The Podcast to End All Podcasts on LLCs

You have likely heard of an LLC. You may even know that it protects your assets. But I would be willing to bet that in this week’s podcast of the LearnLikeaCPA show there is something new for you.

Misconceptions

The first, and by far biggest misconception about an LLC is that you have to have one to deduct expenses. This is flat out not true. Business and rental property expenses can be deducted on an individual basis as well as an LLC, Partnership, or S Corp. Single member LLCs are “Disregarded entities” in the eyes of the IRS. This means that the federal government sees no difference between you and your company for tax purposes. You are one and the same. 

For this reason, LLCs are the most simple company structure when it comes to filing taxes. If you have a multi-member LLC, you will need to file a partnership tax return. This return is due March 15 instead of April 15 and will incur an additional fee to file.

LLC Advantages

1. Limited Liability: This means you're not personally responsible for the debts and liabilities of your business. It protects you from your business's debts, your personal assets from business-related issues, and your businesses from each other.

2. Legitimacy: Having an LLC signals to vendors, customers, and creditors that your business is serious and credible, which can help build trust and attract opportunities.

3. Separation of Finances: It's crucial to keep your personal and business finances separate to maintain clarity and legal protection. An LLC helps you achieve this separation, reducing the risk of financial complications.

4. Operating under a Business Name: With an LLC, you can operate your business under its official name, further distinguishing your personal identity from your business activities while reinforcing its legitimacy.

5. Tax Advantages: If you're running a regular trade or business, you can opt for S Corporation status with your LLC. This can potentially lower your self-employment taxes, offering a financial advantage.

LLC Limitations

1. Limited Deductions: You can't deduct everything under the sun. Deductions must be directly related to your business activities. For instance, buying your niece a doll for Christmas won't fly as a business expense.

2. IRS Scrutiny: Just because you have an LLC doesn't mean the IRS won't question your deductions. If they suspect personal expenses are being claimed as business expenses, they'll want explanations.

3. Limited Protection: Despite the protection an LLC offers, it's not a force field against creditors or lawsuits. In some cases, states may even disregard LLCs, especially if they're disregarded at the federal level.

Set Up Time

After reading the advantages and limitations, maybe you think an LLC is right for you. Great! What now? Now it is time to set up your LLC. This week’s podcast shows a simple six step plan to form an LLC.

1. Register Paperwork with your Secretary of State. States filing fees may differ

2. Go to the IRS website and register for an EIN. Be sure to select Single Member and use your business name 

3. Go to your local bank with your articles of organization and EIN to open up a business bank account 

4. Keep the loan and title or deed of your rental property in the LLC bank account. This is what gives the limited liability protection.

5. Keep separate books and records for each LLC

6. Beware of state filing fees and potential tax returns

How many LLCs?

The next logical question is, do you need an LLC for each property/entity? That depends. There are a number of factors to consider to make an educated decision. Consider the amount of equity in each rental property and your personal net worth. A lot of people will choose to transfer a property into an LLC when they reach a particular threshold of equity to take advantage of the protection. It is important to consider State filing fees. If the filing fee is high, you might want to consider fewer LLCs. Lastly, keep in mind book keeping. Remember, the more companies, the more difficult it is to keep good records.

The Golden Rule

I want to leave you with the golden rule. Rental real estate should be held in your personal name, single member LLCs, or multi-member LLCs taxed as a partnership. You do not want to hold rental real estate in S or C Corporations due to adverse tax consequences. However, if you have an ordinary business activity you may want to look into setting up an LLC taxed as an S Corporation to save on self employment taxes as mentioned above.

The Podcast to End All Podcasts on LLCs

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