How to Start an LLC - Avoid Taxes When You Start Your Business

As a company owner, you will want to know how to start an LLC so that your limited liability is defined as a corporation and all the paperwork is in order. For most small business owners, incorporating an LLC means paying taxes on your income and profits. Unfortunately, there is a complex tax code that complex laws make it difficult to understand. Consequently, many small business owners try to go around the rules and the IRS by forming an 'in fact' corporation. In actuality, they are still only using a limited liability company, or a limited liability company is simply called an LLC and they are not corporations. Read this article further to learn more.

How to Start an LLC

How To Start An LLC - Key Points

  1. The first key takeaway on how to start an LLC is that an LLC is not a pass-through entity for personal assets. A pass-through entity is any entity in which the personal assets of an individual are invested. The benefits of such an entity are that the individual's assets remain protected even if the business structure is changed. Unfortunately, an LLC is not pass-through taxation meaning that the personal assets are not protected and can be taxed. This is why a large majority of small business owners cannot seem to get the ball rolling and end up being taxed heavily at the business level.
  2. The second key takeaway on how to start an LLC is that the new Small Business Association (SBA) does not recognize an LLC as a pass-through entity. While the SBA may recognize LLCs if the owners are members of the association, an SBA decision is based upon the personal assets of the owners of the small business structure. Therefore, whether an LLC is incorporated as a sole proprietorship, a partnership, a C corporation, or some other type of business structure, the LLC is not going to be recognized as a pass-through entity by the small business association. If this is the case, then it is critical to set up an LLC, because doing so can allow the small business owner to be treated like a sole proprietorship and pass-through taxation. As stated above, the SBA does not recognize an LLC as a pass-through entity for tax purposes. 
  3. The final key point on how to start an LLC is that it is imperative to set up an operating agreement with your LLC once it has been set up. An operating agreement is a statement that is created when the LLC is created that legally identifies all of the Limited Liability Company's current and future management structure, including who holds all of the LLC's profits. You should always read related articles on how to start an LLC so you can see what an operating agreement is and how it relates to your LLC. Having a clear understanding of what an operating agreement is and what it means to your small business will go a long way in helping you run your business more efficiently.

How To Start An LLC - For Your Small Business

One other important point regarding incorporating your small business as an LLC is that you must remember that you must keep complete records of all of the LLC's activities. Many small business owners make the mistake of believing that they can just open up a new LLC, put up some advertising and forget about it, but that simply isn't the case. The IRS requires that an LLC that is incorporated maintain proper accounting records to track all of the LLC's profits and losses. 

There are even regulations that allow a member or members of an LLC to personally access the records at any time. If you don't have records to properly run your business then you aren't doing yourself any favors by incorporating as an LLC. It may also be smart to consider the option of incorporating your business as a sole proprietorship, a general partnership, or a limited liability company when you are thinking about how to start an LLC. 

Many business owners don't know how to start an LLC, so this can be a great option for them. With a sole proprietorship, business owners are only liable for their assets which means that they can be held personally liable for their actions if they fail to follow the law. This can be a big problem for people who are new to the world of business. On the other hand, when you incorporate as a general partnership or a limited liability company, you can share in the profits of the business along with all of the personal assets belonging to all of the partners.

How To Start An LLC- Individual Tax Rate

Limited liability companies and pass-through entities are both tax-efficient. In a pass-through entity, profits are taxed only once, whereas in a limited liability company the profits are taxed at the individual tax rate. Both of these types of businesses are very beneficial, but when it comes to how to start an LLC, you have to understand that there are some things you will have to pay for. You will need to register your business, pay the necessary fees, set up payroll, and get any licenses or permits needed. If you are considering incorporating as a sole proprietorship, a general partnership, or a limited liability company, it is important that you carefully consider all of these things before you make any final decisions.

Conclusion

If an owner of an LLC decides to incorporate their business structure as a C corporation or some other type of business structure, they must provide the IRS with proof that they will be personally liable for all of the corporate liability tax. Many small business owners cannot afford this and therefore end up having to pass-through taxation on their income. So if you decide to incorporate as a C corporation, for example, the only way to ensure that you won't be liable for corporate tax is to form an LLC, because only an LLC can make that promise to the IRS.

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