top of page

When Should I Start an LLC?

Updated: Aug 25, 2020

Starting a business requires a lot of decision making. One of the many important decisions you will make as you start a business is which entity to use.


The Limited Liability Company, or LLC, is a very commonly used business entity because it is easy to form and provides useful versatility.


In many circumstances starting an LLC is the right choice. But at times forming your business as an LLC, as opposed to a sole proprietorship or partnership, may add unneeded complexity.


There are a couple of different factors that could impact your decision to start an LLC including; 1) LLCs provide additional liability protection for business owners, 2) LLCs require a separation between business and personal assets, and 3) LLCs provide different taxation options.


One thing to consider as you make your decision is the ease of starting an LLC in Missouri.


The process is simple, requires only a small fee, and unlike many other states, Missouri does not require an annual report or fee from LLCs in the state.


Follow this link for the State of Missouri's online portal to form an LLC now.

 


Liability Protection for Business Owners


The big advantage of forming an LLC is announced in its name, Limited Liability.


All business carries some amount of risk but a Limited Liability Company will protect your personal assets from the risk of operating a business.


Debts owed by an LLC cannot be recovered from the personal assets of its members, or owners.


The same is not true of a sole proprietorship or partnership.





This means that in an LLC, only assets owned in the name of the LLC are subject to the claims of business creditors. Your home, family car, etc. cannot be used to recover business debts.


That is the main reason to form an LLC. And an LLC is especially worth considering if your business is inherently risky. An LLC can help you ensure your personal assets are safe from any business risk.


But there is a small trade off.


Separation of Business and Personal Assets


Along with the ability to protect your personal assets comes additional responsibility.


LLC members owe fiduciary duties to the business.


Additionally, in order to receive the limited liability protections a person must not commingle business assets with their personal assets. That means separate bank accounts for the business. The business must become a separate entity and be treated as such.


That can mean an added workload, but typically, the extra work is worth the reward.


Tax Options


Finally, an important part of an LLCs versatility is the ability to choose how you want your business to be taxed. There are two choices, "pass through" taxation or traditional corporation taxation.


Pass through taxation means the taxes of the business are passed through to the owner(s) or members. So individuals pay the taxes of the business on their own tax return. This is the default form of taxation for an LLC.





If you would prefer your LLC to be taxed as a corporation instead you may elect to do so.


Pass through taxation looks a little bit different depending on the amount of members in an LLC.


A single-member LLC is taxed the same way as a Sole Proprietorship, meaning that income and expenses are reported on an individual's income tax return.


Meanwhile, an LLC with multiple members is taxed as a Partnership.


To determine the tax rate the net income is divided between the members according to their ownership of the business. If you own 75% of a business and the business had a net income of $100,000, you would pay taxes on $75,000. If another member owned 10% the member would pay taxes on $10,000 of the businesses net income.


Most people will chose "pass through" taxation to avoid "double taxation."


Double taxation occurs when an LLC elects to be taxed as a corporation. In this system the LLC is taxed as a corporation and then corporate owners are also taxed on any dividend income they receive.


However, for those with high incomes there may be some tax benefits to structuring an LLC as a corporation.


 

The choice between an LLC or a different business structure can be a difficult one. If you need a lawyer to help you make that decision based on your unique circumstances please contact Hometown Law.





33 views0 comments

Recent Posts

See All

Comments


bottom of page