To Be, or Not to be. Is a Limited Liability Company for me?
In my opinion, if you’re doing business in Texas, you need to limit your personal liability. PERIOD. Whether you’re mowing yards, taking photos, or investing in real estate, you always need to consider your liability and how you can protect your personal assets. From a tax perspective, an LLC may not be worth all the hype, not at first anyway.
In the eyes of the IRS, LLC’s that only have one member are considered “disregarded entities”. In other words, the IRS does not require you to file a federal tax return for an LLC when you are the 100% member. You will have to file the annual Texas Franchise Tax & Public Information reports each year by May 15th to keep the LLC in good standing, but there is no other filing requirement for an LLC.
Most sole proprietors file their taxes on Schedule C or their personal tax return. The net profits of the business are subject to the dreaded self-employment tax, which is upwards of 15.3% on top of their federal tax burden. No fun. An LLC may give you personal asset protection in Texas, but you will still file your tax return the exact same way as you did when you were not an LLC, reporting your income and expenses on Schedule C with profits subject to SE tax. So what’s the big deal about setting up an LLC to save on taxes? As a single member LLC, there is NONE.
Though setting up an LLC is more of a legal move than a tax savings move, there is a very special election that certain taxpayers can make to save on self-employment taxes: The S-Election.
When you fill out the form 2553, you are telling the IRS, “Hey, IRS! I know you didn’t care about my LLC in the past, but as of this date, I want to be treated as an S-Corporation.” As an S-Corporation, the net profits of the business are no longer subject to self-employment taxes. You will now file a federal tax return for the S-Corp, and the profits/losses pass-though to page 1 of your personal return and are taxed at ordinary income tax rates. Sounds like a reason to celebrate right? Don’t run to make the S-election just yet, as there are certain prerequisites that must be met to protect and preserve that valuable S-election.
In conclusion, setting up an LLC may help you out on your legal exposure (contact your attorney for legal advice). From a tax perspective, setting up an LLC won’t help you out at all and will generate an annual filing with Texas each year. LLC’s don’t save tax dollars, that is unless you make an S-election for the LLC to be taxed as an S-Corp. We will discuss S-Corporations in a later blog.
Give us a call if you have questions.
Oliver Financial Group LLC
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