Author Topic: I want to start an LLC but I know little? I need some beginner advice.  (Read 2209 times)

Mr.GrowingMustache

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Hi all,
I have been wanting to do something more with my DIY hobbies for years now but never went to that next step. It has also been a dream of mine to create my own company, even if it is a one man operation. If I don't start it this year, I may never will.

Basically I have a product idea, that can take about 1-2 years to materialize into something tangible. I also have a lot of DIY work that I want to showcase on my own blog/website. The DIY work can also materialize into products that I can sell on the website. I also want to be familiar with running a business, and hopefully mature it to get some revenue.

So as you can see this is not some large operation, or a multi employee.

I live in NJ and I found the state resources where I can file (as well as LegalZoom) and apply but I am still fresh on what exactly an LLC is, and how it actually work once it is formed. Do I need a bank account in the business name, address, can I use personal credit card for the business, etc. I understand that an LLC is "limited liability" so it has an implication of protecting my personal assets in case of a lawsuit as opposed to a sole proprietorship, or is there a lot more? Also I understand that there are fees for re-registering the business every year, around $150, and I am willing to pay that unless there are other things I do not know about.

I would appreciate any advice, tips, links.. etc.

Thanks!


Trudie

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Re: I want to start an LLC but I know little? I need some beginner advice.
« Reply #1 on: January 15, 2016, 12:27:38 PM »
go to irs.gov and read all you can

BlueHouse

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Re: I want to start an LLC but I know little? I need some beginner advice.
« Reply #2 on: January 15, 2016, 03:08:20 PM »
Is there any reason to start an official business and incur expenses for maintaining that business before you actually have revenue?  You might just file as sole-prop until you have some revenue to offset those expenses.  IRS tends to see businesses with net losses as hobbies.   

dleavitt

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Re: I want to start an LLC but I know little? I need some beginner advice.
« Reply #3 on: January 15, 2016, 03:57:44 PM »
Is there any reason to start an official business and incur expenses for maintaining that business before you actually have revenue?  You might just file as sole-prop until you have some revenue to offset those expenses.  IRS tends to see businesses with net losses as hobbies.

I would generally concur with this.  0 revenue and some level of expense doesn't really look good on a tax return.  If you have a full set of activity (meaning revenues AND reasonable expenses) there are additional steps that can mitigate the risk of being classified as a hobby, even if you have losses.  Forming a LLC could be part of this.

An LLC, by itself, is supposed to provide some level of liability protection for its members.  However, most of those protections only seem to apply to non-active LLC members.  Active LLC members (like you will be, since you will be doing the work), seem to have much less protection.

For tax purposes the LLC designation is largely meaningless.  They are not taxed as a unique entity.  If you are the only member, your LLC will be taxed exactly the same as a sole proprietorship by default.


onlykelsey

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Re: I want to start an LLC but I know little? I need some beginner advice.
« Reply #4 on: January 15, 2016, 03:59:22 PM »
Quote
For tax purposes the LLC designation is largely meaningless.  They are not taxed as a unique entity.  If you are the only member, your LLC will be taxed exactly the same as a sole proprietorship by default.

Unless you check the box, no?  I'm not saying that would make sense here, but seems worth discussing?

Mr.GrowingMustache

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Re: I want to start an LLC but I know little? I need some beginner advice.
« Reply #5 on: January 15, 2016, 08:41:34 PM »
Is there any reason to start an official business and incur expenses for maintaining that business before you actually have revenue?  You might just file as sole-prop until you have some revenue to offset those expenses.  IRS tends to see businesses with net losses as hobbies.

I would generally concur with this.  0 revenue and some level of expense doesn't really look good on a tax return.  If you have a full set of activity (meaning revenues AND reasonable expenses) there are additional steps that can mitigate the risk of being classified as a hobby, even if you have losses.  Forming a LLC could be part of this.

An LLC, by itself, is supposed to provide some level of liability protection for its members.  However, most of those protections only seem to apply to non-active LLC members.  Active LLC members (like you will be, since you will be doing the work), seem to have much less protection.

For tax purposes the LLC designation is largely meaningless.  They are not taxed as a unique entity.  If you are the only member, your LLC will be taxed exactly the same as a sole proprietorship by default.

Thanks all for the replies!

That is a good point, when and how does it get classified as a hobby? I am also sure that there are plenty of startups that don't bring in any revenue  when they start up, and dont even become profitable for a number of years. I am not sure how the IRA determines, that "this doesn't look good". Perhaps there is some trigger, for the expenses being claimed, ie if someone claims $100k than that would be examined, rather than someone claiming $2k.

That would be a good question for one of my CPA firends... maybe I should start there.

