Over the past several months we have received a common question that comes from our entrepreneurial clients: do I need to form a LLC (Limited Liability Company)? Here are some thoughts:
Legal Perspective:
LLCs are used by small business owners to keep their businesses and business assets separate from their personal financial assets. When there is the possibility for liability from your business activities it can be important to keep the two separate. The costs for setting up a LLC with the state of North Carolina include a $125 filing fee for the Articles of Organization. We recommend working with an attorney to get these documents filed and including an Operating Agreement if there is going to be more than one owner. We do not give legal advice.
Tax Perspective:
Forming an LLC where you will be the sole member does not change anything from a tax perspective. We do suggest you choose the name carefully since it will be used on all formal tax documents for the business. If another individual is listed on the organization documents (spouses are common examples) a partnership has been created. This requires a separate tax return to be filed. The benefits of forming a LLC is that if you decide to make an S Corporation election for tax benefits it can be as simple as filing a one page form and submitting to the IRS. The scope of the S Corporation benefits goes beyond this blog post, but if interested contact us for more information.
Beware the Incorporation:
First, we suggest consulting your tax advisor before making any decision regarding entity formation. We have heard business owners use the term, “I want to Incorporate myself”. Incorporating your business without any other elections automatically results in you becoming a C Corporation. Unless there is a specific business purpose this is usually not the formation we recommend to our small business clients. C Corporations are subject to higher income tax brackets at lower income levels as well as double taxation. However, if you have incorporated yourself all is not lost. You can make an election to become a S Corporation after incorporating. This typically should be done within 2 months and 15 days of incorporating which is again why we recommend discussing options with your tax advisor.
There are plenty of options available to business owners regarding entity formation. We work with our clients to direct them towards the most tax efficient options that will assist in a successful business.