You’ve weighed the pros and cons and have chosen to kick payroll to the curb –congrats! But now that you’re starting your own small business, there’s some questions you need to navigate to get it up and running. Like, Why should I form an LLC?
First of all, that’s Limited Liability Company, in case no one has ever said those full words to you. An LLC (which you form in a specific state) gives you similar legal protections of a Corporation while still treating you like a sole proprietor or small business. But seeing as you’re new to small business town, let’s break this bit by bit.
What does it mean to be an LLC?
You mean besides the professionalism and legitimacy those three letters give you? (Seriously, say your name and add LLC, and you suddenly exceed boss status.)
In short, you’re personal assets are protected if sh*t hits the fan. The LLC provides protection to owners by limiting the owner’s personal liability. So if there’s a little misunderstanding, and you find yourself in the middle of a legal dispute, this is when you’ll appreciate the little extra bureaucracy of setting up that LLC (and won’t be I asking, why didn’t I form an LLC?).
It’s not a get out of jail free card, but it separates your personal assets from the assets of the business, limiting your personal liability–go figure. It may not seem like a big deal until you can’t buy a gallon of milk because your checking account has been frozen until the knot you’re twisted up in is smoothed out.
What does it mean for my taxes?
The upswing is you’re just doing your own thing and filing your taxes as a single member of the LLC, it’s simple enough. Your friends at the IRS will treat you like a sole proprietor (we talk about this on our podcast), meaning you receive a 1099 MISC from everyone who pays you $600 or more each year, but no additional forms come tax time.
You will need to choose a tax structure for your LLC but honestly, it’s nothing two Advil can’t handle. And if you do nothing, you’ll automatically be considered a sole proprietor or partnership depending on number of LLC owners.
You will have to pay taxes at the personal income tax rate, which could be higher then the Corporate rate (if you nav. yourself into a six-figure company, you’re paying a higher rate).
But hey, if you can’t see yourself in the office, and don’t mind getting in the weeds of the administration work of your business (you do it all, when it’s just you), the extra protection is worth it.
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Disclaimer: Hey Nav.igator, just so you know, we have financial advisors reviewing our content, but our articles are only meant to be educational. Consider this friendly information, not financial advice (talk to a professional for that!).