Why You Need an LLC as a Solo Entrepreneur, Independent Contractor and Small Business
The benefits of an LLC for your business far outweigh the cost and hassle of forming one. In fact, you'll end up protecting yourself with an LLC.
So before you think this article isn't for you because you think that you're just doing side hustles and independent contract work, you might actually want to keep reading.
Or else miss out on great tax benefits and protection of your personal assets being taken away from you.
Most people--when they think of small businesses--usually think of a few employees working either online or in a brick-and-mortar (an actual physical) location.
So if a social media influencer for example reveals that they have branded themselves and formed an LLC, a natural reaction would be, "But why, you're just one person? You don't look like a business to me."
Au contraire, a solo entrepreneur is considered a small business.
Here is a list of side hustles and independent contract work that should incorporate:
Influencers / Youtubers
Social Media Marketing Agencies
FBA / Ebay sellers
Real Estate Investors
Basically anyone who doesn't work Part time or Full time as an employee for a specific company is considered an Independent Contractor.
What is an LLC?
An LLC is a limited liability company. It's a US business structure that offers personal liability protection of a corporation with the pass-through taxation of a sole proprietorship or partnership
I know that looks like an eyeful but we are going to break that sucker down to its bare minimum.
When you own a business, and in order to get its benefits, you'll have to go through a legal process by what type of business structure or business entity you want your company to be so the IRS can tax you accordingly.
You know they have to have a piece of you.
TYPES OF BUSINESS STRUCTURES:
Corporation (1. C Corp 2. S Corp 3. B Corp 4. Close corporation 5. Nonprofit Corporation)
Since we will be looking closely at LLC's instead of the other types of business structures, I'll only touch upon briefly why you as a solo entrepreneur, independent contractor, or small business would bypass the other ones.
A sole proprietor is actually not a legal business entity. Anyone can be declare sole proprietorship on a tax form. Sole proprietors own small or part-time businesses with no employees.
It simply refers to a person who owns a business and is personally responsible for its debt.
There's no protection against commercial debts, lawsuits, and other obligations and you can be sued putting your personal assets at risk.
Sounds like a no go to me!
A partnership is a single business between two or more people who contribute and share in the profits and losses of the business.
And each partner is personally liable for any business debts and the creditors can go after each partner's personal assets.
This is why this is also a no go.
LLC is owned by one or more individuals while Corporations are owned by its shareholders.
Since you're likely a solo entrepreneur or a small business, your company isn't publicly traded (pieces of your company is sold in the stock market), therefore you can't actually choose this particular type of business entity.
A cooperative or Co-op is a business structure that is owned and controlled by the people who use the products and services the business produces.
This structure operates more for the benefits of its members than to earn profits for investors.
This is basically a sharing is caring structure, and you're not really making profit.
Even the Amish don't do Co-ops since they sell their products in markets--of which I am totally grateful because they make the best fresh pretzels!
WHAT IS A PASS-THROUGH TAXATION?
Pass-through taxation means instead of paying taxes at the business level,
owners report business income and pay the business tax on their personal tax return.
And all profits are taxed just once at each member's individual tax rate and avoids double taxation of which a C corporation has to do (being taxed at both corporate and personal).
The maximum rate a person can be federally taxed with a pass-through entity such as an LLC is 37%.
What is the 20% QBI Deduction and How Can I Get it?
The Qualified Business Income Deduction under the Tax Cuts and Jobs Act, Provision 11011 Section 199A is for the self-employed and small business owners that grants you a 20% deduction of qualified business income on taxes
Let's say for the year 2020, your business generated profit of $100,000. You are able to deduct up to $20,000 of taxes you don't have to pay.
First, you must have a pass-through entity. And if you have an LLC, this is already one of the qualifications.
You have to earn less than $163,300 for single filers or $326,600 for joint filers.
Please consult a tax accounting professional to make sure you are in compliance, so that you can get the most out of your deductions.
Trust me, accountants help a lot! I get more deductions than I can say, "hello extra money!"
FYI, QBI began in 2018 and is scheduled to end January 1, 2026 unless extended by Congress.
So take advantage as much as you can right now in case it does discontinue
Check more on QBI from the IRS website here.
