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This is mainly a question for those of you experienced in setting up your own LLC. (Perhaps Art? I noticed you have one.) Reasons and benefits? Is it a yearly state fee? Legalzoom.com?
Any advice would be great and thanks in advance,
John
I looked into it a little bit a few years back. From what I remember (and I could be wrong), by incorporating I would essentially be paying taxes twice. My total “revenue” would be taxed because I’m a corporation, and then whatever “salary” I paid myself would again be taxed. And of course you still can’t get out of the “self employment” tax by incorporating, which generally will make up the largest portion of your tax bill.
I’m really not sure if there are any benefits to a small time freelance composer. For me it doesn’t make sense to pay a corporate tax and then pay taxes as an individual since my total revenue basically equates to one persons salary. One of the main benefits, as I understand it, is that when you are an LLC it can protect your personal assets in case somebody sues you. So if they sue you as an LLC, all they can take is what is associated with your business. If you are not an LLC, then they can take everything you own (house, car, whatever). At least that’s what I’ve heard, but I am certainly no expert on this subject.
I’m going to talk to my accountant about it sometime before the end of the year to get more details and see if I’m missing out on anything. I’ll post what I find.
An LLC is NOT, repeat is NOT, a corporation, nor is it a form of incorporation. It is a Limited Liability Company.
@Steve, you are correct about getting taxed twice if you incorporate. Tax flexibility is one of the reasons people form LLC’s. You can elect your tax status.However, if you are a single member LLC, or if it’s you and your spouse, the IRS considers the LLC a disregarded entity. The LLC’s taxes are basically filed as a schedule on your personal return. You can deduct the LLC’s expenses from your personal income.
As far as protection goes, with respect to LLC’s and corporations, it’s a bit of a myth the smaller you are, and either way only offers protection in certain scenarios. You cannot protect yourself from liability for your own negligence or criminal acts by being a corporation or an LLC. I “pierced the corporate veil” many times to sue people who thought that they were protected.
On the other hand, if you borrow money, or have credit cards in the name of the LLC or corporation, you are shielded from liability if the company goes bankrupt AS LONG AS, you did not pledge personal assets. For example, you go to a bank to get a business loan for your LLC, and the bank requires you to use your house to secure the loan. If the LLC goes bankrupt, the bank can go after your house. The LLC will not protect you.
My state dos not charge an annual fee for LLC’s, unless you are a licensed professional, i.e, lawyer, doctor, etc. So, when I had a law firm, we paid an annual fee. Now that I just have a music business the is no fee. 🙂 Other states may differ.
@John, you can try the LegalZoom route, if you wish, although that may not be available in your state. I’d prefer dealing with an individual (but hey I’m biased).Does that help?
Thanks for the reply Michael. That clears things up. I was under the impression that LLC stood for “Limited Liability Corporation“. Good to know that LLC is indeed different from incorporating. So, in your opinion, what are the advantages of going through the rigamarole (and shelling out the cash) to form an LLC? I’m not sure that I see one thats worth the $500 (I think thats what it costs in my state). Well, I guess you can protect your businesses name that way if you have one, right?While we have the lawyer in the house I’d like to ask a question that I’ve been curious about. I’ve heard that if you put “LLC” or “Inc.” at the end of your businesses name and your business is NOT incorporated or an LLC, that that is actually illegal. Like some sort of fraud I guess since you are claiming a type of liability that you actually do not have.Just curious as I always get business cards etc. from people that say “Phat Beatz, Inc.” or whatever and I know for a fact that they are not incorporated.Thanks.
Ummm… I’m not sure why my above post got transformed into one giant paragraph. Sorry for anybody trying to read it. I know thats annoying.
I actually did use LegalZoom to set it up but I have an accountant so he keeps me up to date on the filings. In Calif. it will cost you $800 per year.
The reason we started one had nothing to do with saving money or a particular business decision but everything to with getting more affordable health care. Robin is a two time cancer survivor and when we moved back to CA the premiums were through the roof (who says we don’t need health care reform!). But at the time, with the LLC, we could get a two person group policy and the insurance company could not deny us for pre-existing conditions. Saved a ton of money on premiums. Once I went on Medicare the insurance company tried to cancel us as they do not cover a one person group. Fortunately there is a loophole. Because I was covered by a qualified plan (Medicare) they could not cancel Robin.
