You Don’t Need To Be Making Big Time Money To Need An LLC

Four reasons why you need an LLC, and three reasons you don’t.

Do you need an LLC? The world is full of people with expectations.  These expectations are generally founded on nothing more than “Joe has one, I must need one too”.

As a business owner, you are constantly presented with choices that can affect your business and life. One such decision is whether to form a Limited Liability Company (LLC) as the legal structure for their business.

Do you need an LLC?  It depends on your situation.  Many tax guys like me suggest that your income level should determine whether you form an LLC or not.  I don’t think your income level is as important as some would lead you to believe. There’s more to this decision than saving on taxes.

I like to look at a clients financial life outside of their business to help determine their needs.  What needs protection?  Is there family or spousal wealth that needs to be considered?  Income level is an important consideration, but so many other things need to be considered.

Let’s be honest.  Saying “I have an LLC” or “I’m incorporated” feels good.  We sound legitimate.  We sound like a real business, like Microsoft or Google.

Let’s take a look at a few reasons why you should and a few reasons why you shouldn’t.  Not everyone needs to house their business within an entity, such as an LLC or Corporation.  Let’s figure out what’s best for you.

Four Big Reasons You Need an LLC

1. Liability Protection Just In Case!

An LLC will protect it’s members (shareholders). This means that your personal assets, are kept separate from the company’s liabilities.

The business will be held liable if you, or an employee or agent of the company does something that caused loss to someone.

In the event that the business faces financial or legal troubles, your personal wealth remains shielded. This protective barrier is a powerful safety net, offering peace of mind and security to entrepreneurs.

If you have employees that drive around on company business, affording yourself additional liability coverage has a lot of benefits.  My employees do drive around to pickup documents from various clients.  I incorporated around the time this was starting up.

2. You Pick How You Want To Be Taxed

This is something that I don’t see a lot of on various “Why You Need an LLC” articles. There are two types of LLC’s you can choose from.

A Single Member LLC (SMLLC) or a Multi Member LLC (MMLLC) are the two types of LLC’s you can pick from.

A Single Member LLC is reported on Schedule C when you file your taxes.  This designation is chosen if there is only one principal to the business. This is the default selection for a one person business.

A MMLLC is a partnership and reported on form 1065.  This is a separate return from your personal return.  Form 1065 will produce K1’s for each partner.  The info on the K1’s is used to prepare each partners individual return.  A K1 is kind of like a W2 for partners.

So far, you can report your LLC’s tax activity as a Sole Proprietor or a Partnership.  You can also elect to be taxed as a corporation by filing form 8832 – Entity Classification Election.

Once you elect corporate status, you then need to decide if you want to be an S Corp or a C Corp.

How you file will depend on your personal (and your partners if any) tax and financial situation.

I’ll write an article on how to choose your entity later.

3. Easy Management Structure

Compared to a corporation, an LLC has much less required annual maintenance.  Other than a tax return, the only other thing you need to do to maintain your LLC status is generally file an information return with your state Secretary of State every other year.  This is also required for corporations, but not for unregistered businesses.  Most business not an LLC or Corp are considered unregistered.

A corporation is required to maintain minutes of shareholder meetings.  Most states require at a minimum, one annual shareholders meeting.  LLC’s have none of these requirements.

4. You’re a REAL BOY Business now!

This reason is the primary reason people form LLC’s, and it’s not a bad reason.  Housing your business in an LLC or corporation tells the world that you are serious about your business.

The cost to form an LLC on MyCorporation.com (it’s who I use) is around $500, l if you do it yourself.  It’ll cost upwards of $2,500 to have an attorney do this for you.  You could probably find a better use of your money this early into your venture.

But.  Perceptions are real.  An LLC appears more like a real business than someone selling oranges out of his trunk.  It’s a perception.  It may not even be real.  The guy selling oranges might have 1,000 other people selling his oranges out of their trunks.  That’s a real business.  But the perception is less than.

Getting financing or other funding is also easier if you are a registered entity, such as an LLC.

Three Important Reasons Why You Don’t Need an LLC

1. Additional Cost and Other Troubles

Setting up an LLC costs money.  Depending on your needs it can cost upwards of $2,500.

In California (and in other states as well) there is an LLC Gross Receipts fee.  They also charge a minimum tax of $800 each year, regardless of whether you have taxable income or not.

You can also count on a higher tax preparation fee.  A Single Member LLC is reported on form Schedule C on your federal return, but there may be additional returns needed at the state level.  These state level returns add at least an additional $250 to your return prep costs.

If you elected to be treated as a Multi Member LLC or as a Corporation (S or C) you can count on an even higher fee to prepare the LLC’s own return.  An properly prepared LLC or corporate return will usually start at around $800.

2. Ever See an LLC as an IPO?

I love LLC’s.  I think they are the perfect entity to hold your business.  You have the liability protection of a corporation, without a lot of the compulsory rules that make having a corporation too much for a small business.

But what if your dream is to build a business, sell it, then build another?  You want the life of a serial entrepreneur.  In this case, an LLC may not be the best choice.

You can absolutely sell your business if it’s not in an LLC or Corporation.  But you won’t receive proper value.  And generally the tax code has more ways to save on taxes if you  sell from a corporation.  Under some circumstances, you could even sell your corporation and reinvest the funds into another small business stock, without paying tax on any possible gains.

3. Legal Formalities and Record Keeping

Compliance, compliance, compliance.  The biggest headache when having an LLC is the amount of compliance and record keeping that is required.

Let’s talk about record keeping.  Keeping books.  You are required to keep a full general ledger set of books.  A balance sheet, profit and loss, and maybe a cash flow statement are what you should aim for.

Maintaining a good, solid, accurate set of books is essential to running a business.  No one can tell how their business is doing just from “touch”.  Running your business from the seat of your pants is a slow walk to insolvency.  How can you make educated decisions without accurate information?

Compliance is actually the easy part.  Your state Secretary of State will require your LLC to file an information return every (or every other) year.  This is needed so the state has a record of your officers or managers on file.

Conclusion

Do you need an LLC?  Why?  Are you planning on growing, then selling your business?  Have you given any thought to your long term plans?  Do you have a need to protect assets not in use or owned by your business?

The decision to form an LLC to hold your business and its assets is usually the right choice.  The only fault I can find in forming an LLC and using it to hold your business, is the timing.

Here’s what I look for when determining whether an LLC is a proper choice.

• What is the basis for your business (service or selling product)?
• What personal assets needs protecting (home, real estate, savings)?
• Along the same lines, how much income from other sources will you have?
• What are your long term plans (grow, sell,…)?
• Will you have employees out in the field?
• What other kind of liability exposure are you concerned with?

When I mentioned timing above, I mean “When did you form the LLC?” and “Why did you choose that time to form the LLC?”

If you are in business as your livelihood (not some part time gig type endevor) and growth, and possibly passing the business on to heirs are some of your biggest concerns, you will be forming an LLC (or a corporation) eventually.  But there’s no hurry.

I’m not a fan of wasting money on unnecessary expenses.  If you’re serious about starting and growing a business, you will be forming an entity at some point.  Don’t do it before you need it.