Should I create LLC for new business?

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Topic Author
uwbadgers
Posts: 86
Joined: Mon Aug 25, 2014 3:36 pm

Should I create LLC for new business?

Post by uwbadgers »

Hi all,

SUMMARY: Should I create a single member LLC for my new side business? Is the setup/cost worthwhile for me and will it help me increase my profits using deductions?
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BASIC INFO
Married
2 kids
HHI = ~175k/year
0 debt



I am a personal trainer and make ~40-45k/year. Over the last year I've created a side "nutrition coaching" business. Right now this is all based within current company A.

For example, in company A, I have 21 clients paying $99/month. I get 40% each month.

$2079 x 40% = $832/month for me.

This is then put on top of my training sessions and other bonuses, taxed, and I get my net income.
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My boss, who recently acquired our franchise (6 locations currently) has suggested I create my OWN LLC company, Company B, and then bill each location individually.

He also has explained how I can use deductions and things like this to overall save on taxes.

While he tells me about all these advantages, I want to make sure this truly is and I'm not blowing lots and lots of $ to put this together for, in reality, isn't massive amounts of monthly income and could fluctuate dramatically. While I want it to grow and succeed, I'm realistic about it. Plus, I would eventually have a "cap" as how big I can grow it before my time in it would become too large to make it worthwhile.
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Right now my 21 clients are just at location A. I am doing a presentation to the other individual studio owners next month to hopefully become "the guy" for the other locations with this program. This has potential to up my clientele to 50-60.

This could/would mean ~$2,000/month additional for me which is a significant jump, about 35%/year for me.

While none of what I've created is "special" (anyone could do this same thing), what I've done is put it all together, test it out, and put it into action. Could other trainers want to/get in to this down the road? Sure, but I'm far ahead and trying to use that to my advantage to "get in" to the other locations now.
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A few questions and

1. Does this make sense for me to make a single member LLC (state of Wisconsin)?

2. This business is 100% ONLINE and I would be coaching through my home/computer for all of it. Would this be a helpful tax deduction?

3. The expenses for running this business are super basic. Right now, the only expense, currently paid by A is $149/month. If I increase my total clients it would go to $199/month. Besides that, there are no monthly expenses. B would then assume this monthly expense if it became LLC. Is that another helpful deduction that I don't have now?

4. Any other thoughts or follow up questions for me?
J295
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Re: Should I create LLC for new business?

Post by J295 »

I don't believe there are any tax advantages in your situation to an LLC. The same tax treatment applies to a sole proprietorship.

What about liability concerns? Do you have liability insurance coverage? Doesn't seem like a high risk liability business, but let's say a client gets ill and claims it is because you gave "bad advice." Lawyer fees alone could eat up substantial resources defending a claim.
RudyS
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Re: Should I create LLC for new business?

Post by RudyS »

In Michigan it is EASY to set up an LLC at minimal cost. I did that for a consultant business after I retired. The Secy of State web site has info. Your state (Wisconsin) may have something similar. Nolo Press had a useful book. Others will discuss any financial advantage and the liability question.
Spirit Rider
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Joined: Fri Mar 02, 2007 2:39 pm

Re: Should I create LLC for new business?

Post by Spirit Rider »

No, there is unlikely to be a benefit to an LLC in this fact pattern.

As already pointed out, by default a single member LLC is disregarded for income tax purposes anyway. You will still file as a sole proprietorship. There will be no difference in allowed business expenses, other than the extra cost to establish and operate the LLC, which you didn't need in the first place.

Also, contrary to a previous post, an LLC provides limited liability protection for the company, it does not protect the personal acts of the owner. However, the liability protection is a legitimate concern. LLC or no LLC you should get liability insurance.

There are persistent myths that all business owners show have an LLC or an S-Corp. In many cases, the former provides no real benefit and thee latter can actually be counter-productive.
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dm200
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Re: Should I create LLC for new business?

Post by dm200 »

One of the major alleged benefits of an LLC (or other corporation) is personal asset protection.

The problem with that is creditors, those with who the LLC has contracts or agreements, etc. often (perhaps usually for many such entities) will require a personal guarantee on such agreements.
bogglizer
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Re: Should I create LLC for new business?

