One of the first and most important steps in moving from your sole proprietorship into a bigger company is forming an LLC.
Forming an LLC Prepares Your Sole Proprietorship for Growth
So you just started your own business. You had a great idea, picked up, and ran with it. Throughout your newfound success, many questions have come up, but one of the biggest questions to be answered is: What’s next – what should you do now in order to move forward and expand? One of the first and most important steps in moving from your sole proprietorship into a whole company is to form an LLC.
TAX LIABILITY
No matter where you fall on the fiscal spectrum, taxes are a reality. When you become an LLC, you gain the flexibility to decide what way to get taxed. For you and your business partners, this means you can be taxed as individuals, partners, or as a corporation, since the IRS will not tax the LLC as a separate entity. Along with simplicity and less paperwork (can’t we all agree on that?!), you’ll be protected from debts and court judgments aimed at the LLC and your personal assets will be protected in case something goes awry.
S CORP, C CORP, OR PARTNERSHIP?
One of the biggest things to note when deciding which of these tax statuses to choose is that different states have different regulations even though many of the taxes come from the federal government. Talk about confusing!
S Corporations are more simple for tax purposes for you and your partners compared to partnerships and C Corporations, which are not as easy to understand but are slightly more flexible with certain deductions. The bottom line is you should consult your accountant, and maybe even a tax lawyer, before filing. If you do decide to make changes to your company’s LLC formation, you can do so; however, once you make a change you can’t change it again for several years. Plus, making changes to tax statuses for an LLC can put a dent in your wallet!
1 IN 8 MILLION
Because of the flexibility and benefits of forming an LLC, it is a popular option. In 2015, the IRS says there are more than 8 million LLC tax filings combining C corporations, S corporations, and partnerships. Business as a sole proprietor continues to prove tough to grow as taxes become higher on these earners, so forming an LLC of any type seems to be a natural transition for many.
HOW MUCH CAN I EXPECT TO SPEND?
Depending on how much help you will want when being guided through the process of setting up an LLC, make sure you have a little bit of cash set aside to make it happen. The first cost associated with forming an LLC is the filing fee. This varies from state to state and costs anywhere from $100-$800. For example, in Washington state, you can mail in your filing paperwork for $180 or fill it out online for $200. Some states also require you to publish your business for all to see (newspapers, radio, etc.), which costs an average of $50.
Last but not least, you must have a plan and an identity. Filing for a Tax ID and forming an operating agreement costs around $200 total. The best way to save in this process: self-education and homework. You can avoid outrageous lawyer and CPA costs by using resources online like How to Form an LLC, which walk you through the whole process step-by-step and state-by-state.
COST BY INDUSTRY
Depending on your industry, you might have more or less rules and regulations to think about when making your LLC a complete company. Liability is one of the biggest things that factors into this.
For example, a trucking company will have to think about multiple types of personal liability insurance for things like workers’ compensation and general liability given the nature of the industry. On the other hand, a staffing agency or marketing firm with just a few employees has fewer regulations to consider resulting in lower operating costs for the LLC. Companies in industries like manufacturing and restaurants also have to consider obtaining additional business licenses and permits in order to provide all the services they desire. Permits and liability insurance for operating can cost over $10,000 at startup for a restaurant while a staffing agency can expect is operating licenses and business training to cost less than half of that amount.
All in all, the more complex your business is, the higher likelihood you can expect to spend more cash during setup.
IS IT WORTH IT?
When forming an LLC, you won’t necessarily always feel like you’re taking a stroll through the park, but just remember to take a step back and evaluate. If you knew it was right for your business at the beginning, it will be worth it in the end. You might get confused by the process or run into money problems, but your tax protection, brand protection, and opportunity for growth through this process will be worth the endurance.
