Do you need a separate entity (LLC/corporation) for your business? Why not just be a sole proprietor?
A separate entity can provide:
- Potential Tax Benefits – There are often significant tax savings that can be realized by setting up a separate entity. To begin with, it’s simply easier to separate your deductible business expenses from your non-deductible personal expenses. But a properly-structured business can also result in significant savings on self-employment taxes and other business/income taxes. Everyone’s situation is different, so talk to your CPA!
- Liability Protection – The owners and managers/directors of an LLC or corporation are not personally liable for certain company debts and liabilities, such as (a) company loans and credit cards (unless personally guaranteed); (b) acts of your employees that weren’t your fault; and (c) acts of the other owners, managers, and directors. There are certain exceptions, but this liability protection generally means that your personal assets (your life savings, property, etc.) are not in jeopardy in the event of a debt or other liability of the LLC or corporation.
- Deal Certainty – With a separate entity and a good Operating Agreement (LLC) or Bylaws (Corporation), the owners and managers of your business all know what their deal is! No more wondering who’s in charge, who owns what percentage of the business, etc.
- Legitimacy – People tend to see a separate entity such as an LLC or corporation as a more legitimate business than a sole proprietorship. It shows that you take your business seriously and have taken the right steps to protect yourself and your company.
So when should you form a separate entity?
- If you work alone and are the only owner – You don’t need to form an entity the moment you have a great business idea or decide to start a new business. However, you should get your new entity formed as soon as possible, and at minimum before doing business with others.
- If you have business partners – Immediately. It’s critical that you get your new business in place as soon as possible so that everyone involved understands their ownership percentages and management rights. This can greatly reduce the chance of arguments months or years down the road.
Let’s learn about the players of an LLC
Registered Agent
This is who collects the mail. You can be your own registered agent, or have a service that provides that for you. This is where important documents from your state will be sent for example Compliance Documents, so make sure it is a person/service that will be checking the mail often. PO Boxes are a no go for your Registered Agent’s address.
Manager
Managers manage the day to day operations of the business along with any employees they hire. Managers can be individuals or other businesses such as an LLC or a Corporation.
Member
A Member is an owner of the business and receive the profits the business generates. Members can also be individuals or other businesses. They can elect Managers and vote on major decisions, but otherwise do not play a role in the day to day operations of the LLC.
Can someone be both?
One person or business can be the sole Manager and Member, but there can also be any number of mixing and matching of Managers and Members. An LLC can have one individual Manager and another business Manager along with two individual Members and one business Member.
Example
BetterBuilders LLC builds houses as their main business, John and Charlie are both Managers and Members of that company with 50/50 ownership. Sometimes they build spec homes where they invest 100% in a project where others, they take outside investment from people or businesses. To make things easy and also remove liability from BetterBuilders, they form an LLC for each home they build. BetterBuilders is about to build two new houses, John is going to oversee one while Charlie the other, they create 325 Riverdale LLC and 5962 Falcon LLC with the following structure:
325 Riverdale LLC
Managers:
- BetterBuilders LLC
- Charlie Smith
Members:
- BetterBuilders LLC – 100% ownership – $300,000 investment
5962 Falcon LLC
Managers:
- BetterBuilders LLC
- John Sno
Members:
- BetterBuilders LLC – 25% ownership – $0 investment
- Outside Investment Inc. – 50% ownership – $200,000 investment
- Sally Jane – 25% ownership – $100,000 investment
As you can see above, both LLCs have individuals and companies managing and owning each. 325 Riverdale LLC is wholly owned by BetterBuilders LLC, while being managed by both BetterBuilders LLC and Charlie individually since he is overseeing that project.
5962 Falcon LLC is a bit more complicated. We still have BetterBuilders LLC and John as an individual running this project, but we have three owners this time. BetterBuilders LLC is earning 25% ownership in the business without any physical investment because they’re providing a major discount on their labor. Outside Investment Inc is getting 50% ownership because they’re putting in 2/3ds of the capital whereas Sally Jane invests in real estate as an individual and put $100k into this project.
*BetterLegal’s LLC Multi-Member form supports up to 3 Managers and 5 Members
There are several business entities to choose from. Which one is right for you?
