Yo what's up everybody? My name is Ryan and I'm a CPA.
And today I'm going to be talking about why you should be forming an LLC for
your business.
The first thing we have to cover is whether or not you even need to
alright. So if you were forming a business,
you likely should form an LLC. However, if you're just dabbling in something and
you're trying to see whether or not you want to start a business in this
area, then maybe you don't have to do it just yet.
So for example, let's say you are sitting at home
and you want to go start cutting grass for people because maybe you think you
can make a business out of it. Well maybe you start cutting grass for
your neighbors charging like 20 bucks or whatever it is. You're testing it out,
you probably shouldn't have to form an LLC for that because you are just
trying it out. You're making sure that you like it, you're only doing it here
and there you know. It's inot like a full-on
business yet. Same thing with anything else you know,
if you're thinking about painting a house or
maybe you're just trying something out for a little bit, it's not worth going
through all the formalities to form an LLC,
if you're just trying it out. Same thing with hobbies. If you do something as a
hobby and you sell it occasionally I don't
think you have to form an LLC for that either because
you're not exposing yourself to enough risk to justify doing that.
Now if you do have a business and you're still just a sole proprietor,
then I would seriously seriously consider
forming an LLC, or something to get that liability protection.
Now, same thing with independent contractors, it really depends
here. If you're an independent contractor as a trade,
then I would seriously consider forming an LLC or something like that.
If you drive for Lyft, Uber, Grubhub, any of those things, then I don't think
you really need to form an LLC because those companies
should have the proper insurances and protections in place
to protect you and to protect the clients or the customer.
If you have rental properties should you put it in an LLC? Probably yes you should.
How you do it depends on the the amount of asset protection that you want.
You know some people put one rental property into an LLC and they do that
for all their rental properties so they have
different LLC's for each of the rental properties. Or some people just put like
all the rental properties into one LLC. And while that's
more simple, that provides less asset protection.
So it depends on what you want to do what your risk tolerance is there.
The primary reason here is for liability and asset protection.
If you're a sole proprietor and you're running your business and you do
something that gets you sued. Then the person suing you can sue for
your business assets and your personal assets - your home and
all that stuff. That's not something that you really
want to happen and that's why people form an LLC to give that liability
protection. To separate themselves from their
business. If you're a sole proprietor and now you form an LLC,
and you operate that LLC correctly, now somebody sues your business,
they can't come after your home or your personal assets.
And that's exactly what we want. You don't form an LLC
for tax savings. Let me state that clearly, that
simply forming the LLC does not save you in taxes in any regard
okay. That requires an extra step which I will tell,
which I will talk about later. And now there's a common misconception
about forming an LLC and receiving asset and liability protection.
Many people think that if you just spend $50 with the Secretary of
State, you get an LLC with your name,
Bojingo's LLC or whatever, and you just have to do that
and you're good, you're fully protected.
And that is simply not true. If you get sued when you do that,
the courts are going to see that you're not operating your LLC
correctly. You don't have the proper documents. You know, you have to prove all
these things that your LLC is actually operating as an LLC. But if
it's not, then they can still do what's called
"piercing the corporate veil" and go after your personal assets. So
it's a misconception that I want to
just blow away right now, that just because you formed an LLC doesn't
mean that you're fully protected. There's many things that you have to
consider in order to do that and you have to operate your LLC
as a separate business. You have to have an operating agreement,
which is something that an attorney will draft for you. An operating agreement is
just a document that states how your LLC will be operated, what kind
of business it's in, who the owners are, how money is
contributed, all kinds of things that kind of define
the way that your LLC will be ran. Another reason people
form LLC's is for flexibility. You know there's other
entities out there, there's corporations, S-corporations, partnerships.
So why are we talking about an LLC? Besides protection, it's flexibility. Now
corporations have certain formalities that you have to
follow. You know, you have to have shareholder meetings
at least once a year, you have to have board of director meetings at least once
a year, you have to have meeting minutes, you
have to keep record with that, and so what does that even look like if
you're just a single owner? What does the shareholder meeting
look like? See those are things that you have to be doing.
With an LLC, it's not explicitly required to do that.
In an LLC you more or less define how you operate
your company. You define your formalities whereas corporations have formalities
written for them that you have to follow. Another
flexibility for LLCs is taking distributions. If you have
multiple owners of the LLC, let's say there's two owners and it's 50
50. But let's say one owner does most of the
work and the other owner just contributed the
money. Now the owner that does most of the work,
maybe that person deserves to take more of the profit
distributions than the one that just contributed the money.
So even though it's 50 50 ownership, the working owner can take like an 80%
distribution and the investing owner can just take a
20% distribution. If you were a corporation and it was 50
50, then the distributions have to be 50 50. There's no getting around that.
And the last point of flexibility is the way that
that you can choose to be taxed. So by default,
an LLC is taxed the same way as a sole proprietor is taxed.
Or if there are two or more owners, it's taxed in the same way that a partnership
is taxed. However, you can elect to have your LLC
taxed as a corporation. It could be a C corporation or an S
corporation. And so you get the benefits legally
of having an LLC and you can have the benefits
tax-wise of having an S-corporation tax election.
Now as I mentioned before, just forming an LLC has no tax effect, there's no
changes there. If you were a sole proprietor before and
you formed an LLC, you're going to be paying the same amount of taxes.
In order to save on taxes you have to be electing an S corporation taxation
and you can do that with one form, Form 2553.
However, it's not so simple as it looks. There are many ways you can screw
it up. That's why I usually recommend you contact your CPA to do that for you.
Now, the S election basically tells the IRS
that yes, we are an LLC, we want to be taxed and we want to file taxes as an
S-corporation. And when you do that, you will find that
S-corporations pay a lot less taxes than sole proprietors, LLC's, partnerships.
And that's because profits from an S corporation aren't
subject to self-employment tax. And self-employment tax is 15.3 percent
of your earnings which is quite significant. Now there's a lot of other
things to consider before you choose to elect an S corp
that you really have to consider. It's not just like, oh yeah let's save
taxes, let's form an S corp and that's the only data point that
we're using. No. There's a lot of things to consider.
So before you do that talk to a tax professional. Contact me, reach out to me,
I'd be happy to consult with you on that.
So after knowing all this information, what should you do now? First you've got to
make sure it's right for you and your business
okay. Talk to a professional. Talk to an attorney or CPA. Make sure it's right for
your business. If you already have an LLC and you're
interested in the S election, then reach out to me. I have my
website in the description below. Go there, you can schedule an appointment
with me. We'll give you a free consultation on this
and we'll make sure it's the right fit for you. Thanks for watching this video.
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concerns, anything like that in the comments. I'd be happy to try to
answer them for you alright. Take care for now and I'll see
you next time.