Post by bogglizer »

An LLC only protects your personal assets if the LLC is truly not run as a sole proprietorship. In other words, someone else has to hold stock. Not sure if it can be a spouse to get the protection. (warning: this may be state dependent.)
clemrick
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Re: Should I create LLC for new business?

Post by clemrick »

uwbadgers wrote: Sat Sep 23, 2017 6:51 am For example, in company A, I have 21 clients paying $99/month. I get 40% each month.

$2079 x 40% = $832/month for me.

This is then put on top of my training sessions and other bonuses, taxed, and I get my net income.
Soooooo, you are an employee of Company A??

What your boss is suggesting is that you start your own business. You do not need an LLC for that, and you will actually be paying MORE taxes since you will pay both halves of the payroll taxes.

You will be an independent contractor. That means you won't have a "boss." You will be providing services to his customers, but he should have very little input about how, where, or when. You bill him for your services and he can charge his customers whatever he wants.

It is possible to remain an employee and then just do the nutritional stuff as a contractor, but then things can get messy if you can't keep the two absolutely separate.

And your computer, you can deduct it (depreciation) only if you use it solely for the nutritional guidance. Any personal use, makes the bookkeeping and tax situation messy.
Spirit Rider
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Re: Should I create LLC for new business?

Post by Spirit Rider »

bogglizer wrote: Sat Sep 23, 2017 10:10 am An LLC only protects your personal assets if the LLC is truly not run as a sole proprietorship. In other words, someone else has to hold stock. Not sure if it can be a spouse to get the protection. (warning: this may be state dependent.)
This is based on a false premise.

A Limited Liability Company (LLC) is not a corporation. It has no stockholders.

An LLC has members with ownership interests and by definition a Single Member LLC (SMLLC) only has one member. A SMLLC properly created and operated has the same liability protections as a Muti-Member LLC (MMLLC) in any state I am aware of. If there is a state that does not offer liability protection to SMLLCs, it certainly has nothing to do with stockholders.

As I previously stated, an LLC does not provide liability protection against the personal acts of the owner. Also, the previous reply is correct, since an LLC does.provide asset protection against business creditors. They are not dumb and almost always require a personal guarantee.

Finally, to preserve what little liability protection there is, you must not co-mingle personal and LLC assets. You need separate financial accounts and lines of credit and diligently keep them separate.
bogglizer
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Re: Should I create LLC for new business?

Post by bogglizer »

Spirit Rider wrote: Sat Sep 23, 2017 12:07 pm
bogglizer wrote: Sat Sep 23, 2017 10:10 am An LLC only protects your personal assets if the LLC is truly not run as a sole proprietorship. In other words, someone else has to hold stock. Not sure if it can be a spouse to get the protection. (warning: this may be state dependent.)
This is based on a false premise.

A Limited Liability Company (LLC) is not a corporation. It has no stockholders.

[...]
Weird. My LLC has 100 shares. I can sell them. Perhaps you are from a different universe?
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bottlecap
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Re: Should I create LLC for new business?

Post by bottlecap »

LLC is primarily for member's or members' liability protection. Shouldn't be any real tax difference.

There are a lot of misconceptions as evidenced by this thread (and your bosses' comments).

If you plan on taking on debt for the business, getting a lease, or could conceivably be sued for a lot of money, setting up an LLC should help. Note that some businesses you deal with will also want a personal guaranty. You should still get liability insurance, too, to be on the safe side.

Local laws about LLC's also vary.

Good luck,

JT
Spirit Rider
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Re: Should I create LLC for new business?

Post by Spirit Rider »

bogglizer wrote: Sat Sep 23, 2017 7:16 pm Weird. My LLC has 100 shares. I can sell them. Perhaps you are from a different universe?
If your "LLC" has 100 shares, you elected to be treated under sub chapter S as a "corporation".
Spirit Rider
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Re: Should I create LLC for new business?

Post by Spirit Rider »

bottlecap wrote: Sat Sep 23, 2017 7:43 pm If you plan on taking on debt for the business, getting a lease, or could conceivably be sued for a lot of money, setting up an LLC should help. Note that some businesses you deal with will also want a personal guaranty. You should still get liability insurance, too, to be on the safe side.
Exactly who are these creditors who won't want a personal guarantee? I'll say it again, an LLC providing only the professional services of the owner gets little to no liability protection.
Topic Author
uwbadgers
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Re: Should I create LLC for new business?