For most people, an LLC is the way to go for a small new business or investment holding entity. However, corporations are also useful in certain situations. Generally, the main points to consider are whether the entity you are picking will help protect you from personal liability and will not result in additional taxes.
LLCs and CORPORATIONS
Limited Liability Company
- Taxes (Pass Through) – By default LLC’s receive the same tax treatment as sole proprietors or partnerships, meaning all profits of the business are “passed through” to the owners, who pay regular income tax on those profits. There is no “double taxation” as mentioned below with corporations. Alternatively, you can elect S-Corp taxation, explained more below. You should talk to your CPA about which tax classification is best for you.
- Personal Liability Protection – Generally yes. The members/managers of an LLC are generally not personally liable for the company’s debts and liabilities.
- Other Considerations: Easy to form and manage.
- Who should use: Almost all new businesses
C-Corporation
- Taxes (Double Taxation) – A corporation’s profits are taxed twice. In other words, when a corporation makes profits, it pays taxes on those profits at the corporate tax rate. Whatever is left over is then paid out to the stockholders, who ALSO pay taxes on whatever they receive at their personal income tax rates. This double taxation is a key reason why many small business don’t choose this business entity type.
- Liability Protection: Generally yes. The shareholders and directors of an LLC are generally not personally liable for the company’s debts and liabilities.
- Other Notes: Harder to form; more rigid management/meeting requirements
- Who should use: Tech start-ups; companies seeking venture capital or heading to public stock offerings (IPOs); high-growth companies who anticipate reinvestment of all profits back into the company’s expansion.
**S-Corporation (a Corporation or LLC with S-Corporation tax classification)
- What is it? – An S-Corporation is simply a tax election that can be made by a qualifying corporation or LLC. An entity classified as an “S-Corporations” for tax purposes is a pass-through tax entity, with the added benefit that you may be able to avoid some self-employment tax or other taxes.
- Limitations: A corporation or an LLC cannot elect S-Corporation tax status if it (a) has more than 100 owners, (b) is owned by any individual who is not a U.S. citizen; (c) is owned by another entity (e.g. another LLC, corporation, or partnership); or (d) has more than one class of ownership.
- Talk to a CPA! – Electing to be taxed as an S-Corporation is a big decision and is not a simple process. You should speak with a CPA before going this route.
PARTNERSHIPS – Generally speaking, a partnership is unlikely to be the type of entity you need for your new business, largely because of the lack of personal liability protection provided. Here’s a quick overview:
General Partnership
- Taxes: Pass-through (no double taxation)
- Personal Liability Protection: NONE; unlimited personal liability
- Who should use: NOBODY
Limited Partnership
- Taxes: Pass-through (no double taxation)
- Liability Protection: LIMITED; only for limited partners.
- Who should use: ALMOST NOBODY, with the possible exception of private equity and venture capital investment funds, and other alternative finance structures.
Is one state better than another?
Choosing the right state for your limited liability company (LLC) is an important decision for you to make, and you should carefully consider your options.
By default, you should generally plan to form your LLC in the state where you live and do business. This is particularly true if your LLC will have an office or storefront in your home state, or if the vast majority of your business income will be generated from sales or services in your home state. If you are buying real estate through your LLC, you should strongly consider setting up your LLC in the state where you will own the real property.
There are some situations in which it may be beneficial to form your LLC in another state, and we will discuss that further below (along with some popular options such as Delaware, Nevada, and Wyoming). However, before you consider filing in a state other than your home state, just remember the following:
- “Taxes are paid where the money is made” – This is an old adage that remains true, but many people believe they can avoid taxes in their home state by filing their LLC in a more tax-friendly state. Maybe you live and work in New York but are considering forming your LLC in Wyoming. Just remember, regardless of where you form your LLC, if your business makes its money in New York you will pay New York taxes. There are of course exceptions, and you should speak to your CPA if your primary reason for picking one state over another is tax savings.
- Local Registration Requirements – If you form your LLC in another state, but do business in your home state, you still have to register your LLC to do business in your home state. For example, if you live in New York but set up your LLC in Wyoming, you have to make initial and annual filings in Wyoming and pay the associated fees. But if your Wyoming LLC is actually doing business in New York, you will also have to register your out-of-state LLC to do business in New York. This means you’ll have to make initial and annual filings with the State of New York and pay fees there as well!
