Posted by JuJuan Buford @JSBUFORD
Disclaimer: This content has been made available for informational and educational purposes only and is not meant to be a substitute for legal, accounting, or other professional advice. If you have specific questions about any legal matter, you should consult with an attorney or other professional services provider.
If you’re in the process of turning your business idea into a legal business entity, forming an LLC is an attractive option. Most business professionals cite that the primary reason to establish a limited liability company (LLC) business entity is for protection from personal liability should anything happen to your business. Or protect assets owned by an LLC (real estate for example) from liens, personal creditors, or some other type of legal harm.
It's a great idea. Remember, the rich don't own things in their personal name. Their businesses own assets, and they enjoy the benefits of those assets while mitigating liability.
However, there are some misconceptions about the extent to which establishing an LLC can protect you.
#1. I have an LLC and liability insurance coverage, so I don't need to keep an attorney on retainer.
Ok. What happens to your insurance coverage and or premiums when you use that policy?
The insurance carrier may drop you at the anniversary date, meaning you're unable to conduct business depending on the industry you're in, or after 6 months raise the rates.
Ask business owners who have endured a lawsuit and had to file an insurance claim, and they will inform you through gritted teeth how the premium increase was tantamount to the expense of retaining legal services on a monthly basis.
#2. Establishing an LLC is not a tax plan. Most tax and accounting professionals will encourage entrepreneurs to set up their LLCs as disregarded entities. However, that literally means the business entity is disregarded, meaning your business is an extension of you. For the purposes of tax planning purposes, all tax liabilities pass on to you.
There are two tax filing seasons. There is a tax filing season, and there is a tax planning season. Consulting with financial professionals and legal professionals that actually understand business financing and tax planning is critical. Professionals specialize. I’m assuming you wouldn’t hire a podiatrist (a foot doctor) to operate on your brain.
Professionals specialize. There is nothing smart or profitable about disregarding this important point. It’s not what you know that kills you in business, but rather what you don’t know. The average business planning tax and accounting professional reports that entrepreneurs miss out on tens of thousands of dollars in tax deductions and relief on a yearly basis because of this error in judgment.
Additionally, if you own multiple LLCs, you’re submitting multiple K-1 filings. Creating a bureaucratic nightmare for new entrepreneurs, greater expenses, and a host of other unintended consequences. Consider setting up a management company to manage your LLCs.
Another article is forthcoming about the advantages of management companies, however consulting a business planning professionals who specialize in this area of the law.
#3. Establishing an LLC doesn’t automatically mean you or your assets are automatically protected. Gasp!
To reiterate an earlier point, most LLCs are set up as single-owner, disregarded entities. Meaning legal liabilities also pass straight through to you. The first clue is in the word “limited” liability company. When the LLC is structured this way, it is more or less operating as an extension of you, offering limited protection.
There are rules that must be followed and suggested guidelines to ensure that the corporate veil isn’t pierced.
- Avoid commingling personal monies and business revenues. Business revenues should be deposited into a business deposit account, and you should pay yourself (deposit monies) into a personal account. If you want to buy groceries do so from your personal account.
- Many states require annual filing fees, and other bureaucratic steps to ensure compliance.
- It is strongly recommended that you acquire an operating agreement. The operating agreement for an LLC delineates each member's ownership percentage, rights, and responsibilities. While an operating agreement is not legally required, having one can be helpful in settling disputes. In other words, it’s kinda like you don’t have to tie your shoestrings in the morning, but you should else at some point you might trip and slam your face.
- Learn about and develop the habit of recording corporate/company minutes on a monthly basis. Why corporate minutes are not legally required, doing so once again can be helpful in settling disputes (particularly tax issues). Kinda like shoestrings.
- Your operations are set up in such a way that it can be argued that the LLC was set up simply to hold assets (very relevant to real estate investors) and for no other business purposes.
- Establish a management company to overcome the aforementioned argument. Consult with both a finance and legal professional that specializes in these issues.
Think about it like this. Lawsuits are business decisions. The math for the opponent boils down to how much can I expect to extract from you, subtract the costs of an attorney, and other expenses to prevail in court. Think of your LLC as a financial deterrent. If the opponent has a war chest, and the amount they can extract from you is large enough you may be headed for a doomsday scenario.
#4. Setting up an LLC in different states isn’t an airtight approach either, especially if it’s for real estate purposes. If you're holding real estate, you must abide by the laws in that state, regardless of where the LLC is set up.
#5. Another disadvantage is that LLCs don’t have shares like corporations do. This might make transferring ownership more difficult. For example, if an LLC has multiple members, every member must agree on any ownership changes.
If you need help with deciding whether an LLC or an alternative business entity is the right structure for your business schedule an appointment at 👉🏾 https://bit.ly/SmallBizArchitectureMeetUp.
#successleavesclues #entrepreneurshipisempowerment #nextopposocial #smallbizarchitect
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JuJuan Buford is a CEO, Co-Founder serial entrepreneur, writer, and public speaker. JuJuan started his career in the banking and investment advisory industry, transitioned into business ownership, and is enjoying entrepreneurial success in multiple industries: business coaching, real estate, direct selling, business technical assistance provider, ghostwriting, and publishing.
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