In the day and age of side gigs, second jobs, renting out spare rooms, driving for Uber, I get asked quite often if I should set up an LLC ?
I am going to first of all mention that I am not an attorney, and this is not legal advice. This is an explanation of what an LLC is, and maybe what it is not. This is more the basics how it relates to your taxes
So - The related question is, will an LLC help me save money on my taxes?
The answer is ... maybe
You need to know the basics
(1) An LLC is a State level of legal protection. In Michigan, the LLC Act was formed in 1993, and you can find it <<here>>.
Most States also have a Corporation Act, and anyone can register a business as a Corporation.
Registering for a Michigan LLC will afford you a certain amount of legal protection from various legal challenges. Maybe you have a roofing company, and you have an employee who falls off a roof. The LLC Act was designed to provide a limited amount of protection from lawsuits.
How much legal protection? "Limited Liability" means Limited.
If there are 3 members of an LLC, and there is a dispute about distributions, the LLC Act provides the framework for resolving those types of issues.
In fact, that is what the LLC Act was primarily intended to do. To provide the framework, the who can do what and who can't do what and how you properly notify someone, etc... If you were going to play baseball, each of the players knows the rules - right? If you are starting a business, the LLC Act provides the rule book for running a business.
(2) I have a LLC, what am I for Federal income tax purposes? The answer is- nothing. You are a disregarded entity. The IRS has only a couple of types of businesses that are recognized:
Corporations, Partnerships and Proprietorships <<entity comparison chart>>
If you register an LLC in Michigan and go to file your tax returns, you are not recognized. Your tax returns are filed with the IRS. That is Federal, not State...
If you come to me at the end of the year and say that you registered a LLC, and nothing else, then we file you as a Sole Proprietorship if its just you, or a partnership if there is more than one of you who own it.
(3) So what do you do? Well, now you know that an LLC is a State thing and that your taxes are Federal thing.
Decide if you want to be an LLC or a Corporation then step #2 is that you need to register your business for Federal purposes.
Most people that start out, start as Sole Proprietors. They are simple to start, there is little additional bookkeeping, and can quickly be dissolved. Your LLC registration will enable you to open a bank account and deposit and write checks using your business entity.
As you grow to a certain level, maybe where your Sole Proprietorship becomes full time, and maybe you are applying for a mortgage or you want to hire employees, then you would move into a Corporation or a S Corporation (Small Corporation).
Review the tax pros and cons of your choice of entity. <<entity comparison chart>> If you elect for an S Corporation, the compliance can get expensive, but retirement planning opportunities open up.
Most importantly, is enlist the assistance of a professional to get set up.
Certified Public Accountant
Certified Fraud Examiner
Enrolled Agent
29 Pearl St NW, Ste 225
Grand Rapids, MI 49503
616 970 3000
dougzandstra.com
email dougzandstra@gmail.com
