Episode 21: What is an LLC? And Do I Need One?

Michelle: Have people been telling you that you need an LLC? But what exactly is an LLC anyway? How can you decide if an LLC is right for you? If you don’t know what it is, we’re going to dig into this and more in this episode of Profit Points. We are a modern CPA. Our purpose is to provide valuable information to small business owners on our podcast, Profit Points. We discuss business how tos, give tax tips and dig in to real life experiences in the crazy world of running your own business. If you find this podcast helpful, then like subscribe and follow us on social media. 

Michelle: Hey, everybody. Michelle and Shawn here and we are going to talk today on Profit Points about what an LLC is and is it right for you and your business. And we have gotten so many questions from new business owners about whether or not they are required to have an LLC or if it’s even the right thing for them and their business. They get a lot of messaging on the Internet and on social media, giving advice on what is the best way to structure your business. And although, you know an LLC can be beneficial for certain things, they always question whether or not, you know, that is right for them. And so, you know, we would like to kind of talk about what an LLC is first, because most people don’t even know what that is and how can you know what that is or what’s right for you until you know what it is? So we’re going to dig into that in this episode and hopefully, you know, give you some understanding as to whether or not this might be the avenue for you. So we’re going to get into what is an LLC, Shawn do you want to talk about that is?

Shawn: Yeah. So LLC stands for Limited Liability Company and it’s a legal entity that, you know, it’s similar to a corporation in that, you know, and I’m not a lawyer. So this is not to say don’t take this as legal advice, but it provides you protection and your assets protection in case there’s some sort of, you know, a lawsuit or some sort of issue where, you know, to protect your business and your personal assets. So, you know, the LLC is relatively new in the world of business entities and you know, they’re really just, you know, kind of similar to a corporation. But you can have, you know, anybody can be an owner of an LLC, it can be a corporation, can be an owner, an individual, a partnership, really. Then you can have as many owners as you want in an LLC.

Michelle: So the flexibility is really there as opposed to some other types of legal structures or entity types. The LLC is very fluid. The LLC actually happens to be one of the only types of entities that can be all the other entities. It’s like a chameleon, right? It can be a corporation, it can be a partnership, it can be an S corp, it can be a sole proprietor operating as an LLC. And so that’s what’s really appealing to a lot of people, is that the LLC provides a lot of flexibility when you’re talking about, you know, legal entity structures and things of that nature. 

Shawn: Yeah, and it’s a little less formal than a corporation because, you know, corporations are required to have board of directors meetings and annual stockholder meetings, those kinds of things. And the LLC is, you know, you don’t have to do that and you know, it’s easy if you want to transfer ownership, it’s easier. And then again, in a partnership or a corporation, you know, obviously there’s a difference. You have a lot of different tax rules that you might want to follow and you have to understand. But yeah, it’s very flexible and it’s a lot more easy, easier to manage than some other entities. 

Michelle: So let’s talk about, you know, deciding whether or not an LLC may be right for you. And we’re just going to talk in generalities because there’s a lot of times that certain industries kind of lean towards having a type of LLC or a corporation, and others may not necessarily. So, you know, you want to look at one, is it right for you and what you’re trying to accomplish? And then two, what does your typical industry kind of lend itself to? Right. And I think that’s pretty helpful when you’re trying to make that distinction. We always like to tell people to think about these things upfront prior to the actual start of your business. While you can create an LLC at any time, once you’re in operations and you’re in business, it is much. Harder to shift gears or create that other entity or, you know, get a new EIN because an LLC is a separate legal entity. A new EIN is required. So, you know, depending on how you were operating before. So we always try and tell people upfront, think about what it is… how you want to be set up so that you’re not trying to make those changes down the line after you’ve already established many things like bank accounts and maybe a therapist that is taking insurances and has used their, you know, a prior EIN, or you know, their own Social Security number and really wants it to be under the companies EIN or something to that effect. It requires a lot more work to do after the fact. 

Shawn: Yeah. When you’re starting out your business, you definitely want to talk with an attorney. You talk with your CPA and get everybody on board on the same page to, you know, get you set up correctly and properly upfront. 

Michelle: Yeah. For the long term, you know, you’re not exactly sure what is okay at this moment. LLC’s are pretty inexpensive to set up. You know, we always say talk to your attorney and your attorney can do it for you. I know other people have used organizations like LegalZoom to do those kinds of things. I’m not saying that’s the way to go, especially because they always try and upsell you, which I don’t prefer. You know, it’s just that they may not have your best interests at heart. And so, you know, talking to somebody that you can have that connection with, they can advise you in the right way is much more important than the quickness or the inexpensive route. So. Yeah. 

Shawn: Yeah. You definitely want to talk to a business attorney to help you understand exactly where this LLC can help you from a liability protection standpoint, where there may be gaps that you may have to cover with insurance or other types of protections. So, you know, you want to have a well-rounded legal opinion and legal advice on this and not just kind of cookie cutter with an online service that isn’t going to, you know, provide any kind of explanation or understanding of what you’re doing. 

