Should I form an LLC?
This article should be taken in a friendly tone yet my advice should be considered.
With the entrepreneurial spirit flowing amongst everybody nowadays, the smart ones should be asking “should I form an LLC to protect myself and my business.”.
The law allows for various forms of business entities to exist. However, choosing the right business entity for you is a more specific question that has financial and legal consequences for your business. If you are asking yourself whether you should form an LLC you are at least on the right track.
What is an LLC?
An LLC aka Limited Liability Company is a business entity with the government. Essentially the government wants to know if you are running a business so they can tax you accordingly. They give the business owner different options to form a business entity. Each has its advantages and disadvantages.
This is a business entity that I personally believe has the best of both worlds for new businesses. Knowing when to form an LLC is also a very important aspect of starting your own business.
Why Form an LLC?
As humans, we need to have an incentive or a reason to do something. So a fair question to ask yourself is “why form an LLC?” Why not just open my own business and run it? Well, I have a great reason why… over 100 years worth of laws is about to hit your business in the face. If you want to be profitable and protect your business you should know what business entity benefits you. Tax and legal consequences come with each type of business entity.
Personally, I am a fan of the LLC aka Limited Liability Company. It combines the benefits of a corporation with limited liability as well. To someone who has no idea about business, this all sounds like a mess. DO NOT WORRY. We can navigate it and make sense of it all.
I will begin with LLC taxation because let’s be honest… we start a business to make money. If you are handling your taxes well you are giving away your business’s profits. The less you get taxed the more you can take home. Forming an LLC lets you have “flow-through” taxation. Instead of the LLC paying any taxes the recipients of the money pay the full taxes. It FLOWS THROUGH the LLC and the taxes are paid by the person who receives them. Don’t worry I will explain this happily.
Example of LLC “Flow-Through” Taxation:
Let’s say Moe’s Tavern is an LLC. Moe’s Tavern hires Barney as a bartender. Moe’s tavern makes 5$ and pays all of those 5$ to Barney as his salary. Barney owes the government taxes on those 5$ and Moe’s Tavern owes 0$.
The LLC itself pays no taxes but instead, the taxes are paid by the people. Thus resulting in no tax liability for the business. We can talk about self-employment taxes in another blog post.
Liability of an LLC
Another important consideration when forming a business is the consequences it can have on your personal life and bank account. You don’t want a business mishap to affect your personal life. Unfortunately, if you never form a business entity there could very easily be legal consequences against you due to your business.
Forming an LLC will protect you from a good amount of legal consequences. When you form an LLC you give yourself and family legal protection. Any problems or lawsuits that arise from the business will be shielded by the LLC. That means that any person who is trying to sue the business can ONLY sue the business and not your personal assets. Pretend an LLC is its own person.
Example of LLC Liability
Mr. Burns (worth 100 million dollars) opens a donut shop and registers it as an LLC. Ralph comes into the donut shop and gets sick when he eats a donut. If Ralph decides to sue Ralph can only sue the donut shop and not Mr. Burns. Thus protecting Mr. Burns’ 100 million dollars from litigation.
Forming an LLC protects your personal assets from a lawsuit. There are certain exceptions but if you have any questions please feel free to contact us.
Conclusion on an LLC
If you are thinking about opening up a business I would definitely recommend to start an LLC. Not only will it protect your personal assets from lawsuits it will also allow an easier way of taxation. At this current stage of my business, I run it as an LLC. I have found a safe and secure business entity for the time being.
If you are ready to open your own business and have questions regarding an LLC, please give us a call.
We would be happy to schedule you a consultation and discuss your options. We take pride in helping small businesses in Houston get their business started.