Why You Dont Need AN LLC to Start Your Business

that was so family it's your favorite uncle cousin Tyrone Gregory back at it again here with another video and this time I am going to be doing my very best to convince you of the fact that you do not need an LLC to start your business or any other kind of business structure for that matter this is something that I feel is truly important something that I think every aspiring entrepreneur anybody who's looking to start a business should know this is something that I wish somebody would have told me when I was very when I was just getting started out so let's go ahead and get to today's video why you don't need an LLC there are plenty reasons to form an LLC however those reasons are extremely specific and strategic you don't form an LLC just because the your your friend told you so or you heard an advertisement on a radio you went to a seminar even if you watch the video and somebody said that if you're starting a business you did LLC that is the incomplete incorrect wrong way and wrong reason for wanting to start an LLC trust me as somebody who has been preparing taxes for small businesses over a decade now I can honestly say with certainty that over 80 percent of the people who have LLC's don't need one and what's even worse is the reasoning behind why people want LLC's I've heard some ridiculous reasons why people want LLC's as a matter of fact the inspiration for this video happened because doing past tax season a gentleman came and sat down at my desk and argued with me for 15 to 20 minutes as to why he wanted an LLC and I did my best to convince him that he didn't as a matter of fact the conversation with a little something like this hey boss smells go out or not gonna help you what's up bro I need to form an LLC okay this is there a particular reason why you want to form an LLC yeah cuz I'm about to start driving for uber okay that's it you're just gonna drive for uber you're not gonna do anything else you're not about to buy a fleet do something up there maybe invest in something start other businesses I mean is that really the only reason you wanna start an LLC just because you're talking for a little bit yeah man is what they told me I can save a lot of money your father incorporated us started LLC well if that's the only reason you wanna start a LLC man let me honestly tell you know you don't yes I do no you don't man yes I do no you don't and that conversation lasted longer than they need it to for yeah and that's exactly how that conversation went so let's go ahead with our in further delays let me do my best again to try to explain to you why you do not need an LLC starting with this question here I am going to do my best to break down what exactly is an LLC so let's go ahead and start with the basic understanding of what it is and LLC is a state-level entity meaning that it is formed and recognized only at the state not at the federal level as a matter of fact when it comes to the government initially the federal government treats you like you know you're a piece of lint on their shirt I just kind of flick your weight everybody don't pay attention to you there you know get out of here we don't recognize you don't know what you are and if you want to be recognized by the federal government the IRS you are going to have to fill out some additional paperwork the only exception to that meaning that you won't be required to fill out additional paperwork in order to be recognized is if you and another individual they are the ones who are forming this this LLC together making it a multi-member LLC you will then be automatically recognized as a partnership meaning that the IRS is going to treat you as a partnership you're gonna have them file a partnership tax return meaning that the earnings and income is going to be reported on a 1065 each individual gets a k1 and you go on from there that is the only exception to the rule of being recognized by an IRS you becoming a multi-member LLC outside of that everything else is the same so as you can see just by forming an LLC it's not going to give you corporation status which is the first reason why you don't need an LLC all right so moving on next let's break down the name l.l.c which stands for limited liability company and for purposes of breaking down the night I'm actually going to do it in reverse order going to start with the C and work our way up so looking at the letter C we can see that C stand how about there we can see that C that's C stands for company not corporation okay we can see that's a very distinctive difference LLC is a limited liability company not a corporation however this just reiterates what I said in the beginning LLC's are state-level entities not initially recognized by the federal government okay does that really make a difference on anything no not really I just started with something you know something for for you to know what here okay so anyway moving on next one the two ales the limited and the liability I'm grouping these together right now because those two words together limited and liability or would cause people to drool over this particular business structure the words limited in liability to most equal asset protection and truthfully speaking it is if done right but then when it comes to asset protection it leads me to ask the question what exactly is an asset well according to Google and asset is property owned by a person or a company regarded as having value and available to me debts commitments or legacies now let me go ahead and break that down because when it comes to forming LLC's that is the biggest reason why people want to form LLC they always say they want to protect their assets and then it it kind of I don't want to sell meat or anything but I'm like you know we really got to go through it and understand what an asset is do you really have any assets to