Should You Make Your Business an LLC?
Monday, June 16, 2014
Posted by: Rhette Baughman
If you are launching a new business, you may want to consider forming a separate entity such as a corporation or LLC, to protect your personal financial life.
The legal form of your business brings different tax implications. When forming an LLC, you receive the benefits of creating a separate entity and thus protecting your personal assets.
When it comes to taxes, however, the IRS has no tax return for an LLC per se. You may treat the LLC as a C or S corporation, partnership or sole proprietorship and file accordingly. Your state taxing agency may have a special set of LLC tax forms for your entity to file.
Entity selection is not something to rush into without first consulting a good business attorney and tax professional. While the internet is a great resource, there are many error-filled websites offering bad advice that can be costly down the road and land you in hot water with the IRS.
There are many things to consider when choosing a business entity. First of all, if you have no assets to protect and a good insurance policy, you may be fine operating as a sole proprietor. But this is something that must be discussed with an attorney to protect your personal finances.
Your company’s success and reputation does not hinge on how it’s classified, and employee benefits are deductible by all business entities. However, the only way to ensure the deductibility of benefits paid to an owner/shareholder is to incorporate as a C corporation. An LLC can elect to be treated as a C Corporation for tax purposes and therefore enjoy this benefit.
Another benefit of becoming a LLC is that you free yourself from personal liability for corporate debt. However, in the real world, lenders seek personal guarantees for corporate debt.
When setting up a separate entity, one must consider the cost. There will be a separate charge for income tax preparation, usually a minimum state franchise tax and filing fees upon formation.
Currently Illinois charges $500 to form a LLC, the highest filing fees in the nation. Eliot Richardson, founder of The Small Business Advocacy Council (SBAC), has been working to pass legislation in Illinois to lower LLC Fees from $500 to $39 and for series LLCs from $750 to $59. The filing fee for a corporate structure in Illinois is only $150 by comparison.
Richardson testified at a hearing last Wednesday in Springfield, IL with disappointing results. The bill had already passed through the senate but the house stalled on reducing the filing fee. No further hearings are planned.
Richardson stated in his testimony, “Some business owners may elect corporate status simply because the fee is lower, when really their best choice is the LLC structure."
Originally published at FOX Small Business. Written by Bonnie Lee.