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Registering Your Business

Are you ready to form an LLC? I’ve seen quite a bit on social media lately about forming a Limited Liability Company to create a business. I want to remind you that not everyone needs to rush into creating one to have a business.  It can protect your personal assets from being reached to pay a judgment if it gets sued.  There are important decisions to be made about an LLC.  Make an informed choice based on where you and your business are at right now. 

 

business registration

 

An LLC has some great benefits. But, it also has some responsibilities that not enough business owners are aware of. 

 

Here’s the skinny on forming an LLC:

 

 

Form an LLC: It Creates a New Legal Entity

 

When you form an LLC, it creates a new legal “person” who will have its own legal identity. You and any partners become “members” of the organization. The organization is the “citizen” of the state where it is formed.  Typically in the state where the member(s) live. You are creating a new structure. It needs to be treated that way, even if you are the only member of the business. Depending on where you live you may need to renew your entity each year and file to keep your LLC in operation. Additionally, the LLC will have a separate Employer Identification Number (EIN) for taxes, and you must maintain separate bank accounts. 

 

 

 

Form an LLC: All the Business Income Belongs to the LLC

 

One of the biggest issues I see is that people create an LLC to protect their personal assets, which it can, but they use the LLC bank account as their personal piggy bank. In order for the LLC structure to work, and to protect you, the finances MUST be kept completely separate. The LLC pays you as the owner.  Either by a paycheck or through an owner’s draw. You don’t swipe the business debit card to pay personal expenses. Ever.  If you do, the courts can conclude that you didn’t actually treat the LLC as a separate person and that you are really the “same person” as the business, so they can go after your personal assets. It’s a little complicated and beyond the scope of this post, but I cannot stress enough how strictly you must keep the finances clean with an LLC. 

 

 

 

You May Not See Tax Benefits Until You Reach a Certain Income Level

 

Another reason to create an LLC is there can be some tax benefits to the business owner. Depending on the tax structure of the LLC, such as an S-Corp, personal income taxes are being paid on the income the owner actually takes as salary or draws, not on the income that is remaining in banks at the end of the year- which belongs to the LLC.

 

Tax structures and whether the LLC is taxed as a “pass-through” to the member’s personal taxes or as a separate entity is a little outside the realm of this article. But you may be surprised to know that the benefits may not be that great until you pass a certain income threshold. Until your business makes a certain amount in profits, the difference in the amount of taxes may be minimal.

 

 

 

 

Understand the Benefits AND the Costs

 

The many companies preparing and submitting LLC documents to the states are either assuming business owners know all the details, or they are focusing so much on the protection they fail to talk about the expense and the upkeep of creating a new entity. In some states, the renewals can be quite substantial. For one of my clients, her LLC renewal is $800.00 a year.

 

Weigh the costs against any assets that may be at risk, and of course any potential tax savings you could have.  Long story short, not everyone needs to rush into an LLC when they first start a business. Talk to a tax professional about any potential tax benefits, and know your state costs and rules before you create your new business entity.

 

Need free resources for your business? Check out our resourcelinktree

 

If you are new to business, or don’t already have your self-employment tax system set up, this post is for you.  Many entrepreneurs treat taxes as an afterthought, often because cash flow is tight, and they don’t set back personal taxes when they take a paycheck.  In the US Self-employment taxes are Social Security and Medicare taxes, like those that are withheld from when you are employed. When the IRS speaks to self-employment taxes, it is referring to this type of tax. There may be additional taxes that business owners and self-employed people have to file.

 

The rates for self-employment taxes may seem high when you first start paying your own. For the 2019 tax year the self-employment tax rate is 15.3% of net earnings, meaning after your expenses.  The truth is that the employer must pay about ½ of  the tax expenses for their employees. So, generally the same percentage is paid by everyone, but if you are employed you pay half (7.65%) and your employer must pay the other half (7.65%).

 

You must withhold your taxes and deposit them at least quarterly, and this is where many small business owners run into problems. The rules don’t allow for self-employed people to just pay annually, you must deposit quarterly, or you can face late-payment penalties. Here is a simple process for setting up your tax system for a successful 2020.

 

  1. Pay Regularly Online. You can easily set up to deposit your taxes online through www.EFTPS.gov by enrolling in the program and receiving a PIN from the IRS, and can deposit your taxes online whenever you take a paycheck. You don’t have to pay them quarterly, just make sure what you paid in each check totals what you owe by the end of the quarter. If you always deposit 20%, this shouldn’t be a problem. This is what I do, I don’t hold back and deposit quarterly anymore. I deposit online every payday.

 

  1. Write Yourself a Paycheck. The easiest and best way to track your income, and the amount you must pay taxes on, is to write yourself a paycheck. When you just take money out of the till and spend it, it becomes a tracking and accounting nightmare. If you get into the habit of writing yourself a regular paycheck, and immediately withholding your self-employment taxes, you will simplify your accounting and reporting for the end of the year and keep yourself protected from tax issues. You can join the movement of entrepreneurs who have committed to pay themselves a paycheck in 2020 by visiting www.entremoneycoach.com/payday.

 

  1. Stay organized with your expenses. Your self-employment taxes are calculated on your NET income, meaning after expenses. Keep your receipts organized, perhaps in an envelope by month, and put the total on the outside of the envelope for each month. You can very easily keep a running total of your expenses on a sheet by totaling the expense envelopes. This doesn’t need to be complicated!

 

The rules for reporting self-employment income are straightforward. If you are a sole proprietor or a single member LLC, you must report your self-employment income and pay taxes using a schedule C when you file your 1040. If you have a corporation or an LLC with more than one member you must file a different form. Staying organized and regularly handling tax deposits will make your 2020 tax year simpler and less stressful.