LLC Info

[alyssamma]

This is a collection of many of the accounting and liability related questions that have been asked here on the forum over the years. I’ve tried to combine the important stuff into this post, but if something is missing please let me know.

First, a disclaimer – I am not an accountant . My advice to everyone is to call your Secretary of State, Department of Taxation, or the IRS to verify things. Also, when in doubt, Google

Second, each state deals with taxes and businesses in a different way. The advice given here is general and your state may impose more regulations/requirements than stated herein. Hence my advice: call your Secretary of State or Department of Taxation to verify things.

Last, I am going to gear this towards an LLC. If people have specific questions about S-Corps or more complicated things feel free to PM me. But to keep this somewhat clean, I’m going to pick a recommendation (LLC) and talk about that (mostly). Additionally, the terms I am using here are generic and chosen so everyone understands them. They are not, strictly speaking, accounting terms.

OK, some definitions:

Liability Protection – this basically means not losing your house if someone sues you.

LLC – Limited Liability Company. This is a company, and not a corporation. It is the easiest business entity to create that provides liability protection. It is a pass thru entity (see below). Note, “Limited” means you can only lose the amount of money you invested in the company to get it started. For a vending business this will be very small.

S-Corp – This is a normal corporation (i.e., C-Corp) that has filed for the S election. More complicated to form than an LLC, but there are some advantages. It provides liability protection. It is a pass thru entity (see below).

C-Corp – Out of scope for our discussion purposes. There is no reason to have a C-Corp unless you are doing this full time and making more than $100K/yr. If that is the case then there are some potential tax advantages to a C-Corp, but that is it. This is the most complicated business entity and it is not a pass thru entity.

Sole Proprietorship – This is just a guy who decided to start doing business. No forms to file, nothing to set up. There is no business entity. No liability protection.

Pass Thru Entity – This means that the money your business makes is, for tax purposes, treated as your income. In other words, you record this income on your 1040 and pay taxes there, instead of your business entity paying taxes. Note, local taxes are almost never pass thru and most states impose some sort of business tax (e.g., in Ohio you pay $150/yr). And yes, the business income still passes thru to your state tax return. Technically this is double taxation, but really not in the sense that most people mean.

So…what type of business entity should I form? Almost always LLC. Don’t do the sole prop because there is no liability protection. The C-Corp is too complicated. The S-Corp is an option only if you are making $50K or more a year. If so, you might get a slight tax advantage. The LLC is simple and provides protection.

Note an LLC can be taxed in several different ways – Sole Prop, S-Corp or C-Corp. By default it will be taxed as a Sole Prop – this is what you want so there is nothing special you need to do. Everything is easy. One extra schedule to file (Sched C) with your 1040 and that is it.

Also, be sure you keep your LLC and personal expenses separate. Get a separate bank account. If you don’t, and there is trouble, you may lose your liability protection.

Lastly, when you form the LLC, you can do it yourself. Go to your Secretary of State’s website. There should be clear instructions on forming an LLC. You must simply fill out a form (mostly online), pay a fee, and you are done. You can use your own Soc Sec #, or call the IRS (or go online) and get a new one for your LLC – this is free.

OK, I formed an LLC. Do I need insurance? It depends. The LLC protects your assets, but nothing protects the LLC’s assets. If you are sued then everything owned by the LLC can be taken. If you have a significant investment in machines then you’ll lose everything. The insurance will cost approximately $300/yr. Do the math to see if it makes sense. If you have $10,000 in machines, definitely get insurance. If you have $100, no need.

Great. I’ve got the company and I got insurance too. Do I need an accountant? How do I do my taxes? Well, the LLC is a pass thru entity. This means you simply take the income of your LLC, subtract the expenses, and the balance is the profit (or loss). This is what you get for all of the hard work you’ve done all year You then file a Schedule C with your 1040 and put that number down there. You’ll pay income taxes (federal and state and, possibly, local) on that figure. You’ll also pay FICA taxes.

FICA taxes are social security and Medicare. Unless you are making >$100K, just figure 7.65% of your income is what you pay. Normally, if you are salaried (i.e., get a paycheck), your employer withholds this automatically and there is nothing for you to do. But in the case of the LLC, the profit that flows thru to you hasn’t had FICA deducted from it. No problem – the IRS will let you pay when you file. However…

You will probably have to pay quarterly estimated taxes from now on. This is because you haven’t had any income tax withheld either. And, if you don’t pay at least 90% of what you owe before the end of the year, or end up owing more than $1000, the IRS wants you to estimate your taxes. If the LLC is your main source of income, you’ll almost certainly fall into this category. Luckily, there is an easy way around this – just figure your taxes in December and make a tax withholding payment. It doesn’t have to be exact – it just needs to be close enough. But if you don’t want to do this, then you can always make the quarterly estimated tax payments – they aren’t hard to do.

