LLCs - Why You Should Think Twice Before Forming an LLC
There has been an uptick in interest in forming an LLC with the recent wave of “network marketing” businesses and entrepreneurial side business owners. You read that right – side business owners. Many small business owners form an LLC without knowing why exactly they are forming one other than that’s what they heard everyone else is doing so they should do it to.
One thing for sure is if you ask a lawyer if you should form an LLC they will probably say yes. Why? Cause they want that sweet, sweet, LLC set up fee along with an operating agreement draft billed at their outrageous lawyer rates. What about a CPA? How would a CPA answer the LLC question? You guessed it…. It depends. Let’s walkthrough why you should think twice before forming an LLC from a CPAs perspective.
You Don’t Need Liability Protection
This reason might be the most straightforward reason to not form an LLC. Simply put, if the business that you have started won’t incur any financial debts then you won’t have to worry about creditors coming after your personal assets. Similarly, if your business assets don’t amount to much and your personal debts aren’t likely to be defaulted on, then you don’t need protection for your business assets. Is there a risk the small business would be sued? Depending on the basis of being sued, your personal assets may be endangered with our without an LLC. Check out LLCs - The Basics article if you haven't already to get an idea. Note: I am not a lawyer so I can't speak with any more detail.
Going Concern
This is accountant speak to mean that your business is going to continue to be operational into the foreseeable future. If you don’t plan on running your businesses for more than a few years, then there is no real reason to form an LLC if you also don’t need liability protection. I say this assuming you don't want to form an investment partnership to hold assets for a couple years and then sell. If that's the case then you will want to talk with a lawyer about a solid partnership agreement. I digress…
State Taxes
First off, to form an LLC you’ll need pay a filing fee with your secretary of state. To form an LLC in Texas that fee is $300. Second, you’ll most likely have an annual filing requirement now that the state knows you are doing business in the state. Depending on your state you may have an annual fee, or a tax based on income. Texas is friendly to small businesses with gross receipts less than $1.1 million. Businesses registered with Texas Secretary of State and have less than $1.1 million don't have to pay an annual fee or tax (yay!). California is not as LLC friendly and makes LLCs pay a minimum fee of $800 each year. I’m not even going to touch on if you owe taxes to other states in this article but that is something that needs to be considered.
Decisions
The cost to form an LLC can be relatively cheap. $300 (for Texas) to file with the state and depending on where you source your operating agreement, you may not have any other costs to be a legit LLC. You may just say the heck with a few hundred dollars, I want that LLC street cred! But know that you do not have to form an LLC to operate your small business. For more information on LLCs, please check out LLCs – The Basics. There will be more LLC related articles for the Tax TeleGraf’s article series on LLCs so please Like Tax TeleGraf on Facebook to stay up to date.
