In the digital age, where social media doubles as a hub for financial advice, misconceptions about taxes and business structures are rampant. One prevalent myth is the notion that simply forming a Limited Liability Company (LLC) unlocks a treasure trove of previously unavailable tax deductions. This is simply not true.
First and foremost, it's essential to grasp that an LLC is a LEGAL designation, not a TAX designation. You form an LLC with your state's Secretary of State. It has nothing to do with the IRS. The Internal Revenue Service (IRS) classifies single-member LLCs as "disregarded entities" for tax purposes, which means the IRS ignores the fact that you're an LLC, treating all the income/expenses incurred in that business activity as if they're just happening to you personally. This is true whether you're operating a business directly or using the LLC to hold property. Should your LLC have more than one member, you have a partnership and have to file a partnership tax return (Form 1065).
Therefore, with your single-member LLC, you will have just as many tax deductions as if you had no LLC in place. Just as many deductions, not more or less.
A reason you might want to form an LLC is it can be beneficial for those seeking liability protection, separating personal assets from business liabilities. It's wise to consult with an attorney to determine if this is necessary for your business.
Another reason an LLC might be beneficial is if you have future plans to grow your business, hire employees, and eventually elect to be taxed as an S-Corporation or become a Partnership. It's worth noting, however, that if you have employees as a sole proprietor and then decide to transition from a sole proprietorship to an LLC with employees, it will involve establishing a new legal entity since your sole proprietor Employer Identification Number (EIN) cannot be transferred.to an LLC.
A recent development for LLCs, effective 1/1/2024, is the introduction of the Beneficial Ownership Information (BOI) reporting requirement. This is required to be filed when your entity is formed. If you had an LLC prior to 1/1/2024, you must file this initial report by 1/1/2025. If you’re filing an LLC in 2024, you have 90 days to file the report and 30 days to report changes in ownership. If you form an LLC after 1/1/2025, you must file your initial report within 30 days of the entity formation and 30 days to report changes in ownership. Fortunately, the filing can be completely done online at FinCEN’s website. This is not a public database. It’s important, though, that these filings are done timely. Otherwise, hefty monetary and potential criminal penalties can be enforced.
Understanding the legal and tax implications of LLC formation is the key to dispelling the myths, establishing an LLC for the right reasons, and maintaining compliance with the latest regulatory requirements.
By Mark Toney
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