Another option is to pay yourself a salary. This is a little more complicated (you’ll need QuickBooks or something similar to handle the payroll), but you won’t have any estimated or FICA tax worries. Note, in general you don’t want to do this unless it is for retirement benefits purposes. This is because your company will also be paying FICA taxes, so 15.3% is taken instead of 7.65%.

Note, I oversimplified some things above. For example, not all expenses are deductible – travel and entertainment are the common examples. But just about everything you are doing as a vendor will be a deductible expense. Also if your profit is actually a loss there are some limits to what you can deduct. All that being said, buy TaxCut or TurboTax and it will walk you through everything.

To summarize about taxes, here are the types you’ll run into:

- Sales Tax. Check your state to see if you need to pay. Many bulk operators are exempt, but not all. This will be based on your gross income.

- Federal, State, Local Income. This is what we were discussing above. Based on your profit.

- FICA. Based on your profit.

- State/Fed Unemployment. Will not need to pay unless you have employees.

- Worker’s Comp. Technically more of a premium than a tax. Will not need to pay unless you have employees.

Company formed, insurance bought, taxes paid. Now, what are all of those tax advantages of LLCs I keep hearing about? Well, really, there aren’t any. At least not for the typical vendor. Running a sole prop will give you the same tax advantages as an LLC. The key is to keep good records and to know what can be deducted. Of course anything that is an expense can be deducted. Normal things like candy and machines are obviously expenses, but so is mileage. You can deduct $0.55 per mile you drive. Just record your mileage and write yourself a check (I do it monthly) for the mileage. It’s yours – tax free and is an expense to your business. Being creative you can find other things to treat as expenses – cleaning supplies (one for the machine and one for your house), cell phone (but just use it for “business”), etc.

An LLC doesn’t give you anything special over a sole prop with respect to taxes. You form an LLC for the 2 L’s – Limited Liability.

Lastly, some of you have employees. If you do, make sure you pay their FICA taxes. No business entity offers liability protection from the IRS coming after you for not paying these. And you’ll face stiff penalties and fines. Don’t try to treat them as “contractors” – you’ll just get into more trouble.

Let me know if there are any other questions

Kevin

[chris in md]

Great info & great post, Kevin!  I like having this all compiled in one spot.  We need to get the POTD voting feature back, b/c this is a great one. 

- chris

[BudLeiser]

Great post.

Would have been even better if you had credited my name for inspiring it

With a C corp you have to "add money" to the company via stock purchase.... right? Say someone sued you with an LLC though, how do they determine what cash is the LLC's and not your cash?

[alyssamma]

Bud, sorry, consider yourself credited

With all business entities you invest capital. With S-Corps and C-Corps you do this via stock purchases. With an LLC you simply deposit money into the bank account and record it for accounting purposes as a capital investment. This is the $ you can lose (hence the word "Limited").

Understand that this doesn't need to be "cash". It can be equipment. It can be "knowledge", etc.

Kevin

[Jarola]

Thanks for the great info!

[chrisdunn77]

great post! thank you!! that def answered some questions.

[lurtsman]

Big respect on that post. I'll read it several times.

[whaletail116]

Do you recommend Legalzoom.com?

[motownman_715]

Thank  you  for take the time and explain that ..

Darryl

[Fritzer]

Great post and so helpful!

[mission vending]

All in all a very good post with great information

To quote a small portion:

Another option is to pay yourself a salary. This is a little more complicated (you’ll need QuickBooks or something similar to handle the payroll), but you won’t have any estimated or FICA tax worries. Note, in general you don’t want to do this unless it is for retirement benefits purposes. This is because your company will also be paying FICA taxes, so 15.3% is taken instead of 7.65%.

My comment:

I've always worked as sole prop. so maybe I'm wrong here cause I pay someone to do my taxes but I've understood that even as a sole prop I'm having to both sides of the FICA tax liabilities on my PROFITS as a "self employment" (the words the accountant uses)tax. Now that does comes AFTER taking all expenses and deductions but I still pay the 15.3%.

[alyssamma]

Mission, on line 27 of the 1040 form you deduct 50% of your SE tax. So, you "pay" 15.3% but get a credit for half, so only end up paying 7.65%.

If you take a salary, you pay 7.65% and the company pays 7.65% (as a side note, this is why you need to be careful with subcontractors...the IRS wants the whole 15.3% if it can get it...). This may seem "bad", but like I said, there are good reasons for doing it - retirement planning is one.

Kevin

[mission vending]

OK that shows you how closely I look at the returns after my accountant does them. So we are both right.

Thanks.

BTW, I've had conversations with accountant about the retirement planning (qualifying for Social security) part of this equation as well. It is something to consider, the lifetime benefits of "maxing" out your benefits certainly needs to be taken into account when making the decision about how to pay yourself.

[alyssamma]

I was really talking about retirement plans like a SEP-IRA in which your contribution is based on your salary. There are others, like a SIMPLE IRA where the contribution is independent of your salary.

