- Hi everyone.
I'm attorney Aden Durham
with 180 Law CO in Colorado,
and you're watching All Up in Yo' Business.
(soft guitar music)
On this episode of All Up in Yo' Business,
I'm gonna talk about six common myths or misconceptions
that people have about starting
and operating an LLC.
But first don't forget to like,
subscribe,
and share,
and check the description for links to additional
information and resources.
All right, let's dive right in.
So, myth number one that people commonly have about LLCs
is that registering an LLC will protect your business name.
There's this common misconception or myth out there
that registering an LLC with your state,
will give some kind of protection
over the business or brand name,
similar to a way that a trademark registration would.
This is pretty much completely false.
Registering an LLC is totally a different thing
than registering a trademark.
And forming an LLC really does almost nothing,
in terms of protecting your business name,
or your brand name,
or preventing somebody else from using it.
Forming an LLC,
that on its own,
really doesn't create any kind of trademark rights
in the business name.
You need to do more in order to have trademark rights
in a name or a logo,
or anything else that is eligible for trademark protection.
Really, all it protects is it might prevent
somebody else from registering that exact same name
for their LLC in the same state.
But it's not gonna prevent anybody else
from registering a trademark for that name,
or registering an LLC name
under the same name in a different state.
Often, it won't even prevent someone from registering
a very slightly different name.
For example, if your LLC name includes a comma in it,
some states will still permit you to register
an LLC name that's exactly the same,
but without the comma.
Or someone can still register a different LLC name
but could use your same business name
as their brand or as their trademark.
An LLC and a trademark are two very different things.
Check out this video if you want more information on,
the differences between an LLC and a trademark,
and which one you usually wanna take care of first,
if you're starting a business.
LLC myth number two is that forming an LLC,
will save you taxes.
Again, this one's pretty much completely false.
An LLC is considered a pass through entity,
or if you're a single member,
LLC it's a disregarded entity,
which means that in the IRS's eyes
as far as taxes are concerned,
it's as if the LLC doesn't exist
and your tax,
you pay income tax on your business's income,
the same way you would if you were operating
as a sole proprietorship.
There's really no tax difference
between a sole proprietorship and an LLC.
And so forming an LLC,
that by itself isn't going to do you any good
in terms of saving taxes.
Now, the one little caveat to that is that,
by forming an LLC,
you potentially have the option
of electing to be taxed as an S corporation,
which an LLC taxed as an S corporation,
can in a lot of circumstances
provide pretty substantial tax savings.
Sticking with the tax theme,
brings me to myth number three,
that forming an LLC in a different state,
will save taxes.
We hear a lot about certain tax haven states.
States that don't charge an income tax
or that might be a lower tax rate than other states.
Nevada,
Wyoming,
Delaware For example,
these are all commonly thought of
as kind of tax friendly states
to operate a business.
But just because you've formed an LLC in one state,
doesn't mean you're going to be subject to those...
that states tax laws anyway.
Again, in the eyes of the IRS,
the LLC basically doesn't exist
and you're gonna be taxed based off of where you are,
or where the business is actually operating.
So let's say I'm located in Colorado,
my business operates in Colorado.
I'm gonna pay income tax in Colorado
regardless of where my LLC is actually formed.
Even if I formed it in one of these states
that has no income tax,
since I'm not actually doing business there,
I don't get to benefit from those tax laws.
And a lot of cases in fact,
forming in a different state
from where you're physically located and doing business,
is actually gonna increase a lot of your costs.
Because you'll typically have to still register
the LLC as a foreign entity,
in that state where it's actually conducting business.
And now you've got double filing fees
'cause you filed your LLC registration in two states.
Speaking of where you should form your LLC,
myth number four is that you have to be
a U.S. resident or citizen,
in order to form an LLC/that you have to form the LLC
in the state that you are located in.
Both of these things are untrue.
There's no requirement that you be
located in the United States
or be a us resident or citizen,
to form an LLC in the United States.
Someone living overseas,
or a citizen of another country,
can form an LLC in any state the same way
a U.S. citizen might.
And you also don't have to be located
in the state where your business is registered.
There's no state that requires,
that if you wanna form an LLC here,
you have to actually be here,
or you have to actually be conducting business here.
You can form an LLC in any state,
regardless of where you're located.
Now again remember,
that's usually not gonna save you anything on taxes,
and you're typically gonna have to still register
as a foreign entity in the state
where you are actually located
or conducting business.
Moving on to myth number five,
is that an LLC means you don't need insurance.
Again, this one's pretty untrue.
An LLC provides a lot of benefit
in terms of protecting your assets.
But it doesn't do the same thing
that insurance will do.
The two really go hand in hand
and having an LLC and good liability insurance
is gonna be the best way to protect your business
and your business's assets
and your personal assets.
So what's the difference?
How do the two play along?
So an LLC puts a separation,
prevents you personally from being liable
for your business's debts and liabilities.
But that doesn't mean that those debts and liabilities
aren't going to come up
or that someone won't be responsible for them.
It's gonna be the business.
Whereas the insurance covers those debts and liabilities.
So let's say you're providing
a service for one of your customers.
Your customer is unhappy about it,
and they sue your business.
Your insurance coverage,
and a lot of instances is going to cover
that lawsuit.
They'll probably pay for legal fees
in defending those claims,
a lot of those legal costs and associated costs
will be covered by the insurance.
And then if you're found to be liable
and have to pay out some damages,
the insurance is there to cover that responsibility
and we'll pay those damages
on behalf of the business.
Of course, up to the insurance limit amounts.
Now let's say, if you didn't have an LLC,
and you just I had insurance,
it's still gonna work the same.
But if you're found liable for something that exceeds
the insurance coverage amounts,
then you would still be responsible
for whatever damages are above
and beyond the insurance.
But in an LLC, since it's the business
that is a party to the lawsuit,
it's the business,
the LLC that's liable for those damages.
Now it's just the LLC and not you personally.
So, the insurance covers,
costs damages associated with liability
and legal issues,
but the LLC makes it so that
you won't personally be responsible
for any of the associated costs as well.
And finally, this brings me
right into myth number six,
which is that an LLC provides absolute
wonderful personal asset protection.
Well, you know, that is the idea
and what we're generally looking for out of an LLC,
is that it'll keep us,
from being personally liable
and it will protect our personal assets.
But that isn't absolute,
it's not a perfect impenetrable thing.
There's this concept called piercing the corporate veil,
which means that in a lot of instances,
an LLC member can be still personally responsible
for the debts and liabilities of the LLC.
So well, most of the time,
that's what we think the LLC is going to do,
and typically the LLC does provide
that asset protection for us personally,
but it's not absolute.
There are ways that you can still be personally responsible
for the debts and liabilities of your LLC.
And check this video.
If you wanna learn more about
piercing the corporate veil,
ways to avoid being personally responsible
for your LLCs liabilities.
That's all for this episode folks.
Drop a comment below,
let me know what you think.
And again, don't forget to check the description
for links to additional information and resources,
including my new business checklist.
That'll walk you through all the steps involved
in getting your business set up.
Thank you all so much for watching.
I'm Adan Durham
and I'll see you next time.
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