At this point she’s a ten year survivor so I’m not sure it’s still an issue and I have thought about letting it go.
Thats good to know info Art. Thanks.
@Steve using LLC or Inc. would be fraud if it was used to intentionally mislead, like to apply for a loan. But, because banks require documentation, i.e, showing corporate ID, date and state of incorporation etc., they would most likely spot the fraud quickly. When you form a publishing company, both ASCAP and BMI require copies of your articles of incorporation, or a certificate of organization for an LLC. Interestingly, states do not require a business to display Inc., or LLC as part of its logo, just on official documents.
I have an LLC. I did not want to incorporate because having a corporation, even if it’s an “S” corp is a PITA. As you mentioned, it means double taxes, which means a second tax return (more money for your accountant), and other complicated things.
I formed the LLC for a number of reasons. I am involved in a publishing joint venture with another company. Together we have our own library. I have two other publishing entities and my composing entity. All of these are divisions of the LLC. Plus, I also publish other writers’ works. When things started to grow beyond just me writing cues, it made sense to go beyond sole proprietor.
I’m in the process of forming an LLC. I’m doing it mainly for the limited liability aspect so that personal assets have a higher level of protection in case anyone would ever take action against me (not that I’m giving anyone reason to). In my state (NC – and I think this might be the case nationally) an LLC is a “tax through” entity so my tax situation shouldn’t change from being a sole proprietor.
Maintaining an LLC costs $200 here.
My lawyer is a big fan of the S Corp despite the added work. He’s pushing me toward eventually folding into one mainly because of the tax break that occurs on profit beyond the reasonable salary that you pay yourself.
“the taxes were through the roof”. Duh, I meant premiums and made that change to my original reply.
@Kiwi..double check with your lawyer AND your accountant. Like an LLC, an “S Corp” in not an actual corporation. It is a tax accounting designation.
An LLC is is flexible in that you choose your tax structure. You can elect to be taxed as a C corp, or an S corp, or even as a sole proprietorship. There is little or no difference with respect to the “pass through” nature if you elect S corp or single member disregarded entity (basically a sole proprietorship)
Pass through accounting is good if you experience a loss on paper, because it lowers your personal income tax. S corps are good if you are in a situation with high self-employment taxes. But, if you have a lot of passive income, like royalties, you could actually be increasing your taxes with an S corp.
Given that you can simply elect for your LLC to be taxed as an S corp, I’m not sure why you would want to “fold your LLC into an S corp” later.
With respect to “limited” liability: almost all state statutes and case law have exceptions which provide for liability of an LLC member or corporate shareholder. This is especially true when the company is closely held. Under these circumstances, the company is often considered and alter ego of the member or shareholder. This rule is known as the identity rule. Where you have the greatest protection is with respect to company debt, as long as you have not secured the debt with personal assets.
With respect to the tortious (wrongful) conduct of the member or shareholder, for example copyright infringement, it may be very easy to pierce the veil to reach personal assets, especially in a single-member LLC / S corp.
Anyone considering forming an LLC or corporation should thoroughly discuss the idea with their attorney and accountant. Be realistic about about your potential income, so you don’t go for overkill. Explain to your lawyer what kind of liability you are concerned about, i.e., debt, someone falling down your studio steps, or getting sued for copyright infringement. Neither an LLC nor incorporation is a magic shield that will protect you in all situations.
Thanks for all of your clarifications and explanations. Very helpful. To be clear, I never meant to insinuate or imply that I believe an S Corp to be anything other than a tax accounting designation.
I’m just sharing my recent experience here, not attempting to advise anyone or guide anyone or claim that I’m qualified to properly disperse legal information. I’m not and I’m very likely to clumsily translate a point that my lawyer has made by saying something like “fold my LLC into an S Corp” when that’s not the most accurate way to portray the idea that was imparted to me. In other words, he said it the way you’re saying it and I didn’t represent that very well.
“it may be very easy to pierce the veil to reach personal assets”
That’s the way I have always understood it also.
Thanks for all of the great input MichaelL!
I received a message asking for clarification regarding my statement that a subchapter S corp is not really a corporation. The S corp designation is a tax accounting method it is not a different kind of corporation. It allows a corporation to use pass through accounting, like a sole proprietorship. An S corp, however, still has all of the “paperwork” and administrative burdens of a C corp.
Here’s a link to a chart showing the differences. http://www.themoneyalert.com/Corp-Entity-Table.html
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