LLCs - Why You Should Form an LLC Right Now
So far, you've read LLCs - Why You Should Think Twice Before Forming an LLC and LLCs - The Basics. If you haven't, stop reading this and go and read those articles first. Or you can just read this article first and then read the others after because I'm not the boss of you. Here are some good points on why you should form an LLC now rather than later.
Small/Side Business Owners
If you are a small business/side business owner (I'm going to have to Trademark the side business term) or thinking about becoming one then you should think about forming an LLC immediately. Why? For starters you get some financial protection from debts. For second starters you can then elect to become taxed as an S-Corporation.
Why Now?
As a non-LLC owner, all the income you earn is being earned by you, the individual. When you do business as an LLC that income is now being earned by the LLC, the business. For example, you have your own small business as a sole proprietor up until May 31st. On June 1st your LLC is created and you now conduct business under the LLC. Income earned during the first half of the year is reported on your Social Security Number. Income earned for the rest of the year is reported under your LLC's Employer Identification Number (EIN). We are assuming the income is reported correctly under the right identification number. Sometimes, whoever is issuing the 1099 will report income for the whole year under the Social or the EIN so be careful income is reported under the right entity.
LLC Reported Income = Good
The more income you have reported under your LLC the more you can save from self-employment taxes (SE Tax). Have no idea what I'm talking about? Read this. For those that have read the article already you should be thinking "I know where this is going - Tax TeleGraf wants as much income to be reported under the LLC because of the S-Corporation benefits!" Well done my brilliant student!
Assignment of Income Doctrine
Forming an LLC right now seems cool. Assigning income earned before the LLC was formed to the LLC so you can save more with the S-Corp election seems even cooler. There is definitely the temptation to do that but you can't. The assignment of income doctrine says can't legally assign income to your LLC that wasn't earned by the LLC. I wish it wasn't so but that is the purpose behind writing this article.
Should I Form an LLC Right Now?
Setting up and maintaining an LLC is relatively cheap. Unless you live in California. If you're already running a small/side business then your tax return will almost look the same. Income and expenses are still reported on Schedule C. Still have a lot of income to earn for the rest of the year? Creating an LLC then electing S-Corp immediately might the way to go. We've helped a client decide in forming an LLC in November so there is an opportunity to save money at almost any point in the year by forming an LLC.
S-Corporation Election
Forming an LLC may make more sense at the end of the year so the following year you can elect to be an S-Corp starting at the beginning of the year. There is some good news if you already have an LLC set up and it's less than 3 years old. The S-Corp election is retroactive. For example, you may form an LLC and assume you aren't going to be making that much money to warrant an S-Corp election so you hold off. At the end of the year you end up making more money than you thought and the S-Corp election sounds pretty good right about now. Well, the S-Corp election is allowed to be effective at the formation date of the LLC (retroactive). So even though the S-Corp route don't seem feasible, it doesn't hurt to get the LLC now and see where you are at the end of the year (preferably November).
Note: Please don't make these decisions alone without getting a professional opinion. Email me at logan@graftaxco.com if you think you may benefit from being an S-Corporation.
Up Next: The Tax TeleGraf's next article will be on how to form an LLC.
