The LLC is a concept with one of the most questions asked by new business owners.
It sounds like the right move to make since you’re running a business but is that really the case?
What is an LLC?
An LLC is an acronym for Limited Liability Company and this is a legal entity, NOT a tax entity, that provides certain features for business owners. You can create an LLC with any state of your choice by applying and paying the associated filing fees.
After the LLC is created, you will receive a notice from the state that your LLC has been created and will now be a member of that LLC.
What does an LLC do?
This is one of the questions that most people have. Everyone talks about you needing an LLC so you created but now what?
The LLC provides a level of separation between you and the business which protects your personal assets, such as your home or bank account, from any liabilities of the business. In general, if your business gets sued or if your business can’t pay back a business debt, only the assets in your business is at risk while your personal assets are protected. If you don’t have an LLC, anything and everything is at risk for your business liabilities such as lawsuits.
Business Bank Account – While you don’t need an LLC to create a business bank account, many banks require you to have an LLC to create a business bank account with their institution. This will also establish a business banking relationship with the bank right from the start.
Business Credit Card – Similar to a business bank account, you don’t need an LLC to create a business credit card but many institutions require you to have an LLC. It will also establish business credit with your LLC so you can be qualified for when you need business funding/loans.
S-Corp Election – When your business gets to a point where it generates enough income to consider an S-Corp election, the LLC will already be established for you to make the election without any additional paperwork for LLC creation.
Do I need an LLC?
An LLC is beneficial but it doesn’t make sense to create one unless you are in a position to need the benefits that the LLC provides.
You may need an LLC if:
- You work with others (customers/employees)
- Working with others naturally bring a risk of liability
- You are looking to protect your personal assets
- You’re making a consistent level of income that justifies making the S-Corp election
No, you do not need an LLC for business deductions. An LLC is disregarded for tax purposes and makes absolutely no difference for tax purposes. You are able to take business deductions whether you have a business or not.
No, an LLC does not make any difference in your taxes. It is for the protection that it provides for you and your business.
If you are a single-member LLC, you do not file a separate business return. You will include your business activities on the Schedule C of your personal tax return (1040).
If you are a multi-member LLC or have made the S-Corp election, you will need to file a separate business tax return each year on the Form 1065 and Form
1120-S respectively.
When you create an LLC with a more than 1 person as the member, your LLC is considered a “multi-member LLC” and is automatically classified as a Partnership. You will need to file a business tax return on the Form 1065.