Looking to understand why you should start an LLC? Check out the info below, a useful guide for any prospective small business owner.
What is an LLC
An LLC or Limited Liability Company is the American form of a private limited company. A public company, as opposed to a limited company, issues shares of stock (ownership) that can be publicly traded on a marketplace whereas a limited company does not.
An LLC offers a flexible business structure which protects its owners (members) from being personally pursued for its debts or liabilities.
LLCs are essentially a hybrid entity that combine the many business structure characteristics and let you take advantage of the sole proprietorship, corporation, and partnership business structures.
Why you should start an LLC
Reasons you might want an LLC include:
- Reducing the risk that your personal assets may be used to pay off corporate obligations. In the case of a limited liability company (LLC), only the assets held in the name of the LLC may be taken by business creditors or used as compensation in a lawsuit against the LLC.
- Acquiring funding via the sale of shares to shareholders. To achieve this goal, the company might recruit new members who are willing to invest money, goods, or services into the company.
- There are financial benefits. Unlike corporations, LLCs are not often subject to a “separate entity tax.” Like in a partnership, the members of an LLC share in the good and bad times.
- Simple: A limited liability company (LLC) has the lowest barrier to entry when it comes to starting and running a business. There is no need for the formalities associated with a company, such as appointing officers and directors or holding regular board or shareholder meetings.
- The number of owners, who are also known as members, of an LLC is completely up to its individual businesses. A limited liability company (LLC) might have as few as one member or as many as hundreds of members.
- LLCs may be controlled by its members, meaning that the business’s day-to-day operations are the responsibility of all of the owners. In addition, an LLC may choose more than one manager to oversee daily operations. Managers may consist of designated members, non-members, or a mix of the two.
- Credibility: Forming an LLC to own and run your business helps give you credibility. It reassures customers that your company, a hostel business for example, is in fact a real business. You’ll also have an official business name to use.
- Inexpensive and relatively easy to form: Compared to corporations, starting a business as an LLC is quite easy and inexpensive (usually less than $1,000). The exact process is determined by your state, but the paperwork is typically minimal, as is the cost.
- Perpetual existence: Unless the articles of organization specify differently, a limited liability company has perpetual existence. This means that the owners can change without triggering the dissolution of the company.
You should also compare your state’s fees associated with both LLCs and corporations, to see if one or the other is less expensive to form and maintain. Also, you should consider what your state requires in the way of holding meetings of the members, and annual reporting.
Expenses incurred by an LLC may be deducted from their taxable income. Taxation of LLCs might be elected for several reasons. Single-member LLCs (SMLLCs) and multi-member LLCs (MLLCs) are typically taxed as partnerships or sole proprietorships, but may elect to be treated as corporations instead.
Fortunately, this may be done by submitting what is called an election to the IRS. There are two possible taxation structures for LLCs: C corporations and S corporations. The following list of LLC costs may be useful when looking for tax-deductible expenditures.
|Deductible Expenses||IRS code||Expense details|
|Self employed tax||Topic 554: Self-Employment Tax||It is the responsibility of self-employed people to pay both income taxes and self-employment taxes. On the other hand, self-employed individuals may deduct half of their SE tax from their taxable income.|
|Startup expenses||Publication 535: Business Start-up and Organizational Costs||In the first year of operation, the IRS permits a deduction of up to $10k for startup and $5k for organization expenditures, provided the total is less than $50k.|
|Advertisements||Publication 535: Advertising Expenses||Any expenses directed toward advertising, marketing, and/or promotions are deductible expenses. |
This includes but is not limited to logo creation, printing business cards, website updates, printing costs, and social media marketing. Some businesses also use large advertising mediums like billboards and television commercials.
|Office services||Publication 535: Supplies and Materials||In a broad sense, the term “office supplies” refers to the many items that are required in order to carry out the day-to-day operations of an office. Some examples of these items are documents, pencils, notepads, inks, photocopying, mailing, and delivery services.|
Write-offs may be used against the amount that was spent on incidental materials and supplies, allowing owners of small businesses to deduct the whole cost of running an office.
|Business insurance||Publication 535: Insurance||Any form of protection that is essential to successfully manage a company is often covered by business insurance.|
You may be eligible to take a tax deduction for a number of insurance premiums, such as those for asset coverage, worker health insurance, liability coverage, and employees’ compensation insurance, even if the costs vary depending on the sort of company you run.
|Costs Associated with Obtaining a Business Loan||Publication 535: Interest You Can Deduct and Publication |
535: Credit Card Convenience Fees
|There is a possibility that you may be able to take a tax deduction for the interest that was paid on a business loan. This deduction may include borrowing costs, monthly service charges, business banking overdraft expenses, and payment processing fees.|
The Internal Revenue Service (IRS) publishes rules that specify the categories of loan interest that may be deducted and those that cannot be deducted.
|Education||Publication 535: Education Expenses||You may be able to deduct the cost of any classes or other types of training that you take to improve your professional abilities or earn certifications for your company.|
Books and other forms of study material that are helpful to professional growth may fall under this category.
|Depreciation||Publication 946: How to Depreciate Property||Depreciation is defined as a provision for the wear and tear, degradation, or obsolescence of the property by the Internal Revenue Service (IRS).|
Depreciation is a tax break that enables companies to deduct the value of specific tangible property over an amount of time, often over the “useful life” of such property. In other terms, depreciation is a tax write-off.