Post by uwbadgers »

Hi all,

OP back. Thanks for all the words here......can't say I understand all of them, but thanks :)

From the sounds of it, many say that this isn't really a tax BENEFIT for me. My boss, not a CPA keep in mind, has made it sound like in an LLC setup I'm able to deduct A LOT of things thus showing less profit thus taxing me less for that portion of my income.....but sounds like that isn't necessarily 100% true or lawful?

Just to clarify a few things, if it's helpful, there will never be debt to incur for this, never an actual location (besides my home), and insurance wise very little risk on my end the way the program goes.

Does the below change any thoughts here?

Both of these are assuming I get to additional 20k/year soon (currently at 10k)

Current
New Income---60k
taxed normally
Work for Company A as normal and they just pay me my coaching portion (20k) on top of training portion (40k)

New
Training Income---40k
---taxed normally

Coaching Income LLC---20k
Deduct---program expenses each month, home office used exclusively for this, other?
---taxed after deductions as part of my "entire income"
---create separate bank accounts for all funds in and out
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Again, this is very outside my comfort and knowledge zone. If this really doesn't make sense for me and will only cause me stress and time spent for minimal benefit, I don't have interest. Just trying to make the best decisions assuming future growth.

Adulting is hard :)
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bottlecap
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Re: Should I create LLC for new business?

Post by bottlecap »

Spirit Rider wrote: Sat Sep 23, 2017 8:32 pm
bottlecap wrote: Sat Sep 23, 2017 7:43 pm If you plan on taking on debt for the business, getting a lease, or could conceivably be sued for a lot of money, setting up an LLC should help. Note that some businesses you deal with will also want a personal guaranty. You should still get liability insurance, too, to be on the safe side.
Exactly who are these creditors who won't want a personal guarantee? I'll say it again, an LLC providing only the professional services of the owner gets little to no liability protection.
What's with the 'tude?

I'm not as personally invested In this thread as you are, but I also know that I don't know much about the OP's business, and I don't know where he lives. That's why OP should investigate with someone who actually knows and can consider these things.

And if your business has a credit history, there are instances where a personal guaranty might not be required. However, most sophisticated creditors will if there is substantial money involved and that's precisely the reason I mentioned that many creditors would require one.

JT
Spirit Rider
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Re: Should I create LLC for new business?

Post by Spirit Rider »

Being an independent contractor does cause you be a business that allows more options for legitimate and 100% legal business expense deductions. However, a default single member LLC is treated as a disregarded entity by the IRS. You will file on the same exact Schedules C and SE as a sole proprietor. Therefore, there will be no difference taxwise.

There is one other advantage as a business. You will be both the employer and employee. This allows you to adopt an employer retirement plan. This does not matter if the maximum your budget allows is <= the $5,500 IRA contribution limit.

However, if your financial plan says that your total retirement plan contributions should be 20% of your gross income, you can not reach that with the IRA alone. Especially if you have no retirement plan through your
current employer, your business can adopt it's own plan.

A SEP IRA allows you to contribute up to 20% of your net self-employment income (net business profit - 1/2 SE tax). This in combination with an IRA would allow 15% total retirement plan contributions.

A one-participant 401k allows you to make an employee deferral of up to 100% of net self-employment income up to a 2017 limit of $18K plus the same employer contribution as the SEP IRA. This would allow you to make total retirement plan contributions of 20% - 45% gross income.

Note: Your boss may not be entirely altruistic here. He could be trying to improperly categorize the additional compensation as going to an independent contractor to save himself the employer share (7.65%) of FICA. You you will pay this as part of the 15.3% SE tax.

If he is proposing to pay you the same rate. You are losing money. You need a 10% higher rate just to break even on the extra SE tax. There are other cost savings to the employer than just the FICA. This is a different situation then entirely being an independent contractor, but I still would want a minimum 20% premium over your W-2 hourly rate.
Spirit Rider
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Re: Should I create LLC for new business?

Post by Spirit Rider »

bottlecap wrote: Sun Sep 24, 2017 8:05 am What's with the 'tude?
I did not intend to offend. The OP does not presently have a business. This would be a totally new business. It is extremely unlikey that any creditor would offer credit without a personal guarantee. I was simply asking for an example of a creditor that would do so in these circumstances.
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dm200
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Re: Should I create LLC for new business?

