You've decided to go into business for yourself and want to make things official. After careful consideration, you've also decided that a limited liability company (LLC) will be the best option.
Here are some things to keep in mind while operating your business:
Tax Identification Number — An LLC is a separate entity from the business owner. Similar to your social security number, your tax identification number should be used when engaging in transactions on behalf of the business (i.e. setting up bank accounts, contracts, etc.).
Bank Accounts — It is crucial to have a business account separate from personal accounts.
Co-mingling business and personal funds could have a devastatingly negative impact on personal liability for business dealings should a lawsuit occur.
Operating Agreement — If this will be a multi-member LLC now or in the future, strongly consider creating an operating agreement. This will help members avoid confusion as it relates to how the business functions.
Accounting — Good record keeping will be a great habit to establish from the inception of the business. This will make any necessary reporting requirements (i.e. payroll, tax, etc.) much easier.
Now that you are an LLC, your tax profile in the eyes of the IRS will change drastically. The greatest impact will depend on whether you are a single or multi-member LLC.
Single-Member — As a single member LLC, you may be required to file a Schedule C as a part of your individual tax return. For tax purposes, a single-member LLC is considered a disregarded entity (meaning the taxpayer and business are considered to be one and the same).
Multi-Member — In general, an LLC with multiple members is required to file a partnership tax return. Once complete, members of the LLC receive a K1. The K1 reflects each partner's portion of income, expenses, and other tax items to be reported on their individual returns. Consult your tax advisor regarding reporting requirements.
If you were operating as a sole proprietor under your social security number, you would have unlimited personal liability for anything that happens to your business. This means if things go wrong, you could potentially lose all of your personal possessions.
Business ownership via an LLC affords the opportunity to limit liability to the amount invested in your business. There are lots of things to keep up with when starting a new venture as an entrepreneur. Understanding how operating an LLC will impact business operations should remain a huge priority.
Carter West Law is a law firm that specializes in corporate and real estate law. Carter West can help your business with anything from mergers and acquisitions to intellectual property protection and licensing.
About the AuthorMore Content by Dixie Somers