an LLC, which can be great – but you should know some things before starting one.
LLCs are NOT about saving your taxes
If you were deciding on an LLC because you thought your taxes would be lowered, you’re not the only one who has had this misconception – in fact it is the number one misconception that people have about LLCs, says Megan Naasz, owner of Allay Accounting.
LLCs are not a tax-saving strategy; rather, LLCs and sole proprietors are taxed at the exact same rate -so you’ll pay the same amount whether as part of an LLC or completely alone. The primary point of an LLC is not saving on taxes – it’s the legal protection that it provides.
You don’t have to form an LLC all on your own
While paperwork is less for an LLC compared to, say, a corporation, it can still be daunting to have to do all that work on your own – like figuring out payrolls and expense categories. While this may be hard work to you, it is in a day’s work for someone like a bookkeeper or a CPA.
Many people do not reach out to these experts for fear of being talked down to because they do not know, but experts actually expect new business owners to come to them, especially in the beginning, as it can be incredibly hard doing it by yourself. In fact, many people find themselves a specific CPA who stays with them for the long-term, helping them through their business all the while. That being said, it’s important to find someone who understands your business.
LLCs and IRS
A common misconception by many is that setting up an LLC is almost as if you’re waving a giant, red flag to the IRS. But according to Sam Vander Wielen, a company owner, becoming an LLC does not increase your chance of an audit.
LLCs carry a limited life with them
While corporations can last forever, an LLC has to be dissolved when a number of things happen, for instance when a member wants to leave or a new one would like to be added on. For this to happen, the LLC needs to be disbanded and a completely new one needs to be formed, which can end up being quite a long process, if you plan to have many people coming and going from your business, and disruptful to your business too – so in this case it might not be the best structure for you.
You must remember to keep your home and business life completely separate
One of the most common mistakes people make in their LLCs is signing contracts with their own name, instead of the LLC name, or skipping contracts altogether. While you don’t need contracts for an LLC, it is highly recommended as you have to make sure your LLC has contacts with the company’s name. If you don’t, or instead end up putting your own name on these contracts, you could technically lose any protection your LLC offers, as you merge the two into one.
Setting up an LLC is affordable enough, but based on your state, you may have to pay additional fees and maintenance costs that vary by state – for instance, in California, LLCs are charged a yearly franchise tax of $800, whether or not you make a profit. It is advised by experts to do their own cost-benefit analysis based on where they leave, as you could end up being surprised by starting prices.
TRUiC shows the simplest way to start an LLC on their website. Be sure to visit their site to learn about it.