protect meaning that if you're renting you don't own the building right you're you're renting if you you don't own it it's not your asset if you are still paying your Cardinal or you're leasing the vehicle you don't own that you don't own the vehicle if you think I'm playing don't pay the card no don't pay the lease agreement see what happens remember an asset is something that you own all right free and clear you have the title you're you it's is yours you have the pink slip renting and and still paying Cardinals that is not an asset even if you were in a house and you're paying a mortgage you don't own that home until the mortgage is paid off again if you think I'm playing don't pay their mortgage and see what happens you need to own it free and clear in order for it to be considered your asset so think about that when you're trying to say hey I need asset protection do you really have any assets yes we may own jewelry and things like that but if it's not worth you know thousands of dollars then are you really trying to protect this so if you're thinking of starting an LLC just for purposes of asset protection really doing inventory and see what assets do you have think about can you convert that item that you're thinking about can you convert it immediately into cash to pay a debt a commitment or legacy if the answer is no well then you really don't have no assets to protect and therefore you do not need an LLC okay moving on the liability that word which leads to the question what can we be liable for and truthfully speaking as a business on individual there are a lot of things that we can be liable for in the course of our business but the most of the things that we can be liable fall under three particular categories and they are criminal liability contractual liability and tort liability and let me go ahead and explain those to you criminal liability is when you or your company has broken the law whether you've done it on purpose or by accident the law was broken and punishable actions can and will be taken okay that is criminal liability contractual liability means that you entered into a binding contract and you and/or your company did not hold up your side of the agreement causing the other party to be wronged or damaged financially or whatever some sort of way by you not holding up you're in the other party got a negative impact so that is contractual liability and tort liability this is the one that we are the most afraid of this is the one that for purposes of forming an LLC that we try to avoid tort liability this one is when the liability comes about when everyday folks like the ones pictured here are using our products and services and somehow someway end up being wronged or some some sort of damage that happened to them and this is mostly brought about by negligence either get on purpose or by accident which is why we fear it the most because we do our best to make sure that every box is checked and every T is crossed and every I is dotted but somehow some way is Murphy law dictates whatever could go wrong will and so tort liability covers that tort is different than criminal because criminal is war against the government they've set the laws we have broken them tort is against the individual is more of a civil type matter than it is a criminal type matter so that's the one that we fear the most tort so those are the liabilities that is the L in LLC then the middle under liability now let's look at the last word limited here you know limited means that there is a confined amount of spaces not a real large range it's not extremely open is it's limited it's a confined amount of space but also limited means that there is room within that confined amount of space for things to happen which also means that even though it is limited you can still be held responsible for the liability those three liabilities that we just spoke about so just because it's live it does not mean that you are going to be absorbed of anything there is not anything that is going to be a hundred percent protected yes it is limited but it is not a hundred percent protection you can still be held personally reliable or personally responsible for any of those liabilities that we just talked about and if the LLC isn't properly structured that anybody can do what we call piercing the corporate veil so as you can see forming an LLC will not give you a hundred percent protection which is reason number two why you don't need one moving on here we're going to talk about everybody's favorite LLC's and taxes and for purpose of LLC's and taxes I'm actually going to be talking about a particular type of LLC one that I like to call a slick slick slick smart you know what let me just show you could my pronunciations ease off today here I'm talking about the SM LLC that's why I was trying to bring all those words together make one single sound slick I don't know but SM LLC which stands for single member LLC this particular LLC is formed by one individual and one only because remember the minute you bring on somebody else you are immediately considered a partnership and you will be taxed as such so single-member LLC is what we are talking about here today in this particular scenario and when it comes to taxes please note that a single-member LLC is the same exact as a sole proprietor meaning that there is no significant difference a single-member LLC is held by the same laws the same theories the same application as a sole proprietor as a matter of fact both the single-member LLC and the sole proprietor will both be filed all of their income and deductions are going to be reported on a Schedule C no actual difference and you know what that means both the single-member LLC and the sole proprietor because they are the same it's still going to be subject to self-employment taxes so as you can see forming an LLC will not get you any kind of