Do You Really Need an LLC?
I’m answering one of the most common questions I get in consultations: “Do I need an LLC, and where can I start one?”
To be clear from the start, not everyone needs an LLC, and forming one does not automatically mean tax savings. Also, I will be including an affiliate link in this post, but the purpose of this article isn’t to sell you an LLC - it’s to genuinely answer the question.
An LLC is a business structure or entity that draws a line between your business and personal assets. If you form a single-member LLC, you are still eligible for relevant business deductions, aka write-offs. You are responsible for filing your individual tax return, called the 1040, which is due April 15th. If you start an LLC with more than one member, then you’re responsible for filing a 1065 tax return, which is due March 15th, in addition to your individual tax return due April 15th. The only time there are tax savings associated with an LLC is when you elect to have it taxed as an S corporation. It’s actually an LLC or Corp taxed as an S Corp—but that’s another article.
It would make sense to open an LLC if:
You’re at risk of being sued.
You’re at risk of going bankrupt.
You’re concerned about staying anonymous.
You plan to make the S election in the near future.
Having a business entity grants you an EIN number with the IRS, which is like a Social Security Number for your business. You can use your EIN along with your business formation documents from your state to open a true business bank account. Otherwise, you can operate your business out of a separate personal checking account as a sole proprietor without an LLC.
Having a business “identity” allows you to build credit for your LLC and do business in the name of your LLC instead of your personal name. For example, instead of having your government name tied to payment platforms, you can use your LLC. If you’re running an email newsletter and are mandated to include an address, you can list your LLC address instead of your personal one. When you issue contractors 1099s, you’ll use your EIN instead of your SSN. You can even qualify for business loans by showing income hitting your business bank account under your LLC’s EIN. See where I’m going with this?
If you’re a sole proprietor earning under $75,000 a year (this is GENERAL advice - please consult a professional), you likely don’t need an LLC. If you’re confident your management company won’t sue you, your business income is separate, and you’re tracking expenses, you’re probably fine without one.
Forming an LLC is simple enough to do on your own after you’ve thoroughly researched and carefully considered the decision. You can use a service like (here comes the plug!) Northwest Registered Agent to form your LLC for a fee. I recommend forming the LLC in the state where you live. Income is taxable based on where it’s earned. For instance, if you live in California but work in Las Vegas, forming a Nevada LLC doesn’t exempt you from paying California taxes. However, your LLC formation fees are a write off.
If you’re a multimillion-dollar corporation, you might consider filing in Nevada or Delaware for specific benefits, but for a small business it’s typically best to file in the state where you reside.
You’re an entrepreneur! Weigh the pros and cons of forming a business and take the time to educate yourself on how your taxes really work. The only way to beat the system is to understand it!