Maybe you are doing some side work in addition to your regular W-2 job.  Or maybe working from home during Covid made you realize you are over the 9 to 5 grind and you are going out on your own.  You heard that if you are working for yourself, you should set up an LLC so you got on the Secretary of State’s website and filed the articles of organization.  You don’t really know what it means but you set up an LLC!

What is an LLC?

LLC stands for limited liability company.  It is a type of business entity that is typically set up for legal purposes, to limit the liability of your business activities from your personal life and/or other businesses. 

To set up an LLC, You usually start  by filing articles of organization with your state’s Secretary of State.  For an LLC to truly serve the purpose it is designed for i.e. limited liability, you will want to do a few other things including:

-Set up a bank account for the LLC to run all of your business income and expenses through.

-Consider working with an attorney to draft an LLC operating agreement.  This is especially important if you have partners/co-owners in the business.

-Set up a bookkeeping/accounting system.  If there will be minimal income and expenses, you may be able to just keep track in a spreadsheet.  If there will be more financial activity, you may need to utilize a bookkeeping software or app such as QuickBooks or Wave.

-Provide an updated W-9 to any clients/customers who give you a 1099.  You will want to give them an updated W-9 showing your LLC name (and EIN if applicable).

Also, to clear up one common misconception…setting up an LLC does not magically convert otherwise personal expenses into business deductions.  Generally, the amounts you pay to run your business are deductible as business expenses, regardless of whether you have a separate legal entity set up for the business. 

Tax filing options as an LLC

Operating an LLC gives you several tax filing options.

If you are the sole member (owner) of the LLC, you can file your taxes in the following ways-

-You can have the LLC treated as what is known as a “disregarded entity” which means you report all of the LLC’s income and expenses on your personal tax return and do not have a separate LLC tax return filing.

-You can make what is known as an “S election” with the IRS and file a separate S corporation tax return.  The main reason LLC owners choose to do this is it can reduce the self employment taxes you pay on your LLC income in some cases.

-You can file an election to have your LLC taxed as a C corporation and file a separate C corporation tax return.  One reason you may choose to do this is if you have a large amount of medical expenses; C corporations can allow for generous medical expense deduction reimbursements.

If you own the LLC with one or more others, in addition to being able to file as an S corporation or C corporation, you can also file as a partnership.  Filing as a partnership is the default tax filing for an LLC with two or more members.  A reason you may choose to file as a partnership is it can provide more flexibility in allocating income and losses to the members than filing as a corporation.

Do you need a federal employer identification number from the IRS?

If your LLC is going to be taxed as a corporation or partnership, you will definitely need an EIN to use for your business tax return.  If you are going to treat your LLC as a disregarded entity for tax purposes and report on your personal tax return under your social security number, there are still some circumstances where you will need or want a separate EIN for the business including if you plan on hiring employees.  Also, when you open a business bank account the bank will ask for your EIN.  You may be able to get around having an EIN with the bank by using alternative identification depending on the bank and their account opening requirements.

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