When it comes to setting up LLCs, many people are unaware of what the process actually entails. While starting an LLC can have legitimate benefits, it’s critical to understand the technical information you need to create an LLC. Here are just a few do’s and don’ts that can help you successfully form your LLC.
- DO: Create a finalized business plan
Anybody can file the paperwork to start an LLC, but running one successfully requires a truly business-savvy personality type. Make sure you have a business plan to stick to once your LLC has been created. Don’t just expect things to fall into place naturally. A successful LLC doesn’t just happen; it’s a result of hard work, dedication, and persistence.
- DON’T: Assume the business structure you chose works the same in other states
It’s imperative to understand that the rules and regulations for LLCs and corporations can differ greatly from state to state. According to the National Association of Small Business’s 2015 Economic Report, the majority of small businesses surveyed are S-corporations (42%), followed by LLCs (23%), but different states offer various tax incentives for each. You should also know that the state you file your LLC in doesn’t necessarily need to be the same state you currently reside in.
- DO: Choose the right type of corporation
Don’t just assume that an LLC is best because it stands for ‘limited liability.’ There are advantages and disadvantages to each type of corporation. For example, while S corporations have just one level of taxation, they can also have no more than 100 share holders, and each one must be a resident of the United States. These are important details to discern before deciding which type of business is best for you.
- DON’T: Panic
Sure, there’s a ton of important information to understand before you file for an LLC or corporation, but it’s not impossible to learn it — it just takes time. Many people choose to sit down with a professional and discuss their options, which is a viable option for those who aren’t equipped with the knowledge to handle it themselves. Whichever path you take, know that there are plenty of resources available to help you achieve success.
Ultimately, it’s important to understand these do’s and don’ts before starting an LLC. For more information, contact My USA Corporation.
It’s no secret that starting an LLC is the first major step in becoming a small business owner. Once you’re finally there, however, it’s important to understand the technicalities of the law surrounding your business type. Here are some do’s and don’ts for small business owners.
DO: Pay yourself fairly
Once you form your LLC or corporation, it’s important to pay yourself a fair wage: personal service compensation is considered a business expense that’s deductible if it’s a reasonable amount. According to Avvo.com, there are five factors that employers should consider when determining a reasonable wage that avoids auditing by the IRS. The employee’s company role, the company’s condition and character, a wage comparison of employees in similar fields of other companies, conflict of interest, and finally, the “internal consistency of salaries paid to all employees of the company.”
DON’T: Neglect Employee Classification
There are two options that the IRS has for corporations to be taxed: either as a C corporation or an S corporation, and one major step after you learn how to form an LLC is to remember to classify your employees correctly. If your employees aren’t classified correctly, you may end up with an employment tax liability you weren’t expecting. While an employee is hired by and remains employed by their employer the whole time, an independent contractor works as a service provider to your company, but isn’t technically employed by it. It’s important to understand these critical differences, especially when tax season rolls around.
DO: Emphasize record-keeping
Keeping records is a critical part of operating any legitimate business, whether you want to form corporations or are more interested in setting up LLCs. Well-maintained and organized records make your life much easier when tax season comes. Plus, keeping business records accurate and up-to-date just makes sense. If you’re ever in need of a tax professional, having accurate records makes the process exponentially easier.
DON’T: Let Losses Be Disallowed as Hobby Losses
When you form your LLC, you should know that the IRS considers a ‘hobby’ to be an activity that doesn’t generate profit. A few examples of activities that may be classified as hobbies under the IRS are farming, multi-level-marketing efforts, horse breeding, and airplane or yacht charters.
Ultimately, these are just a few do’s and don’ts for small business owners to be aware of. For more information about how to form your LLC, contact My USA Corporation.
Starting an LLC with a partner is much different than starting one on your own. Joint ownership is all about communicating and considering all details to avoid major conflicts down the line. The most important business conversations will happen before you officially launch your business, so be sure to take the time to talk through even the most difficult details. To do this, consider these simple tips for launching your LLC with a business partner.
- Communicate your values and expectations. Before you jump into starting a business together, it is important to determine that you and your partner are on the same page. This is especially important if you are friends of family, since emotions can get in the way of a logical partnerships. If any major disagreements come up, it may be best to reconsider your decision.
- Make your agreement as detailed as possible. Put every verbal agreement that you make into writing and discuss every “what if?” that comes up. This written agreement will become an important conflict resolution tool for you and your business partner. When you take the leap to start an LLC, the more details you include the better.
- Discuss how you will manage employees. There were 27.9 million small businesses in the United States in 2010. These make up a large portion of the economic sector, thus the job sector as well. Even if you aren’t thinking about hiring employees at the moment, it is a good idea to talk about the potential. Decide if you will co-manage these workers or if one of you will take a more behind-the-scenes role.
- Talk through a growth plan. Once you start your LLC, growth will likely be the ultimate goal. Be sure to discuss what expansion and more revenue could mean for your partnership and what you will do if you choose to branch out geographically. Discussing these details now will keep you from being surprised when your business does well.
- Understand tax details. Taxation is part of the equation when anyone chooses to create an LLC, so work with a professional to learn how to manage taxes with a partner. This is especially important if your business partner also happens to be your spouse. Your finances may need to be adjusted when you start your LLC together.
When you choose to form your LLC and work through all of these details, it is important to get a legal professional involved. They can help you write up ownership contracts and mediate any disagreements. By taking the time to start your LLC in an organized and diplomatic way, you are setting yourself up for a successful partnership down the line.