Michelle: Yeah. So one of the first things that I know when people come to us and ask, you know, I’m starting this business, I don’t know if an LLC is right for me. We talk about their industry and we and we always refer them to an attorney, but we also talk about, you know, is your industry a litigious one? You know, are you exposed to being under lawsuits of any kind that would affect the decision to maybe create this LLC and the types of protection and insurances as well? And so we pretty much start at that point. Creating an LLC does not necessarily make or break your business. It does not give you additional tax deductions. People say, Well, I want to save some money and I want to create an LLC. Well you have all the same, for the most part, tax deductions that other other organizations have, you know, and you still have the flexibility. But, you know, you may find that being a sole proprietor is more appropriate for you at this point. 

Shawn: Yeah. I mean, as if you’re operating the business as a sole proprietor, um, there’s, you have the same tax deductions as if you are operating that same business as an LLC that’s taxed at a sole proprietor. It’s, there’s, there’s no difference. Same thing if you’re an S Corp or an LLC tax is an S corp. They’re the same tax deductions, There’s a lot of misconceptions out there.

Michelle: Now there’s some tax strategy that can take place when you’re talking about being a sole proprietor LLC, which is considered a disregarded entity, it’s called a disregarded or single member LLC versus an S corporation. There are other rules and there are other tax strategies that are associated with having an S Corp, but the actual tax deductions are still the same. You can still have a business use of your auto. You can still have advertising expenses. You can still have employees in either type of entity, whether it’s a sole proprietor, a sole proprietor as an LLC or an LLC, as an S Corp or a regular S corporation. All of those deductions are all the same. 

Shawn: Right. Exactly. It’s just the strategies within, you know, that what you want to do as that business. And if you need to organize as a different type of taxable entity versus as a sole proprietor. So yeah, the tax deductions are still there. You just have to see what type works best for you and your business and how you want to. Yeah. 

Michelle: So when people are trying to get these entities set up, you have to understand that you have to get organized under your Department of State. This is a legal entity that is separate from yourself. And so the Department of State will require your registration and then you’ll probably have some sort of registration for the Department of Revenue and for federal purposes. If you are a single member for tax purposes, they say, okay, well we’re going to make it easy on you and you can file all of that activity as if you are a sole proprietor and put it on your personal income tax return, which is really helpful for costs like fees and costs associated with things not having to file separate returns. The complexity of it is so much easier. So, you know, there are multiple steps to creating an LLC if you feel that that is the right way for you to go. But for tax purposes, if it is a single member LLC, they do make it easy and you are treated as if you are a sole proprietor. So I’ve had people who were sole proprietors and then created an LLC and they say, Well, we’re so different now. And it really isn’t. It actually looks identical as just the EIN number of the LLC is listed and the name of the LLC is listed at this point. So once you’ve created that. 

Shawn: Right and then and that they’re filing with the Department of State, you know, you definitely have to have to do that. And that’s usually done with your attorney, when they draw the organizational documents for your LLC, which would include the filing with the Department of State, which would include an LLC membership agreement. You’re considered as the owner, you’re considered a member of the LLC. And then there’s the filing for the EIN. And then like as you said, the Department of Revenue or Taxation with the state or states that you organize it and if you do operate in more than one state, then you would file the organization documents with the original Department of State that you operate in. 

Michelle: Kind of like your home base. 

Shawn: Your home base. And then you would have to file as a foreign LLC in any other state you are. Yeah. 

Michelle: So it gets more complicated if you’re in multi states and different states have different rules for LLC as well. So many of them have adopted, you know, the same treatment as federal, but some of them have like an extra filing form that might be required or a filing fee every year. So you really have to look at each state specifically. Now, you’ll probably understand and know your home state, but if you do end up having, let’s say, an office in another state and you’re doing work there and you have, you know, presence in that state, then you definitely want to be sure that you’re following the rules of that specific state and know what forms are required. So things become a lot more complicated if you’re adding multistate to your LLC. 

Shawn: Exactly. 

Michelle: Yeah. So, you know, setting up and getting going all the same as if you were, you know, a sole proprietor or an S corp. Everyone has the same deductions. An LLC. Another item that’s really beautiful about an LLC is that if you decide to bring on another person, it’s very easy to do that. You can do that in different ownership percentages. You can have different rules drafted for different things, and it’s very flexible. So, you know, I do have people who have been operating as a sole proprietor for a long time and then decide that they want to bring on a partner into their, let’s say, practice or their business of some sort and would like them to participate as a true owner. And that is very easy to do with an LLC. 

Shawn: Yes, it is. It is easy to do as far as the mechanics of it. But there’s a lot of things you need to consider when you’re bringing in additional owners and different tax ramifications for that. So yeah, it can get complicated. So you just don’t just add somebody just to do so.

Michelle: It’s like getting into a marriage and, you know, you always want to be sure that you’re going to do that. And it’s always probably a little more complicated than you thought it was going to be. And, you know, treat your business like you would a marriage because it’s as important as one. 

Shawn: Yeah, exactly. 

Michelle: So we thank you for joining us today. And we talked about what an LLC was. Maybe if that LLC is right for your business and some of the misconceptions that organizations or people have about deductibility of expenses, whether you have an LLC or not. So we thank you for joining us today and we look forward to seeing you on the next episode. 

Shawn: Take care. 

Michelle: If you find this podcast helpful and liked, subscribe and follow us on social media.