If anything at least I want to know how it all works.

dleavitt

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Re: I want to start an LLC but I know little? I need some beginner advice.
« Reply #6 on: January 15, 2016, 08:52:26 PM »
Quote
For tax purposes the LLC designation is largely meaningless.  They are not taxed as a unique entity.  If you are the only member, your LLC will be taxed exactly the same as a sole proprietorship by default.

Unless you check the box, no?  I'm not saying that would make sense here, but seems worth discussing?

The LLC can elect to be taxed as a C- or S-Corporation, but unless you are going to prepare the returns yourself it usually isn't cost-effective to have that arrangement until your profits are up.  The good news is the LLC can elect corp treatment at any point in the future.  In our practice it isn't unusual for LLCs to start out being taxed as sole proprietorships, then elect S-Corp status once they are established and profitable.

dleavitt

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Re: I want to start an LLC but I know little? I need some beginner advice.
« Reply #7 on: January 15, 2016, 08:55:34 PM »
Is there any reason to start an official business and incur expenses for maintaining that business before you actually have revenue?  You might just file as sole-prop until you have some revenue to offset those expenses.  IRS tends to see businesses with net losses as hobbies.

I would generally concur with this.  0 revenue and some level of expense doesn't really look good on a tax return.  If you have a full set of activity (meaning revenues AND reasonable expenses) there are additional steps that can mitigate the risk of being classified as a hobby, even if you have losses.  Forming a LLC could be part of this.

An LLC, by itself, is supposed to provide some level of liability protection for its members.  However, most of those protections only seem to apply to non-active LLC members.  Active LLC members (like you will be, since you will be doing the work), seem to have much less protection.

For tax purposes the LLC designation is largely meaningless.  They are not taxed as a unique entity.  If you are the only member, your LLC will be taxed exactly the same as a sole proprietorship by default.

Thanks all for the replies!

That is a good point, when and how does it get classified as a hobby? I am also sure that there are plenty of startups that don't bring in any revenue  when they start up, and dont even become profitable for a number of years. I am not sure how the IRA determines, that "this doesn't look good". Perhaps there is some trigger, for the expenses being claimed, ie if someone claims $100k than that would be examined, rather than someone claiming $2k.

That would be a good question for one of my CPA firends... maybe I should start there.

If anything at least I want to know how it all works.

Part if it is this: is the activity being treated as a business?  i.e. Does it have it's own bank account?  Is the business name registered with the state?  Does only business activity go through the business bank account?  Is the personal account not used for business?  Stuff like that.  If you have a CPA that you work with, he/she would be the one to talk to.  There isn't a bright line.

SwordGuy

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Re: I want to start an LLC but I know little? I need some beginner advice.
« Reply #8 on: January 15, 2016, 09:41:49 PM »
Do not mix personal money with LLC business money.   It will weaken and may destroy the whole purpose of the LLC, which is to limit the liability of LLC actions to only the assets the LLC possesses and not your non-LLC assets.

You can invest your money into the LLC and have the LLC spend what is now its money.  That's ok.  But don't pay a LLC bill with your money or vice-versa.

Mr.GrowingMustache

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Re: I want to start an LLC but I know little? I need some beginner advice.
« Reply #9 on: January 16, 2016, 09:39:54 AM »
Do not mix personal money with LLC business money.   It will weaken and may destroy the whole purpose of the LLC, which is to limit the liability of LLC actions to only the assets the LLC possesses and not your non-LLC assets.

You can invest your money into the LLC and have the LLC spend what is now its money.  That's ok.  But don't pay a LLC bill with your money or vice-versa.
Quote
For tax purposes the LLC designation is largely meaningless.  They are not taxed as a unique entity.  If you are the only member, your LLC will be taxed exactly the same as a sole proprietorship by default.

Unless you check the box, no?  I'm not saying that would make sense here, but seems worth discussing?

The LLC can elect to be taxed as a C- or S-Corporation, but unless you are going to prepare the returns yourself it usually isn't cost-effective to have that arrangement until your profits are up.  The good news is the LLC can elect corp treatment at any point in the future.  In our practice it isn't unusual for LLCs to start out being taxed as sole proprietorships, then elect S-Corp status once they are established and profitable.


Yes, I saw on the form that I can be taxed as sole proprietorship, especially if I am the only employee. And yes I will do my own taxes for such a small operation. The major difference of having the LLC is that I get to register a name with the state. Now if there is more than one employee than me it seems that it gets complicated. I think I will also have to get an Employee ID Number from the fed (EIN).

And yes, a separate business bank account would make tracking expenses much better, as well as keeping the business separate.

I think it is more beneficial of having an LLC/Company name when I request quotes, and estimates from various contractors. I would be taken more seriously I guess. Thoughts?