special tax treatment which is another reason why you don't need one and real quickly on a side note I also want to tell you this when it comes to LLC's you cannot pay yourself a wage and deduct it when you make money from the company as a single member LLC same as a sole proprietor it's called a distribution and that does not reduce the amount of money you will pay tax on doing so will not reduce your self-employment taxes okay as far as the Internal Revenue Service is concerned the amount of profit is sole proprietor earns is the same exact as the business earnings so whether those funds are held in a business account or on a personal account they are treated the same now I know that there are videos out there there to say hey this is how you pay yourself in an LLC write yourself a check write it off on your taxes blah blah blah no and I'm not saying I don't like to call people liars I don't want to do anything like that I'm just assuming that maybe that they haven't got to the section of the law that explains that so let me just show you this here here is the IRS Publication 334 this is chapter 8 page 34 and you can see it says you cannot deduct your own salary or any personal withdraws you make from your business as a sole proprietor you are not an employee of the business remember LLC's or single member LLC's are the same exactly the eyes of the IRS they are bound by the same laws and regulations therefore if you cannot do it as a sole proprietor you cannot do it as a single member LLC so again as you can see and I guess I'm going to be say so as you can see a lot forming an LLC really does nothing for you as far as taxes goals again and I'm not deducting anything if there's nothing for you and that is yet another reason why you don't need one moving on it does look good on paper I know I get it you got your company letterhead on that letterhead you see this your company name comma LLC and it looks good it looks prestigious it adds like you know makes you pump your tests up a little bit of walk with your head high because whoa it looks good I have an LLC that makes me in CEO whatever I'm the owner of this legitimate business and you know I get it it looks good looks good there looks good on your email signature it looks good on your business card when you present it that's it you know there's this myth that surrounds forming an LLC or any type of business structure for that matter this midstate that as soon as you form this LLC and every day becomes a legit you'll have immediate access to things like additional capital you'll be able to go to the car light of your choice talk to the fleet manager and with a brand new luxury car or a fleet of them for that matter there's the myth that says that investors are going to come running to you with money in their hand just wanting to give it to you immediately ready to invest because you have this business structure and the worst one of all that I personally believe is the worst one of all is that if you have poor personal credit well that's okay because you'll have immediate access to business credit that is ridiculous those are what I like to call false truths meaning that it is true all of those things can happen however they exaggerate it that so much that it's a lot because it's not gonna happen immediately to get those things to happen it is going to take capital to get access to capital you are going to have a put in a lot of time a lot of work there's a lot of strategy that goes into building that especially with the business credit you know a lot of things when you're first building your business credit depends on your personal credit anyway so yes again it can't happen I'm not saying that it cannot but listen to me it is going to take time it is going to take a strategy and you are still going to have to do some things personally for those things to happen so as you can see forming an LLC does nothing for you as far as fame and riches goes which is another reason why you don't need one let's go on to the next additional cost this one is straightforward LLC's aren't free nor are they cheap as a matter of fact most states require that you pay what's called an annual franchise tax fee or minimum tax Zess for the privilege of having an LLC formed in their state take the go to state of California that I live in for example just to have an LLC at the end of your company name is going to cost you a minimum of $800 per year as of the date of this video $800 per year and that's whether you make a profit or not zest for having the privilege of having LLC any name and also consider another additional cost additional prep tax preparation fees can be included when you're having an LLC and I know I know you're thinking well cousin you just said that an LLC is the same of the sole proprietor is gonna be able to same forma Schedule C so while there are different charts excellent questions excellent thinking and you're absolutely right but remember LLC's are state level entities okay they are not initially recognized at the federal which is why the same but at the state level they are recognized and so therefore there will be additional forms for your state taxes like California time you have an LLC yes you're going to do a Schedule C on the federal but there is going to be an additional state form added to the California return and because of that there's going to be additional fees on your tax preparation so definitely keep that in mind so as you can see forming an LLC does nothing for you as far as saving money goes which is another reason why you don't need one well we want well weird okay so at this point I know you're probably saying to yourself you know you've given us plenty good reasons why we don't need an LLC so when are some reasons or when will be some good ideas to actually form an LLC and that is a good question and trust me there are plenty reasons like