People frequently ask just what is an LLC anyway?
Do you know tax savings you get from having an LLC? Will a LLC protect both your personal assets AND Business assets if you get sued?
These are things to consider before you do any business formation.
A LLC, which stands for Limited Liability Company, is a modern hybrid business entity that has been created by most all States.
They are fairly new as they were first created in the late 1970s. It was created by skimming the best things from other traditional business types, leaving behind most of the bad things and the LLC was born.
LLCs are very flexible and can be easy to use, depending on your business.
They are different from corporations. LLC stands for Limited Liability COMPANY, not Corporation. A LLC does not have a president or shareholders like Corporations. Instead, there are managing members and members. The lingo is just a bit different.
LLCs are very flexible because while you may choose to form a LLC, you can still pick and choose to be taxed as if you were another other business entity in order to save yourself taxes. A LLC can be set up to favor your business needs, whether it’s a small or other sized business.
This makes a LLC very unique and flexible.
Saving Your Money
After you have formed your State LLC, you have 75 days when you can choose to be taxed (Federal Taxes) as if you were one of the following:
- Sole Proprietor / DBA
- S Corporation
- C Corporation
- Partnership, but only if there is more than one member.
Which one you choose will depend upon your individual business, the taxes you think you might save and how much extra paperwork you are willing to do. You will find more detail on the tax savings of forming a LLC in another post.
Tax Savings using a LLC
Ok, on to the important stuff; saving your money.
You can save substantial payroll taxes by forming a LLC and within 75 days of formation choosing to be taxed like an S Corporation. You would then be an LLC, but will be federally taxed as if you were an S Corporation. There is an advantage.
For example, a person who owns a DBA or Sole Proprietorship, and earns net income of about $113,000, will be required to pay payroll taxes of about $17,000. Heck, that’s not fun.
However, if the same person does a California LLC formation, or any other State LLC formation, with that same net income will ONLY pay about $10,000, if they elect to be taxed as an S Corporation. Now that IS fun. You just saved about $7,000 by having an LLC.
To Zoom or Not To Zoom
As you can see, it is important to know what you are doing before you set up your business formation. That is why “what is an LLC” is a great question to ask because you need to know how to set it up before jumping in. The problem is that websites that do document prep services like Legal Zoom can’t give legal advice regarding formation of your LLC.
Your California LLC formation is the foundation of your business and how it is set up will affect your taxes and asset protection later on. Legal Zoom is not allowed to give you legal advice about the forms you fill out; you are on your own. They just have you fill out forms to be filed with the State.
LLC Asset and Liability Protection
A person who just starts up a business without forming a LLC or other type of business is considered a sole proprietor or a DBA, called Doing Business As.
You may be required to file some minimal paperwork.
Running a business as a DBA can be risky to both your personal assets such as your home, car and cash in your bank account, and to your business assets as well.
If you are sued on a personal matter, the person suing can go after everything you own. Your house, your car, your bank accounts and your business assets. This is because as a sole proprietor, you and your business are considered as one thing.
Once you form an LLC, you get the asset and liability protection that you’d traditionally get from having a Corporation.
This means that if you are sued for a personal matter, they can’t go over your business assets. And, if you are sued for a business matter, they can’t go after your personal assets. The asset protection of an LLC prevents “cross pollination” of your business losses into your personal losses.
Will They Get Your Money?
Keep in mind that there is no airtight asset protection.
When someone is trying to get your money (by suing you) they will often try to get your business AND personal assets because there is a bigger pile if they can get both.
This is traditionally called piercing the Corporate veil.
The person suing attempts to prove that you really don’t have a LLC or Corporation by showing that you are treating your business assets as your own personal assets. Meaning that the LLC is really just your personal alter ego and not a separate thing.
Keep it Separate To Protect Yourself
One way a person suing you can prove your business and personal money are not separate things is to show that you don’t have separate bank accounts for your LLC and personal money.
Without separate accounts, it is much easier to prove that you and your business are not separate things. If you are using your personal bank account to deposit your LLC monies, this can be used to prove there is really only one entity: you personally.
The big takeaway here is to always always have a separate bank account for your LLC and a separate business credit card.
Your business accounts should be SEPARATE from your personal accounts.
You can then just transfer money from the LLC bank account to your personal bank account, preferably by using a LLC check payable to you personally. This will help shield you by showing that you keep separate LLC bank and credit card accounts and from your personal bank accounts. This shows that you have two separate things: a business LLC and a personal life.
If you are sued as a sole proprietor, you are done. All of your assets are exposed and are there for the taking. Having an LLC will give you a better chance of having the asset and liability protection that you will need.
There is also a minimum $800 California State Tax on your LLC, which I will discuss more in a separate post.
LLCs are very popular and everyone has heard of them. Whenever something is popular, it seems to attract taxes like flies to honey. Have you ever looked at the list of taxes on your cell phone bill? They know that people won’t stop using their cell phone no matter how many taxes they add to it. Of course, I’m sure the State of California didn’t consider this sort thing at all when it decided to lob a tax on your LLC. Keep in mind however, if your LLC earns in excess of around $55,000 you’d still pay the $800 anyway.
As you can see, it is worth your while to ask “what is an LLC”.
You can have it all – tax savings of a partnership and protect your money with the asset and liability protection of traditional Corporation – just by forming a California LLC. Remember to keep your LLC and personal bank accounts separate. This will help prevent someone from piercing though your LLC into your personal assets and the other way around too.
Have a look around this site; I will expand on some of these topics in future posts. And feel free to leave a comment.