Still, there are situations when you should consider forming your business in another state. Businesses that generate revenue from all over the country and don’t necessarily have home offices or storefronts – such as online businesses, traveling consultants and service providers, etc. – should consider the tax, filing, compliance, and other factors that may make filing in other states more appealing. Some of the more popular options are:
- Delaware – Delaware continues to be the most popular option for entrepreneurs starting a new LLC. It is a business-friendly state with some notable advantages. To begin with, Delaware’s initial and annual filing fees are low compared to many other states. In addition, Delaware does not tax out-of-state income, meaning that if you form your LLC in Delaware but do a significant amount of business elsewhere, Delaware will not tax those earnings at the state level. The Delaware Chancery Court is another big plus for businesses concerned about disputes. The Chancery Court focuses entirely on business matters, meaning Delaware arguably has a more sophisticated and fast-tracked business dispute judicial process, with judges well versed in business law (in other states, judges hear all types of civil disputes and may not be as well versed in applicable business law). You may also want to consider Delaware if you are planning to raise investment capital. Delaware is still seen as a corporate business haven, and many potential investors will want you to have your LLC registered there.
- Nevada and Wyoming – In recent years, Nevada and Wyoming have been gaining popularity as pro-business states. Neither state charges business income or franchise taxes, though both have small annual filing fees. In addition, their LLC formation costs are relatively low and their processing times are very fast (Wyoming processes the filing immediately).
Why You Should be an LLC Under the GOP’s Final Tax Plan
One question looms on the minds of many freelancers and small business owners.
Under the new tax laws, should I become an LLC?
The answer is an unequivocal yes.
It goes without saying that establishing your business as an LLC is a win-win. Doing so affords you liability protection, deal certainty, and legitimacy in the eyes of your clients or customers.
What is lesser known, however, is why doing so has become even more important after the passing of the Republican Tax Plan. Here’s an overview of how you will benefit by transitioning to an LLC, and why this matters to companies of all sizes – not merely large, profit-heavy corporations.
Major Savings for Business Owners
Under the new federal Tax Plan, if you run your business as an LLC, you can get a 20% tax break on all profit that comes into your company. In other words, if your business makes $100,000 next year, you will only be taxed on $80,000. This would mean thousands of dollars in tax savings!
That deduction is available to all LLC business owners if their taxable income is less than $315,000 if married or $157,500 if single. Even then, the 20% deduction phases out gradually till income reaches $415,000 if married or $207,500 if single.
W-2 Employees vs Joe Contractor LLC
While Americans who make most of their money from wages and salaries can anticipate a measly 1.5% after-tax income increase, owners of LLCs can expect a boost approximately three-times as large.
Put another way, Eric the Electrician would wage a much bigger tax cut as Eric the Electrician LLC than as an employee of a property management firm. Likewise, Grace the Graphic Designer would pay less in taxes as a consultant than as a salaried employee – even if she does the exact same work for the exact same pay.
This provides an interesting opportunity for any W-2 employees who have the flexibility to be treated as freelance independent contractors. Consider the following example: Joe Contractor is a writer employed as a W-2 employee by an online newspaper making $100,000 per year. As an employee, he is taxed on the full $100,000 he is paid each year. However, if his employer agrees, Joe Contractor could instead set up a new LLC (Joe Contractor LLC) and be paid by the the newspaper through the new LLC as an independent contractor (or freelance writer), rather than as a W-2 employee. This would mean that Joe Contractor would be able to write off 20% of the income his LLC receives from the newspaper (i.e. Joe would be taxed on $80,000 instead of $100,000)!
This was designed as a way for small businesses to stay competitive with large corporations, who will receive a cushy tax cut of their own.
Deep Dive
The new tax bill is complex and still evolving as more tax and law experts consume the 1000+ page document. If you have a lot of time and caffeine, you can have it broken down piece by piece with this helpful Forbes article. It’s also always advisable to discuss its effects on your particular situation with a Certified Public Accountant; every business is different! RegisterYourCorp does not guarantee that the above summary and tax consequences will apply to you.