Tax Your LLC as an S-Corp
The LLC is the business entity, but taxing your LLC as an S-Corp is how the IRS treats a business for tax purposes.
If you don't select how you are to be taxed, the IRS will do it for you, and it may not be to your best interest.
So it's best to elect it for yourself.
The reason why you want your LLC to be taxed as an S Corp is because S Corps have more advantageous self-employment taxes.
S Corp taxation owners can be considered employees and be paid "a reasonable salary".
A reasonable salary is any salary that you would pay someone to do the same job.
S Corporation tax treatment can provide a way to take some money out of your business without paying employment taxes.
Hooray for keeping more of your hard earned money, I say!
To give you a picture of how this works, let's do two examples of fictitious characters with totally plausible and believable stories:
Character: Mr. Mustachioed Maximiliano.
Business: Uber and Lift Driver by day. Karaoke singer til 3 am.
Mr. Maximiliano, being a smart man that he is, knew that if he didn't have an LLC in place, he would have to pay a self-employment tax of 15.3% on all of the income he earned as a driver.
He of course need not declare his extra curricular singing activities for the income he made consisted of a bagful of peanuts and $10 in cash every night from other patrons who begged him to stop singing.
M. Maximiliano took it upon himself for his LLC to be taxed as an S-Corp which means M. Maximiliano's business pays him a reasonable salary and he only has to pay self-employment tax from that salary that his business paid him.
To put this in actual numbers:
So instead of paying $14,382 in taxes from his Uber and Lift earnings of $94,000. His LLC paid him a salary of $40,000, which means he would only pay $6,120 in self-employment tax.
$40,000 x 15.3% = $6,120
That's a savings of $8,262!
$14,382 - $6,120 = $8,262
And the rest of the money he kept!
That is until he got suckered into purchasing the 8th continent of the world. But that is a story for another day.
Character: Oleg the Wise
Business: Lifestyle Influencer on Instagram and Youtube
Although the amount of Oleg's wisdom is measurable by 0, he definitely has pizazz and is one pretty sassy influencer!
Perhaps this is the appeal for his popularity.
And he knows it.
He's already graced the covers of mid ranking Alexa digital magazines such as Too Sexy for You and Don't Even Touch Me.
Oleg understands the importance of branding himself and formed an LLC, taxed as an S corporation.
In fact Oleg through his infinite wisdom knows that S Corp is the only business form that makes it possible for its owners to save on Social Security and Medicare taxes.
You see employees withhold just 6.2% for Social Security and 1.45% for Medicare because the employers pay another 6.2% for Social Security and 1.45% for Medicare.
Self-employed people pay both halves (12.4% total for Social Security and 2.9% total for Medicare)
Not wanting his profit of $100,000 to go to good old Uncle Sammy, Oleg's LLC pays Oleg $50,000 in salary.
The $50,000 remaining which is Oleg's business profits are passed through the S Corporation and reported as an S corporation distribution on Oleg's personal income tax return, not as employee salary.
Because it's not viewed as employee wages, neither Oleg nor his LLC need to pay Social Security or Medicare tax on this amount.
Which means he only pays $7,650 in self-employment tax.
The rest of the money, Oleg keeps.
What Oleg wants, Oleg gets.
What a brilliant genius this Oleg is!
But then there's the additional 20% QBI (Qualified Business Income Deduction) that could also reduce Oleg's taxes even more!
How much joyous joy could a person handle?! This is too much good news I say!
LLC Protects Your Personal Assets
Once you've formed your LLC, you have created a separate legal entity. This protects you and your personal assets. The LLC is only liable for its debts and obligations, the owner of the LLC is not.
We live in a very litigious society. Someone is always wanting to sue somebody.
I mean come on, people actually sued McDonalds for gaining weight instead of looking at themselves and saying, "I need to be disciplined and not eat at McDonalds."
Or what if a company had some problems and couldn't pay what they owed, instead of creditors coming and taking your personal assets, they can only go after your LLC's assets.
LLC Makes Your Life Cheaper
Write-offs should be your favorite word. Because small businesses can write off a number of expenses as tax deductions to help lower the amount you owe on your income tax.
Think of it like this, for every $1,000 in business-related expenses, you as an employee are paying $250 more than you would be if you had a business set up as an LLC.
