Should I Form An LLC?
Should I form an LLC? We get this question all the time and it is an important one.
Let’s talk about these four things:
What is an LLC?
Pros and cons of using an LLC
How to set it up?
Is an LLC right for me?
What is an LLC?
LLC stands for limited liability company and it is a business structure that you can register with a state that provides protection to LLC owners by limiting their personal liability. It is an extremely common structure used for business owners and rental property investors.
Pros and Cons
Pros
Asset protection — Generally, debts, liens, and lawsuits against the business are limited to the assets of the business itself. If someone sues your business they can only go after what is inside the business, not your house or cars.
Added Legitimacy — You can reserve a business name with the state and your business name will have “LLC” at the end of it, which can make you seem more legit to potential customers because you’re registered with the state as a legal entity and you’re not asking clients to write a check to your personal bank account.
Simplicity — No separate tax filing, meaning you continue to file on the schedule C of your personal return.
Cons
Fees — You must pay a registration fee with the state as well as annual renewal fees.
Corporate maintenance rules — You must follow corporate maintenance rules or your liability protection disappears. These rules include things like:
Maintain separate records
Use company name to do business
Set up a separate business bank account
Doesn’t help tax liability — Having an LLC does not help your tax liability at all. We’ll dive deeper into this in another article but whether you are doing business under your own name or using an LLC it is taxed exactly the same.
How to set it up?
You set it up in the state in which you live (or wherever your business is operating). Don’t listen to fearmongers or fake news people that will tell you that you need to set up your LLC in Delaware, or Wyoming, or Nevada – that only provides better asset protection if YOU are doing business in that state. If you live in Utah and operate a business in Utah there is no reason to set up a Nevada LLC.
Choose a name (most exciting part)
File articles of organization with the state
Pay registration fees and/ name reservation fees
Create operating agreement
Set up a business bank account and run all activity out of that account.
Is an LLC right for me?
Generally speaking, an LLC is almost always a good idea if either:
You own rental property; or,
You are running an active business (as opposed to a hobby, a temporary small side-gig, or for
passive income like dividends or interest).
Hopefully that is helpful. Give us a call or contact us if you’d like to talk about your unique situation and get our recommendations for you.