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Do I need an LLC?

Doug Jackson

Many people set out to start their own business every day with the hopes that they will leave their current job or replace their current job with a more fulfilling and engaging lifestyle.


One of the best ways to become wealthy in America is to start a business. Not to mention that starting your own business can come with other benefits, such as building your schedule, unlimited income potential, and the satisfaction of creating something great while helping people.


However, there needs to be more clarity about how to start a business. Most people are told to go out and form some entity, like an LLC or corporation, to make their business legitimate.


In this article, we will discuss what an LLC is and why you would want to create an LLC When starting your business. We will also talk about some of the pitfalls we see when people try to create their own LLC without the help of a professional.


At the end of this blog post, you better understand what an LLC is, which will help you determine if you need one.


Do I need an LLC to operate a business?


No.


Anyone can go out right now and start their own business by simply selling a product or a service to someone else and collecting their money. They don't even need to have a business name. They do not need to register an LLC or another entity with their state or local government.


This type of simple business arrangement is a sole proprietorship. It is a great business structure for someone starting a small business or side hustle. Suppose you plan to have at most $20,000 in sales in any given year and have no real liability exposure. In that case, a sole proprietorship may be perfect for you.


All you need to do is track your income and expenses, file your profit and loss on schedule, and see your tax return at the end of the year. That's it. You're a business owner, and you're making money; there's no need to jump through hoops with anything more complicated than that.


Picture of a child working in a small business lemonade stand.

When should I consider starting an LLC?


Suppose you are operating a business that exposes you personally to a lawsuit or other settlement. In that case, it is an excellent time to think about creating an LLC for your business.


LLC stands for limited liability company. The only thing that does is create a corporate veil surrounding your business operations that separates you, the person, from your business operation.


If somebody sues your business, they can only come after the assets that your LLC owns. They cannot access your assets unless fraud or personal negligence is involved.


If you are unsure if you have liability exposure, consult with your attorney before deciding to start an LLC For liability protection.


Does an LLC offer any tax advantages?


No.


There are tons of videos on social media of "experts" discussing the tax benefits of creating an LLC. Simply making an LLC offers no tax benefits whatsoever. A single owner or single member LLC would file taxes like a sole proprietorship would on Schedule C of your personal 1040. Taxes are filed the same way, and there are no additional tax benefits to starting an LLC.


The LLC entity structure only provides liability protection, which comes with a cost and more steps to maintain correctly.


What is required to maintain an LLC?


A limited liability company is an entity that is registered with the state in which you live and operate your business.


Registering an LLC involves applying to your Secretary of State and paying a filing fee. The application process and the amount of the filing fee varies by state.


Additionally, the state has its own rules regarding other taxes that may or may not need to be paid yearly to keep your LLC active and in good standing. For example, most LLCs in Tennessee must open business and franchise tax accounts. They are also required to file business and franchise tax returns each year through the Tennessee Department of Revenue and pay an amount of tax due based on company profits. For a small single-member LLC in Tennessee, it's common for annual state-level filing fees to run anywhere between $450 and $1000. The yearly state filing fees for larger multi-member LLCs can be several thousand dollars. The owner of an LLC will pay their accounting firm double or triple the cost to file all LLC returns, compared to filing just one personal 1040.


It is essential to understand your state's requirements, file the returns, and make the corresponding tax payments on time to maintain your liability protection and corporate veil.


Opening up an LLC to have an LLC is potentially a waste of time and money. Suppose you are operating a business that doesn't require significant liability protection. In that case, you're better off operating as a sole proprietorship, which doesn't require additional filings, increased accounting, or fees, and opening yourself up to the possibility of making some of the following serious mistakes.


What are some of the mistakes people make when they try to start an LLC by themselves?


Suppose you think you need to start an LLC, or you've already discussed your need for an LLC with an attorney. In that case, it's essential that you get help from a CPA, Attorney, or other tax professional to help you start the LLC. Here are some of the most significant issues we have seen people make when they try to do it by themselves.


  • You are erroneously opening up payroll tax accounts. Many business owners mistakenly open payroll tax deposits and unemployment tax accounts with the IRS when they start their LLCs. If you are not paying an employee, there is no need to open up these accounts. Suppose the accounts are opened, and you do not file payroll tax returns and make the associated tax deposits. In that case, you will be penalized by the IRS.

  • Forgetting to file a partnership return in a multi-member LLC, a new business owner will often add their spouse while setting up their LLC. This action triggers a requirement to file a 1065 partnership return with the IRS. The IRS will penalize you if the 1065 return is received after March 15th of the following year.

  • Need to set up the appropriate state-level tax or revenue accounts. In our experience working with clients that have just tried to set up an LLC on their own, they are unaware of the requirement or forget to set up these accounts nine times out of 10; penalties and interest can stack up if not addressed quickly not to mention additional legal and accounting fees if help is then required.

  • We are not creating an operating agreement or partnership agreement between the members of the LLC. This can lead to significant internal issues between the partners if a disagreement arises while conducting business.


Here at Tennessee Tax Solutions, we meet new and prospective clients who have always attempted to create an LLC for one reason or another. Almost 100% of the time, we determined that either the LLC is unnecessary or, if necessary, something is wrong with the structure of the LLC that would eventually create massive financial issues for the new business owner; we cannot stress enough how important it is to sit down with a CPA or tax consultant to determine if LLC is right for you.


Please schedule a free discovery call today with our firm to determine your needs.

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