|Legal and Professional Fees||Publication 535: Legal and Professional Fees||Some legal and professional fees are considered deductible, including lawyers, bookkeepers, tax professionals, and accountants that you employ in order to operate your business.|
|Home Office Expenses||Publication 535: Personal Versus Business Expenses||If you run your company out of your house, you may be eligible for the home office deduction, which is a reduction in taxable income equal to the proportion of home expenses attributable to employment.|
This covers the monthly rent, the cost of utilities, any necessary repairs or maintenance, the cost of cleaning services companies, and any other costs linked with the office buildings.
|Travel Business Expenses||Topic 511: Business Travel Expenses||People who are self-employed are eligible to deduct some travel expenditures incurred for the operation of their enterprises. These expenses may include, but are not limited to, airfare, business meals, accommodation, and local transport.|
|Rented Equipment||Business equipment that is rented for certain small business services (e.g., construction equipment, power tools, etc.) can be considered a deduction. (Personal equipment is excluded from this deduction.)|
|Business Car Usage||Publication 463: Car Expenses||Every year, a taxpayer is entitled to a deduction for a percentage of the expenditures connected with business vehicles. These costs include mileage as well as other operational costs for automobiles, trucks, and other heavy trucks.|
If you use a car for both your company and your personal life, only the expenditures associated with the business use may be deducted from your taxable income.
|Rent||Publication 535: Rent||Rent that is paid on office premises, or the cost of rent that is paid on space that is covered by office furniture if you work remotely may be eligible for deduction on your taxes.|
Write-offs may also be used to locations that you hire out on an irregular basis for business-related activities.
|Cost of Goods Sold||Publication 535: Cost of Goods Sold||The “cost of goods sold” (COGS) is an expense that may be deducted from the “gross revenues” of a company even if the company only makes the product itself. Natural materials, supplies, labor are all potential components of COGS.|
|Retirement Contributions||Calculating Your Own Retirement-Plan Contribution and Deduction||A person who is self-employed may be eligible to deduct their payments to a retirement plan via their LLC. The individuals personal retirement package and the maximum contribution limitations for that plan will determine the overall amount of the deduction that they are eligible for.|
|Charity and Gifts||Publication 535: Charitable Contributions |
Publication 535: Gifts
|Donations to charities that are made in the manner of cash donations are often tax deductible. Having said that, any donations to charity organizations that are immediately connected to your company should be taken into consideration.|
A gift given to bring a corporate conference to your city, for instance, would not be deemed a charitable contribution since the event would not benefit the community.
|Utilities||Publication 535: Utilities||Utilities, including as gas, electricity, water, and sewage, may be deducted if they are used in the operation of a company.|
Basic telephone service is not tax deductible if you work from home, but the expense of a second telephone line and long-distance business calls are.
Protection benefits of an LLC
The personal assets of the LLC members cannot be claimed to satisfy business debts. For most people, this is the most important reason to form an LLC.
This is where the term “limited liability” in LLCs comes from. The LLC provides protection to the LLC owners by limiting the owner’s personal liability. Generally, this means that business debts owed by the business, and other claims on the business, including liens and lawsuits, are limited to the assets of the business itself. Those holding such liens against the business cannot pursue the personal assets of the business owner(s) in most states and under most circumstances.
Especially if you’re the one who did the wrong thing or was negligent, you lose a lot of the safeguards the law gives you. If you conduct tax fraud or mix business and personal funds, for instance, you will be personally liable for the debts incurred by the company.
In the case that your firm is sued or fails on a loan, this will safeguard your house, vehicle, and money. Besides those cases, there are just few more. As was previously said, providing a guarantor for a loan does not shield you from debt collectors. If you fail to make payments on time, the lender may seize whatever personal property you own.
You lose the protection of an LLC if you sign an agreement in your individual capacity rather than in your capacity as a the company’s representative. In the end, your limited liability company’s protections may be weakened if they are not in line with the formality and recordkeeping requirements of the law in your state.
How to start an LLC?
To start an LLC, you’ll need to:
- 1). Select the State to setup your LLC
- 2). Name Your LLC
- 3). Choose a Registered Agent
- 4). File LLC Articles of Organization
- 5). Create an LLC Operating Agreement
- 6). Get an EIN (Employer Identification Number (EIN)
After you decide to form an LLC, Articles of Organization LLC forms must be filed, and state and initial fees must be paid. The LLC formation can be done via a Professional LLC service or by submitting the documents yourself to the relevant state department.
The main cost of forming a limited liability company (LLC) is the state filing fee. This fee ranges between $40 and $500, depending on your state, excluding add-ons.
Does an LLC protect your personal assets?
Yes, an LLC does protect your personal assets in most cases. An LLC is a particular business structure that offers the liability protection of a corporation while giving you the flexibility of a partnership.
What does an LLC not protect you against?
An LLC will not protect you against personal liability for your own negligence, malpractice, or other personal wrongdoing that you commit related to your business.
What can I write off as an LLC?
LLC businesses can write off self-Employment Tax, startup business expenses, office supplies and services, advertisements, business insurance, business loan interest and bank fees, education cost and depreciation.
Tom is the founder of Gottagrow.io. He reads the offers, deciphers the details including features, pricing, included services and more to find you the best products and services.