Since it’s the funkiest of tax seasons here in the good ol’ USofA, I’m getting a lot of
complaints questions about taxes. (I owed this year due to the new tax law, even though I am meticulous about records. Le Sigh.) With this in mind, I thought I could shed light on how to know if you should become an LLC.
DISCLAIMER: I am not an accountant. Or a bookkeeper. Or a business lawyer.
I AM a freak in the spreadsheets. I have grown to lurrrrv numbers. Tis true, math and I have had a very trying relationship over the years… and don’t be mad at me, please, but common core is saving our relationship.
ANYWHO… wanted to briefly go over just a few concepts so you can think through how you’d like to set up your biz. Nothin’ fancy. Just some info to clarify some things.
Sole Proprietor: As a sole proprietor, you report net income or loss from a business on the “proprietor’s” personal income tax. Generally, sole proprietors own small or part-time businesses with no employees. It costs nothing to establish a sole proprietorship
LLC: Limited Liability Company – THIS IS NOT A TAX DESIGNATION! (Sorry for yelling.) There are two types of LLC’s. A “single-member” and a “multi-member”.
A multi-member LLC is a limited liability company with multiple owners who share control of the company, and it stands in contrast with a single-member LLC, wherein one person is in sole control of the organization. Most voice peeps would fall under single-member, so I’ll talk about that here.
It costs money to become an LLC. Depending on your state it can be inexpensive to maintain (yay! Arizona!) or less fun (Like where I live! California!).
LLC limits your liability. SUUUUPER basically, this means that someone can’t sue you personally, but can go after the assets of your business, only. SO, instead of debtors or unhappy people going after your kids’ college fund, they get your piano and studio mics instead. (I am not sure which is worse, though.)
If you have a single-member LLC, you can do your taxes two ways: on your personal income tax 1040 form, using a Schedule C, just as you would in a sole proprietorship OR you can apply to be taxed/regarded as a corporation, in which case the biz files its own federal tax return in addition to your 1040 personal income tax forms.
A multi-member LLC, on the other hand, is required to file a tax return and give its members K-1 forms to file with their returns.
S-Corporation: Unlike an LLC or a C corporation, an S corporation is not a type of business entity. The S corp. designation refers to the way a business has chosen to be taxed under the Internal Revenue Code.
This changes how your taxes are reported…. here’s a great excerpt from LegalZoom:
If a Single-Member LLC Is Taxed as an S Corporation:
The member can be considered an employee of the business. An owner-employee must be paid a reasonable salary. The LLC will report the salary as a business expense, and the owner will report both the salary and any remaining business profit on his or her personal tax return.
However, unlike the sole proprietor LLC owner who must pay Medicare and Social Security taxes on all profits, the S corporation and its owner will only pay these taxes on the owner’s salary. The remaining profits are not subject to these taxes.
Here’s One Example
Suppose you are an LLC owner taxed as a sole proprietor and your business makes $100,000 profit. You will report $100,000 of income, and you will pay Social Security tax and Medicare tax on the entire $100,000.
Now suppose you have elected to be taxed as an S corp. and have determined that your reasonable salary is $50,000. Your salary is a business expense, so the business now has a $50,000 profit. You will still report $100,000 of income [$50,000 of salary plus $50,000 of profit], but you and your business will only pay Social Security and Medicare taxes on your $50,000 salary.
It’s important to note that a “reasonable salary” isn’t based on the revenue of the business, but on criteria like training and experience, what other people in your field in your location make, time and effort devoted to business, etc. You can learn more here.
This would lead us to consider the actual amount of revenue your business is bringing in, how much you’re gonna pay yourself in salary, and if that makes a good balance. As sole props, folks often pay themselves based on how much revenue they make. Not so with SCorp.
Let’s just say you can’t make $150K a year, work in your business full time, and pay yourself $30K,to try to get over on taxes, if you live in a place like New York City, where the pay for any other voice teacher would be more than $30K for a full-time employee gig. You’d have to pay yourself much more – and that may or may not be worth the switch. (If you’re at $150K, then yeah, consider it.)
It costs time/money or both to apply for S-Corp status because of accountant and lawyer fees and such.
Oh! If you choose to be a sole prop or a single entity LLC, I highly recommend that you pay your quarterly estimated taxes. Here is the form you need to figure that out.
So, should I become an Limited Liability Company?
In my opinion, if it is financially doable, and you have a net worth from other parts of your life that is relatively large, it is 100% worth it to become an LLC.
If you’d be a single-member LLC, some questions to ask are:
1. How much does it cost in my state to apply?
2. How much does it cost to maintain?
3. What is my net worth outside of my sole prop?
4. How am I “proving” I am a business in other ways, in case my business were to be sued?
5. Do I have insurance to cover these sorts of things?
6. Am I making enough to justify the expense?
If you realize that you would like to have that added legal layer (again, NOT tax designation!), it’s a reasonable cost and worth protecting your net worth, then 100% – confirm with your accountant and biz lawyer and go for it!
If you have separate business accounts, you may have to tell your bank you need a new on under your LLC. If you do not have separate accounts, please make that happen right away. Maybe this blog will convince you.
It Doesn’t Have to Be Scary to go from Sole Prop to LLC
If you are good at looking up info and willing to ask questions and dig around, you can do this yourself through your state small business or tax agency.
If you’re nervous to do it yourself, you can hire a lawyer.
Or, you can pay a bulk legal service like LegalZoom or IncFile.
Let me know what you’ve chosen, and why! So many of us have different ideas and perspectives on how to set up our shops, and Iove learning about all the ways you’ve chosen!
Talk to your lawyer and arts-savvy accountant to determine which is right for you! This bloig isn’t meant to be that advice… it’s meant to bring some simplicity to the fog.
Did it help? I hope so!
All my BeastyBoss,
P.S. Further reading on if you should LLC, here.
P.P.S EIN = Employee Identification Number. This is the same thing as a TIN… Taxpayer Identification Number. Get one, pronto. It will be used everywhere you use your social security number (like W9’s/1099’s you give and receive). You’ll need this for adding employees, too. It’s free. Do it here. You’ll need a new EIN for your LLC, if you have one as a sole prop already.