Is an LLC right for me?
One of the first business decisions you'll make is choosing a legal entity structure. Limited liability companies, or LLC's are a popular option because of their federal tax flexibility. They also provide legal protection for the owner's personal assets. However, LLC's have specific needs that if unmet, could negate legal protection. Here are three key points that entrepreneurs need to be aware of before committing to the LLC structure.
Be careful not to pierce the corporate veil
Personal funds and business funds cannot be intermingled when an owner elects LLC status. Doing so pierces what known as "The Corporate Veil", a figurative line that separates the business entity from the owner's personal affairs. When the line between business and personal is breeched, the legal protection of an LLC is compromised. Opening a business bank account is an essential fist step to maintaining the veil.
LLC doesn't necessarily equal tax savings
As mentioned earlier, the LLC is a flexible structure. Owners can elect to be taxed as a sole proprietorship, S-Corp, or C-Corp with the IRS. There's a common misconception that LLC's provide tax savings. This isn't always the case. For example, an LLC with one owner and no S-Corp/C-Corp election is taxed exactly the same as a sole proprietorship. Therefore, you pay the same amount of federal tax as you would without LLC status. Every business should analyze whether S-Corp or C-Corp elections would create tax savings or additional tax burden.
Expect more paperwork with an LLC
Limited liability companies require more maintenance than sole proprietorships. The amount of maintenance depends on the business's state. Owners should at the very least, expect to file an annual report with the Secretary of State. Some states require minimum fees. Failure to file the required reports could have negative effects such as penalties and interest, loss of legal protection or even the revocation of the business's right to operate in the state.
I truly hope I haven't scared anyone out of becoming an LLC! It's a great legal entity and personally, I'm a big fan. Choosing a legal entity is a decision that takes research, expert advice and careful analysis of your business needs.