We are frequently asked if you should create an LLC for “tax savings.” This is a common source of confusion for most non-tax practitioners. It is very important to gauge the source of information when online blogs or websites recommend a limited liability company for any type of tax benefit.
If you were to search in Google “limited liability company for tax benefits” or you will notice that many of the main sites to appear are ones that have a distinct interest in you opening the limited liability company. Such sites include Incfile, LegalZoom, and other similar competitors, who all charge fees to open & maintain your LLC. They also eventually eventually sell you associated services, such as Biennial Statements, Annual Reports, and other related services.
Here are some legitimate reasons to open an LLC:
First of all – let’s define LLC: Limited Liability Company. There is nothing in the definition that pertains to tax. Rather, this is a company created to limit liability. The abbreviation itself makes it clear that this is a legal matter & not a tax matter. If you were to bankrupt the LLC, the point is that your assets will remain protected. Additionally, if you were to be sued, it would only be your company that gets sued (theoretically speaking). The conclusion here is that an LLC is a great entity to open if you want to protect yourself from a lawsuit or bankruptcy. Again, nothing here about tax.
Tax is a separate conversation altogether – your optimal business structure choice depends on a variety of factors that cannot be summarized adequately in a blog & definitively require some dialogue. If you are interested in this, please schedule a call with us. We are fluent in all 50 states regulations and have clients in all 50 states.
Another instance where an LLC makes sense is if you are contracted by a company to perform work & they require that you register as some type of entity (whether an LLC or a corp). This is very frequent as employers often want to protect themselves from Dept of Labor scrutiny – not to mention workers compensation, disability insurance, unemployment insurance – so they take care that no contractor can be confused as an employee and take the legal steps necessary to prevent it. One of these steps includes having contractors register as a company so that it is clear that the individual is not an employee and therefore not subject to the myriad of compliance requirements associated with employment. This structure alone will not actually help an employer win a dept of labor dispute in many cases, but that is a separate and unrelated topic altogether. The point here is self-explanatory: some companies will force you to incorporate or form an LLC prior to employing your services and will only then grant you the work. For this reason, it may make sense to form an LLC. An LLC is a great choice as the single-member LLC structure avoids much of the complexities associated with a corp.
Note that a corp may actually give you better tax treatment, depending on a variety of individual variables, which, per our prior note above, is a topic for a separate conversation
Note that both of these reasons for creating an LLC are based on legal considerations and again have nothing to do with tax
What is the conclusion? Unless you have legal requirements that must be met by this structure, an LLC provides zero tax benefits above and beyond simply operating under your name as a sole proprietor on schedule C of your individual return. An LLC is reported on your individual return and not a separate entity (unless you chose s-corp election or are a multi-member LLC partnership). The IRS even has an article explaining that an LLC is a purely disregarded entity that takes the form of whatever entity type you elect – and the default election is single-member LLC.