So if you and your spouse are involved in the business, you could set up your date night dinner as a "business meeting" and just made your date 50% cheaper. You do have to spend a part of your meal discussing business.
It's best to record meeting notes with a journal to make it "official".
There are more deductions you can do as a small business like the ones in the article below.
Should You Incorporate in Delaware, Nevada or Your Own State?
There are several advantages and disadvantages to incorporating in your state or out-of-state, it's best to do more research and decide for yourself
I myself chose to incorporate in my own state.
Because I ran out of words to write and my fingers are starting to sound incoherent.
So I'll let this guy do the talking:
How to Form an LLC
You don't need a lawyer to form an LLC, but it's not as difficult if you have the right company to do it for you
When it comes to legal stuff, I don't want to touch it with a six foot pole.
There are too many legal jargons that make me question my English native language ability.
So when I weigh the cost versus getting things in order, it's way better for me to hire the right company to do my LLC for me.
It took me literally weeks going back and forth looking for the company to work with. There were too many duds and such bad reputations online.
I normally overlook a few bad reviews because I know you can't please everyone, but when there are just so many with evidence to boot, plus the good ones seem canned, then I have to say, "Pass!"
But this company that I ended up working with is so good!
They're always on top of things and let me know what I need, they send me my paperwork and tell me what's missing. They even remind me of my paperwork I need in my state.
There are some things that you don't need for them to do because you can actually do them yourself, therefore you end saving more money.
And I like they don't insist about it.
They actually give you a choice if you want them to do it for a fee or do it yourself for free.
For example, you can apply for an EIN/ITIN number yourself with the IRS here for free.
You need this number when you apply for a Paypal business account, merchant account, affiliate account, business bank account. Anything business related they'll require it so you don't have to use your social security number.
This company is Northwest Registered Agent and their customer service is phenomenal. If you can't get a hold of them by phone, they'll email you and even call you back.
I once had an email where we had some miscommunication that we ended up being so confused because we had no idea what the other one was talking about.
To resolve it, one of their representatives called me on his off hours to make sure he could resolve my issue.
We ended up laughing at the ridiculousness of our confusing email.
I love how they just want to help.
Why You Need a Registered Agent for Your LLC
It is actually required by law to have a registered agent and a registered office when forming an LLC.
Now this doesn't mean you can't be your own Registered Agent because you can technically appoint yourself.
What is a Registered Agent?
A registered agent is an individual or business entity that accepts tax and legal documents on behalf of your business.
The reason why states require business entities to have registered agents is the aspect of due process.
If there is a lawsuit against your business, it cannot move forward in court without your business being properly notified first.
Which is why the registered agent must have an actual physical address within that state and be available during business hours.
I don't know about you, but I don't want my address blasted out there for all to see and I don't want to deal with all that paperwork when someone can handle all that for me and just let me know where to sign and when to pay.
These are the reasons why I myself and most people choose to hire someone else to be our registered agent.
If you list yourself as your business' registered agent, you'll have to list your own home address as the business point of contact because you need an actual physical address where you can be found.
A PO Box is not going to do.
This puts your name and home address on public record for those to officially contact your business.
This means, hello to lots of junk mail and anyone dubious looking to bother you.
ELIMINATE EXTRA PAPERWORK
For someone like me who likes to do as much free things as possible, I'm willing to pay the fee, which isn't a lot because it's yearly, to not have to deal with all that stuff.
Your registered agent will track and notify you of annual reports and keep your business in compliance with the state and your important documents will be kept in one place so you don't lose it.
MORE FREE TIME
Yeah, you really do have to be there at the actual physical location at business hours to accept service of process.
Which means you can't work other jobs because you have to be at home at those business hours to receive paperwork.
You can't even go on vacation or grab a bite to eat because someone has to be at your home.
BUSINESS LOCATIONS IN MULTIPLE STATES
If you do business in different states, you actually need to register with all of those states and each state you need a registered agent.
Last time I checked, we can't split ourselves and multiply our bodies yet.
But if you do have this very fascinating and strange ability, do contact us. We'd love to meet you!
Northwest Registered Agent does have different packages, so choose the one that fits your needs the best:
And with that, I bid you adieu and happy start up! We look forward to your success. Do let us know how it all goes.
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