Should you form an LLC for your small business?
What is a Limited Liability Company? An LLC is a business structure that allows income to pass through to the business owner’s personal tax return. Just like the sole proprietor or partnership business structures, income is taxed one time. In contrast, a business formed as a corporation is taxed twice. Once on the corporate tax return and again at the individual level when that income is paid out to shareholders.(Businesses formed as S corporations can avoid double taxation if certain conditions are met. More information on S Corps can be found at the IRS’s website: https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations)Additionally, an LLC provides limited liability. Your personal assets are separated from the business. Claims against the company are limited to the company. There are important caveats if you are criminal or grossly negligent you can be held personally liable. The second caveat is that if you co-sign or sign a personal guarantee on a loan, you take personal liability.
Sole Proprietor or Limited Liability Company?
There are important factors to consider when deciding on the legal entity best for you. Do you have personal assets that need protection? Assets such as homes, retirement funds, cars are an example of some of the assets you may want to protect. If you don’t have assets to protect a sole proprietorship may be the preferred option. You would either do business under your name, i.e. Joe Smith or a DBA. (Doing Business As) Ex. Joe Smith doing business as Plymouth Plumbing Supplies. You would need to file your DBA with your local county and pay the associated fees ranging from $10 to $100. Forming a Limited Liability Company requires more expense. Here in North Carolina, it costs $125 to form an LLC. The application process was very smooth. I was able to complete the entire process online and had my articles or organization e-mailed to me within a few days. Additionally, there is an annual filing requirement and fee. Fees in your state will vary.
Do I need an EIN (Employee Identification Number)?
Sole Proprietors are not required to obtain an EIN if they operate the business alone. If you decide to hire employees, you will need to obtain an EIN. Limited Liability Companies should obtain an EIN. Most banks require LLC’s opening accounts to have an EIN. Which leads to a good reason for the sole proprietor to obtain an EIN: Identity Protection. By obtaining an EIN, you reduce or eliminate the need to use your social security number when opening up accounts and completing paperwork. With all the issues with identity theft in today’s world, having an EIN makes good sense.
The main benefit of forming an LLC is that it separates the business assets from your personal assets. As mentioned above, there are circumstances that individuals can be held personally liable. Generally speaking, however, claims and debts will belong solely to the company. Most entrepreneurs pursue multiple business ventures. You can have multiple DBA businesses under one LLC. However, all of the LLC’s assets will be at risk. An example, you operate a pest control business and a heating repair business under the Joan Smith LLC. A customer sues Joan Smith LLC for breach of contract, the assets used to operate the heating repairing business are also at risk. Establishing separate LLC’s would limit the liability to just that company. The paperwork needed to established an LLC is fairly straightforward. However, you can also hire an attorney or an online service such as LegalZoom. Fee’s vary depending on whom you can use but it can save you the time.
Disclaimer: This article is not intended to provide any legal advice. Please consult your legal and tax advisors for specific information related to your situation.
Jef Scot provides solutions to small businesses in the areas of web hosting, website design, direct mail, and marketing. Please see our solutions page for more information. As a special incentive for you to get started used the discount code: Business2018 at checkout to get $50 off. Start the life you dream of today.