I said in the very beginning to form an LLC so I'm going to go through and give you some of my top reasons for forming an LLC and please keep in mind that this is not an exhaustive exhaustive like I cannot say they were this is not a definitive list so to speak I can pronounce that word a lot better this is not a definitive list so let's just go ahead and grunt through a couple of scenarios where you would actually want to use an LLC type business in the beginning and here they are dealing directly with the living as opposed to the dead I guess unless you you know specialize in zombie apocalypse but what I mean by this is when you provide a product or service that can have a physical negative outcome meaning that it can cause injury illness or worse to anything living humans animals plants insects etc so if you are in one of these type of professions you would want to consider forming an LLC and these are professions like caterers think about it caterers deal with people in foods or what if there's an outbreak what if somebody has an allergic reaction what if somebody chokes on something of your food definitely can cause some serious illness or some serious injuries there so you definitely want to be protected property managers as a matter of fact LLC's are excellent business structures for those looking to get into real estate who want to do property management because what if somebody gets injured on one of your properties you know what if something happens if nothing that you've done on purpose think about that tort liability it was just negligence you thought you crossed all your eyes not at all your teeth at something still happen on that property so when in that industry definitely want to make sure that you have an LLC then there's also individuals who are in beauty and hair I personally have a client she has an excellent hair care product which stimulate growth and she showed me the before and after pictures for her and worked miraculously on her children she I did a real good job there but what if somebody else tries it and it has the opposite effect so I definitely encourage her to go ahead and start with an LLC definitely to protect that and even when you're dealing with with beauty and then cosmetics people may have an outbreak a rash or something like that so if you're in that industry definitely consider forming an LLC and then childcare you know when it comes to two small children it takes only a second for something to happen and if you have a child care and and Tommy's over there crying and throwing a hissy fit and you turn over there around the go see what's going on with Tommy and then next thing you know Billy they picked something up and swallowed it and now he's choking I mean things happen in an instant so child care industry definitely makes sure that you consider forming an LLC next when you want to form it is when you actually have assets remember we broke down assets but when you get to the point in your life that you actually have true assets and you are still running your business then yes is time to make that strategic move from sole proprietor to LLC and make sure you get recognized by the IRS and either S Corp C Corp or one of them other legal structure that they accept there when you actually have assets next is when you want to diversify LLC's are perfect for people like me who have multiple businesses all operating at the same time by using a strategic hierarchy you can have each venture be placed in its own LLC and keep everything completely separate so for example if you have you know the the main structure LLC and you have corporation a corporation B corporation C and some happen with corporation a where corporation B and C will not be affected because they each have their own structures you have diversified everything okay next is when you have lots of money there does come a time especially for tax purposes where it just makes sense to form an LLC and become recognized by the federal government as it will save you money now you will have to do the research on this because every business is different every ever every venture is different and you have to know what that number is for you you have to know when you hit that number will it make sense to go from sole proprietor to LLC that is something that only you can know and trust me you can ask any one of those self-employed tax academy students they'll tell you Reeve restarts that number very well but even still it's different for every person so do the research understand what your numbers are and look at your taxes see how much you paying if you convert to this LLC how much would you save and all the saving is going to alway the cost that's what you want to make sure you look at but there does come a time when you're making that lots of dough then boom good to go alrighty family there you have it the reasons why you do not need an LLC I surely hope this video was helpful if you know anybody who was thinking about considering getting an LLC make sure that you share this video with them be a good friend save them some time anguish and money again shared with them tell them about it make sure that you hit the subscribe button if you have any questions as always leave your comments below I'll make sure I respond find me or either one of these social media platforms and that's it for me family I appreciate you love you and I will see you in the next video

Channel: The Self-Employed Tax Guy

Views: 157,407

Rating: 4.8350277 out of 5

Keywords: LLC, LLC's, Taxes, Self-Employment, Business Structures, S Corps, Independent Contractor, Freelancer, Corporations, Starting a business, Entrepreneur, Startups, 1099, Limited Liability Company, Sole Proprietor, SMLLC, Single Member LLC, Business Strategies, Tax Strategies, Tyrone Gregory, Business taxes

Id: 8OwEsPbRJZk

Length: 29min 59sec (1799 seconds)

Published: Thu Aug 09 2018