Post by dm200 »

It is extremely unlikey that any creditor would offer credit without a personal guarantee.


Exactly my experience a few years ago with an LLC startup. Not just credit but some (or many) other contracts, such as a lease on business space.
Topic Author
uwbadgers
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Re: Should I create LLC for new business?

Post by uwbadgers »

Spirit Rider wrote: Sun Sep 24, 2017 8:48 am Being an independent contractor does cause you be a business that allows more options for legitimate and 100% legal business expense deductions. However, a default single member LLC is treated as a disregarded entity by the IRS. You will file on the same exact Schedules C and SE as a sole proprietor. Therefore, there will be no difference taxwise.

There is one other advantage as a business. You will be both the employer and employee. This allows you to adopt an employer retirement plan. This does not matter if the maximum your budget allows is <= the $5,500 IRA contribution limit.

However, if your financial plan says that your total retirement plan contributions should be 20% of your gross income, you can not reach that with the IRA alone. Especially if you have no retirement plan through your
current employer, your business can adopt it's own plan.

A SEP IRA allows you to contribute up to 20% of your net self-employment income (net business profit - 1/2 SE tax). This in combination with an IRA would allow 15% total retirement plan contributions.

A one-participant 401k allows you to make an employee deferral of up to 100% of net self-employment income up to a 2017 limit of $18K plus the same employer contribution as the SEP IRA. This would allow you to make total retirement plan contributions of 20% - 45% gross income.

Note: Your boss may not be entirely altruistic here. He could be trying to improperly categorize the additional compensation as going to an independent contractor to save himself the employer share (7.65%) of FICA. You you will pay this as part of the 15.3% SE tax.

If he is proposing to pay you the same rate. You are losing money. You need a 10% higher rate just to break even on the extra SE tax. There are other cost savings to the employer than just the FICA. This is a different situation then entirely being an independent contractor, but I still would want a minimum 20% premium over your W-2 hourly rate.
Thanks for these thoughts. I didn't realize the retirement account was something possible in this scenario....it actually makes it more appealing to me.

1. So for the taxes, as an LLC I now absorb that FICA tax. So assuming all things are equal I make less in that scenario? Would expense deduction even things out?

2. I do not have or will be having a 401k offered at my current job. We max both ROTH IRA and my wife maxes 401k.

I am intrigued that I can create a self 401k. Would this be an option that makes this LLC more worthwhile? I can contribute to a tax saving retirement account while decreasing my total taxes?

3. This is more of additional info, but one little "wrench" is that if I am able to go company-wide with this, there will be 5 different owners that I would work with.......I enroll their clients and would then bill each of them separately......each of our locations is independently owned. Does that change any thoughts on this situation? Would having the own business simplify that monthly process?

Thanks for any words of wisdom!
Spirit Rider
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Re: Should I create LLC for new business?

Post by Spirit Rider »

As previously stated, a default single member LLC is irrelevant income tax wise. You will file the exact same tax return as a sole proprietor on a Schedules C and SE
  1. As a sole proprietor you will pay a 15.3% employer/employee SE tax instead of having the 7.65% employee FICA deducted from your pay. When you switch from an employee to an independent contractor your current employer/future client is saving the 7.65% employer FICA, unemployment insurance, workers compensation insurance, etc.. Under no circumstances should you accept the same hourly rate. If the owner will not increase your rate, it is prima facie evidence that the owner is improperly trying to reclassify you from an employee to an independent contractor purely for the owner's benefit. The business expense deductions should not be factored in. One of the factors the IRS considers when evaluating the employee/independent contractor question is, "Is the independent contractor being paid at a rate that a business would charge and not simply that of a contract employee".
  2. Certainly employer retirement plans are a great potential benefit as an independent contractor, provided that you have the financial means to take advantage. You can greatly decrease your current tax liability while increasing your retirement savings. Here again this should not be a factor in allowing the owner to low ball your rate.
  3. The more clients there are, the easier it is to justify the independent contractor status and the more opportunities for legitimate business expenses. However, it still does not justify being economically disadvantaged by the owner(s).
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