If you’d like to take advantage of the new tax benefits for your business as an LLC, there’s no better time than now. Complete the entire process for LLC formation online in less than 15 minutes with RegisterYourCorp.
Can you form your EIN after we provide the rest of our services?
Yes, if you feel more comfortable filing your EIN on your own, we can skip that part of the service. Simply leave the social security number blank in the form and notify us via chat that you will file this on your own. Please note that you must wait for us to get your Certificate of Formation back from the state to make sure they’ve approved your LLC’s name before you file your EIN.
Regardless of whether or not you choose to file your EIN on your own, the cost for our service is still $299.
Which form is right for you?
There are a few answers to this, but most of the time a sole business owner should fill out the Single-Member form. If you have more than one Member or Manager, you need to fill out the Multi-Member form. The only other reason to fill out the Multi-Member form as a sole business owner is that you are choosing not to act as your own Registered Agent.
Comparing RegisterYourCorp to LegalZoom apples to apples
Based off of LegalZoom’s pricing page, let’s do the best comparison we can:
https://www.legalzoom.com/business/business-formation/llc-pricing.html
RegisterYourCorp – $299 + $300 Texas Filing Fee ($599 Total)
We’re using Texas as our example
- Certificate of Formation
- Operating Agreement
- EIN (Tax ID)
- 2 day turnaround
- Documents emailed instantly
- Ongoing Compliance Reminders
LegalZoom Economy Package – $149 + $301 Texas Filing Fee + $9.95 Shipping ($459.95 Total)
- Certificate of Formation
- Operating Agreement
- 30 business day turnaround (6 weeks)
- Documents mailed via “Standard Shipping” in unstated amount of days
Economy Package Comparison – you save $139.05, but you need to wait 6-8 weeks to do business. When you go to open a Business Checking Account or Credit Card, the bank likely requires an EIN which you don’t have and now need to obtain yourself (or pay LegalZoom another $70 to get you).
LegalZoom Standard Package – $289 + $301 Texas Filing Fee + $9.95 Shipping ($599.95 Total)
- Certificate of Formation
- Operating Agreement
- Company seal & binder
- 20 customized membership certificates
- 15 business day turnaround (3 weeks)
- Documents mailed via “Standard Shipping” in unstated amount of days
Standard Package Comparison – well that price escalated quickly! You’re now paying the same price as BetterLegal, but you’re not getting an EIN and you still have to wait 3 weeks (plus a mystery number of shipping days) to do business or open a bank account. You also get a Company seal & binder as well as 20 customized membership certificates. We honestly do not know the purpose of this. The Operating Agreement lists who the Members/Owners are already, but maybe it’s to make each Member feel special inside. The seal and binder you simply don’t need.
LegalZoom Express Gold Package – $359 + $301 Texas Filing Fee ($660 Total plus $39.99 in hidden monthly charges)
- Certificate of Formation
- Operating Agreement
- Company seal & binder
- 20 customized membership certificates
- 7-10 business day turnaround (1.5-2 weeks)
- 2-day shipping
- Discounted EIN for $49
Express Gold Package Comparison – greedy is the only word I can think of here. For $660, you still don’t get an EIN included, you still have to wait 2 weeks (including shipping), AND they have the nerve to sneak in a $40 monthly service that charges your card automatically every month UNTIL YOU CALL THEM ON THE PHONE TO CANCEL (see screenshot below). If you spring for the EIN, you get the privilege of paying LegalZoom over $700 to begin running your business in 2 weeks and an additional $40 a month for some unknown legal and tax advice. To be fair, I don’t know what is really included in the $40 a month and how useful it is, but knowing the going rate for a lawyer is $200-$500 an hour, I’m very skeptical.
This comparison doesn’t include the time saved by our ad free forms. What I didn’t mention above are the hundreds of dollars worth of services that LegalZoom attempts to confuse and upsell you during the form filling process. A great example is the $69 annual compliance calendar (see screenshot below). In Texas that $69 buys you a notification that your Texas Franchise Tax filings are due on May 15th. At BetterLegal, you’ll receive compliance reminders via email for free.