If you are planning on taking Soc Sec and are self-employed, your "profit" that your report on your 1040 counts as your "salary" for calculating benefits.

Kevin

[Woody2]

Excellent information. Just one piece for clarification. In regards to the Liability Insurance. Is the coverage that you speak include if someone gets sick on the product? My insurance agent says that there are 2 levels of coverage. Level one is to protect in case someone is hurt by the machine.

ie, small child pulls machine over on themself. Level two is what he calls "Completed Operations". This coverage includes the above but, also covers you if someone comes back to you and says your candy made them sick. Level one is around $128.00 per year. Level One and Two runs around $350.00. Are both levels required?? I will already have established a sole prop. LLC.

[mizugori]

where does one get this insurance?

[agrantha]

I only have one Venstar 3000 bulk candy machine that I bought off Craigs List.  Should I set up an LLC?

[Iolaus]

I only have one Venstar 3000 bulk candy machine that I bought off Craigs List.  Should I set up an LLC?

This depends if you have any substantial personal assets to lose.  If you own your house free and clear and have $50,000 in the bank, stocks, etc.  then you might want to consider forming that LLC. 

If you're like me and your net worth is currently a negative number, you probably don't need to worry about it.

Without the LLC in place, someone can sue you personally for everything you own.  With the LLC they can only sue the company for its assets, in your case one Venstar 3000.

*I am neither an attorney nor accountant and none of this is qualified legal or tax advice.

[bostonvendor27]

Not sure if this was touched upon  in any of the other  post,  but  In some states when you form a LLC  they can require you to publish it in the local news papers. It might be worth looking into if you are thinking about forming a LLC!

[Iolaus]

Not sure if this was touched upon  in any of the other  post,  but  In some states when you form a LLC  they can require you to publish it in the local news papers. It might be worth looking into if you are thinking about forming a LLC!

But, you don't have to form your LLC in the state in which you live, or in the state in which you conduct business.  If you form an LLC in a state other than your own, you'll usually have to register it with your state in some way to conduct business there, but that's all.

If forming an LLC for asset protection, choose the state with the best laws and case history for that purpose.  Currently this is Nevada, imo.  Unless it can be proven that one of the Members/Officers intentionally committed fraud or harm, it is very difficult to "pierce the corporate veil"  and go after personal assets here. 

Wyoming has a very business-friendly environment and the law is written to make it difficult to pierce the corporate veil, however there is very little case history testing the law.

[alyssamma]

I am not 100% sure, but I don't believe you need to publish anything in any paper for an LLC. Bostonvendor...do you know a specific state where this is true?

Lolaus, don't confuse an LLC with a corp. An LLC is a *company* - no corporate shield to pierce because there is no corporation.

Since you will pay extra to form an LLC in a state other than the state you are doing business in, I would advise against it. *Corporate* "friendly" states like Delaware and Nevada would offer nothing for a vendor.

Kevin

[amc-vending]

I know here in Arizona, they require that it run in the newspaper for so long before you get your LLC

[Iolaus]

Lolaus, don't confuse an LLC with a corp. An LLC is a *company* - no corporate shield to pierce because there is no corporation.

This is true, however courts in Nevada look at the two as the same when it comes to a lawsuit.  With an LLC, the "corporate" veil still needs to be pierced in order go past suing the entity and pursuing the personal assets of the principals involved.

I wasn't advising for or against forming an entity in another state, just pointing out that the possibility exists. If the ONLY reason you are forming an entity is for personal asset protection, it's worth paying extra to maintain it in Nevada or Wyoming.  The only "extra" charge is usually for someone to act as a resident agent in the state you choose.

Again, if your only consideration is asset protection there is no bulletproof answer, but some choices are much better than others.

[alyssamma]

amc, thanks. I'm kind of surprised at that because who still reads newspapers today

Nick, I'm not 100% sure of the laws regarding personal lawsuits in NV, but it is misleading to imply that there is a corp shield with an LLC. An LLC is a passthru entity, where a corp (C-Corp) is not. A corp is an entity to itself, so the concept of "piercing" to get to the owners makes sense. With an LLC, virtually all states (I want to say all, but not 100% sure) have laws that make it illegal to sue the owners of the LLC, unless some type of purposeful negligence has occurred, or the LLC is not being run as an LLC. You don't need to be in NV for that type of protection.

Also, the extra charge is to file as a foreign LLC. Most states require this and the filing fee is at least the cost of filing in the state to begin with. This is in *addition* to getting a registered agent there.

I can't see any reason for a vendor to form an LLC in a state other than the state where they are doing business.

Kevin

[alyssamma]

amc, I just checked the AZ SOS website. I think that filing is for *LLP*'s and not LLCs. The two are slightly different and a LLP is typically for professionals (e.g., a group of doctors or lawyers). I think that may be why you need to publish...but I don't think you have to for an LLC.

Still, that is a good point you brought up and something to be aware of.

Kevin