It’s not uncommon for a successful small business to consider a change in its organization and management from time to time. When it comes to organizing a business, there are many options provided under the law. One option is to move a small business to an LLC.
A Limited Liability Company was created with the intention of limiting the personal liability of the owners. It is very similar to a corporation, but it also allows the business to be taxed like a partnership. Depending on how much your small business taxes are, you may find that it’s a good move to change your small business to an LLC because of the tax benefits.
This new taxing process comes with some learning curves. However, reaching out to a professional business tax consultant firm like Waters Hardy may be a great option for you. As small business tax specialists, we are here to offer our expert advice. We have years of experience and can guide you on what the smartest business tax moves are for your new LLC.
What is an LLC?
A limited liability company, or LLC, is a U.S. business structure that combines the tax advantages of a partnership with the personal liability protection of a corporation. Owners of an LLC are called “members,” and these members are protected from being personally responsible for the company’s debts or liabilities.
Your personal assets- vehicles, house, savings accounts, etc. are safe if your LLC declares bankruptcy or is sued.
A single-member LLC is considered a pass-through entity because the profits or losses from the LLC are “passed through” to the owner and taxed as personal income. As a benefit, you don’t have to pay both personal and corporate taxes.
A multi-member LLC is also a pass-through entity and taxed as a partnership. This means that each owner paying personal income taxes on their portion of the profits.
What to Consider Before Transitioning to an LLC
Small-scale sole proprietors sometimes find themselves outgrowing their roles as self-employed taxpayers. Switching your business to an LLC is a bit like graduating, an official way to move up.
Here are questions to ask yourself as you consider an upward move in your business organization.
- Is the business growing?
- Are you earning, or plan to earn more profits?
- How much are small business taxes, and could you save by moving to an LLC?
- Are you considering hiring employees to help run your business?
- Are you considering more owners to share your business?
If you answered ‘yes’ to any of the above questions, it may mean that it’s a good time to consider moving to an LLC.
Benefits of Starting an LLC
Some business owners avoid changing to an LLC because it sounds too official. So, they assume that changing must be a complicated process that they just don’t want to take the time to navigate. The truth is, it’s not too complicated at all. In the end, the benefits of an LLC far outweigh any anxiety you might feel about making the switch.
Personal asset protection
- You are not personally liable for the LLC’s debts or lawsuits.
Pass-through taxation
- Business profits are only taxed once, which are reported by the business owner on their personal tax returns.
Simplicity
- LLC’s are easy to create and maintain, with minimal paperwork and requirements.
Flexibility
- The structure, ownership, management, and taxation of your company are minimally restricted.
Credibility
- Forming an LLC is a way of formalizing your business and showing your professionalism and commitment.
Access to business loans
- Further your business by building a credit history.
Flexible profit distribution
- Profits do not have to be split equally or proportionate to ownership.
How to Start an LLC
Select your state
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- You will most likely file in your own state, but you don’t have to. Some states have business-friendly laws that might be appealing to your LLC.
Name your LLC
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- Naming rules differ by state, so check your state requirements.
Choose a registered agent
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- Sends and receives legal documents on behalf of the LLC.
File LLC Articles of Organization with the State
- Names of founding members and contact information
- The business’s name
- The primary address of the LLC, where official mail and tax documents will be sent
- Length of time the company has existed
- Information about the registered agent
- Information about the LLC, such as a mission statement
Determine management structure
- Member-managed
- Manager-managed
Create an LLC operating agreement
- Legal documentation that outlines the structure and roles within the LLC
- Organization
- Management and voting
- Capital contributions
- Distributions
- Dissolution
Get an EIN (Employee Identification Number) for your business
- Needed to hire employees and open business accounts.
File to do business in other states
- Required if your company does any business across state lines.
Additional Start-up Tasks
- Set up taxes and unemployment insurance.
- Determine how you will handle accounting.
- Acquire the necessary permits.
- Decide on business insurance policies.
- Workers’ Compensation
- General Liability
- Know the hiring laws.
- Employees must be eligible to work in the U.S.
- Report any new hires to the state.
- Provide workers’ compensation insurance to employees.
- You must withhold employee taxes.
- Print and place compliance posters in visible areas of the workplace.
- You must pay employees at least minimum wage, as often as the state requires.
Make Your Business Transition with Waters Hardy
If you’ve been self-employed for some time, you’ve probably learned to handle your small business taxes by now. However, if the business is booming and you’ve recently transitioned to an LLC the tax process is different. Even if you are considering changing your business to an LLC in the near future, our tax experts can walk you through all the details with your tax matters.
Waters Hardy is here to help take the complication and confusion out of navigating your taxing needs with professionalism and reliability.
Our amazing team of tax specialists knows exactly how to manage the specifics of your LLC tax filing. We can manage all things tax-related with your LLC, and you’ll see why our clients continue to trust Waters Hardy with their businesses. Contact us today!