Is an LLC Worth the Hassle and Cost?


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The easiest business structure for your business is simply to not have any business structure. In other words, you just start your business. You may need to get a city business license. That will depend on the laws in your city. If you hire employees, you’ll need to get an EIN (employer identification number) from the IRS and you’ll need to get some kind of state identification number so you can file the state payroll tax returns. 
Other than that, you just need to track your income and expenses for the business so you can file your annual federal and state tax returns.
Seems simple, right?  

Well, it is, but there is a cost to that. You’ll probably pay more in taxes. And you’ll definitely have a lot more risk. This type of structure (no structure really) is called a Sole Proprietorship.  

Your net income from a Sole Proprietorship is subject to a self-employment tax of 15.3%. Since the Trump Tax Plan effective 1/1/2018 (Tax Cuts and Jobs Act) came about though, there is a benefit to a Sole Proprietorship. You can take a 20% tax deduction of based on the net income from the Sole Proprietorship. Is the deduction worth more than the self-employment tax? It depends. However, it’s something you can calculate once you know the business income, total net income for the Form 1040 and whether the business is service or non-service. See your CPA to figure out the calculation on that part. 
The other issue is even bigger. It has to do with asset protection and liability. As a Sole Proprietorship, if something goes wrong in the business, everything you own is at risk. If something goes wrong personally, your business is at risk.  

An LLC (limited liability company) is the only entity that protects you from judgements in the company (provided it’s been set up and run correctly) and protects the business from judgements against you. If you have a corporation, you personally may be protected from a judgement in the company but the company is not protected from a judgement through you. Someone else can sue you and take away the stock in the company. 
The LLC is the only entity that protects both you and the company. You can elect how you want the LLC to be taxed, so you have flexibility with your strategy.
There are a few rare cases where we may not recommend the LLC as the business entity of choice, but most of the time, the LLC is the right one.  

The questions after that, though, are which tax structure do you want to be elected as, what type of LLC should you form and in what state should it be formed. Those are the things to discuss with your tax or legal advisors.  



2 Comments

  1. Diane Kennedy says:

    Hi Kathryn:

    The simplest way to do this (when you’re ready) is to elect S Corp status with the LLC.

    The one concerning thing is that he is in an LLC “with the estate”. Presumably that is a multi-member LLC that is being taxed as a partnership.

    The estate will eventually settle which means that there is a second partner who will need to be consulted on all of this. If the remaining partner inherits, then there will be a basis adjustment necessary for him. I would do that adjustment before you change structure.

    Either way, at this point, the answer is wait until the estate settles.

  2. kathryn espinoza says:

    Hello I’m in the state of Washington I have a client that owns a cannabis store it’s retail and medical store he is an LLC the partner passed away in August and now he is an LLC with the estate I’d like to move him into an S CorpI’m not sure if that’s possible and I don’t exactly know how to go about that I would appreciate if you have any input. thank you very much and I enjoy reading everything you put out. You are one smart cookie.

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