What does it even mean to start a business? How do I do it right? Should I be a sole proprietor, an LLC, a corporation? We’re going to talk about 4 types of entities:
Sole proprietorships and General partnerships
Limited Liability Companies (or LLCs)
State primarily covers limiting your liability. And the federal (specifically the IRS) primarily covers taxes. And common sense covers your assets among other things.
For the second part of this blog, we are going to talk about LLCs.
Limited Liability Company (LLC)
A limited liability company or LLC is when you ask the secretary of state of Indiana to give you “limited liability” so that you don’t have to face personal liability. It takes 15 minutes and just under $100 to be yours!
The owners of an LLC are called Members.And it can be managed by either the members or by Managers. It is controlled by what is called an operating agreement.The operating agreement discusses the procedures of how your LLC operates, who owns it, who manages it, how voting is done, how meetings are handled, etc.This document is extremely important for keeping your limited liability, even if it just you as a single member LLC. This is because if you want a court to respect your LLC as a separate entity, you have to respect the LLC as a separate entity.That means separate bank account, contracts, and following your operating agreement.
Now we’ve been talking about limiting liability, but what about taxes?Well the LLC is default treated by the IRS as a sole proprietor if you are a single member LLC, or as a partnership if there are multiple members. A sole proprietor is what is called a disregarded entity, so you simply put the information about your taxes on your 1040 tax return, which will be taxed with a self-employment tax.Partnerships are what is known as a pass-through entity.While the partnership has to recognize the money it has made, the taxes are passed through to the partners, so the money is only taxed once.This money will also be entirely subject to self-employment tax. However, an LLC can elect to be taxed as a corporation too! So let’s talk a bit about corporations. Stay tuned for the next blog on Part 3: Corporations!