If you’re starting a small business, one of your first questions is probably whether you should establish your company as an LLC. It can be a bit of a bureaucratic nightmare and it’s another expense you have to consider, along with all the other costs associated with getting your business up and running (business cards, a website, etc. It all adds up). When you’re just starting out, you’re on a tight budget, which leaves you with the question: Is it worth it to establish your business as an LLC?
Protect Yourself from Liability
LLC stands for “limited liability corporation” and one of the main benefits of establishing your business as an LLC is to protect yourself from any personal liability in the event something goes wrong with the company. For example, if the company gets sued, they won’t be able to use your personal assets – only the company’s assets.
This is especially beneficial if you’re married. If you don’t establish an LLC and you get sued because of something related to the business, not only are your personal financial assets up for grabs, those of your spouse might be as well.
An LLC does not have to pay federal taxes. This does not mean you and your employees and/or business partner(s) don’t get taxed for the income you bring home – it just means the business itself does not get taxed. That income gets distributed to all the members of the LLC, each of whom then has to pay federal and state income taxes on that money.
The reason it’s beneficial to not have the company itself get taxed is because not all of the money the business brings in will go straight into your pocket – there will be business expenses you’ll have to cover and it will give you peace of mind knowing you won’t have to pay taxes on that money before paying for things like rent and utilities for your office, not to mention your employees’ salaries. It also means you won’t have to pay the government twice by paying corporate taxes, followed by your own income taxes.
But just because you don’t have to pay federal taxes doesn’t mean you should forget about state taxes. Depending on where you live, your LLC might have to pay state taxes. For example, in Illinois LLCs do have to set aside 1.5% of their net income to pay the personal property replacement tax.
What Do I Need?
To establish your company as an LLC, you need to file an article of organization, which you can find at your local secretary of state’s office (these days you can probably find it on their website). Once you have completed the form, you need to file it with your secretary of state’s office in order for the LLC to legally come into existence.
Keep in mind that any mistakes on the form could result in a delay in getting your LLC established while you go over the form trying to figure out where you went wrong. This is why it’s so important to have a qualified attorney at least look over the form and help you file it. Ideally, they should be with you every step of the way so you can avoid do overs.
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