In today’s litigious society, there very few businesses that carry little to no risk and are deemed safe businesses to operate under the status of Sole Proprietor.
Graphic Artist, Web Designer, Handymen, Writers, Hair Stylist etc. were always viewed as “safe” businesses to operator as a sole proprietor, but these business types are being sued daily. Just watch an episode of Judge Judy.
A lot of new business owners who elect to set up their own business entities are often misinformed by Federal, Government and Bank employees on the importance of setting up a business entity that will provide the best tax benefits and asset protection. As a matter-of-fact, I would urge you not to take the advice of employees regarding something as critical as your business formation. Consult an Accountant, CPA or Business Attorney (not a real estate attorney, but a Business Attorney).
A Limited Liability Company (not CORPORATION), LLC is a business entity offering “limited liability” to its owners. The LLC combines elements of a Corporation and a Partnership making it suitable business entity type for most small businesses that require asset protection.
Under the status of the LLC, the business owner is referred to as a Member. Unlike the Sole Proprietorship, the LLC could consist of a single member or multiple members. Also, an LLC must be legally registered with a state, it is not necessary to register the LLC in your home state. Depending on the type of business, a business attorney may recommend that you register the LLC with a state like Nevada or Delaware. I am not a huge advocate of this practice for new businesses. Establishing a business outside your home state carries additional fees and a degree of inconveniences if you are interested in applying for your Minority Business Enterprise status or other certifications.
When you register the LLC, you are establishing the Articles of Organization which operates as proof of the existence of your business.
Along with the Articles of Organization, you should also do the following: write the Operating Agreement; apply for an EIN (Employee Identification Number) with the IRS. This number is free and could be obtained immediately by telephone IRS (which I don’t recommend, there’s a government employee on the other end…) or applying at
www.irs.gov and fill out the SS-4 form. Set up a business bank account. All of this could be accomplished in one day.
Then of course, you must still obtain the proper licensing to be in compliance with the law.
- $100.00 for Articles of Organization; $50 to expedite
- $100.00 for Amendment to Articles of Organization; $50 to expedite
- $100.00 for Articles of Dissolution; $50 to expedite
- $100.00 for Cancellation; $50 to expedite
Please make note of the Dissolution and Cancellation fees, a lot of small business owners forget to “clean up their house” when ending their business. You continue to be responsible for the yearly tax assessment of $300.00 (the beige 9x12 envelope sent yearly from the Maryland Tax Assessment office). When business owners attempt to reinstate a business after years of inactivity, they are often shocked when they are given a huge bill to restore the business entity back to good standings.
There are things to consider when forming an LLC, here are just a few:
- All income, regardless of distribution, is taxed to members.
- Pass-through taxation, unless you elect to be taxed as a C corporation, then you are looking at double taxation.
- Income may be allocated by agreement of the members, subject to tax law.
- LLC members are protected from personal liability for business debts and claims.
- The limited liability provided to a LLC is equivalent to that provided to corporations.
- All income, regardless of distribution, is taxed to members.
- Capital losses pass through to members and are treated on individual returns. Carry-forward subject to individual tax conditions.
Additional forms of Limited Liability Companies:
Professional Limited Liability Company, PLLC is an LLC formed for the purpose of providing professional services. This entity type is generally formed when the services provided by the professional requires a license. All members of the PLLC must practice the same profession.
Series LLC (or Cell LLC). The first time I heard about the Series LLC was 2 years ago while attending a Real Estate Investors training workshop in Baltimore. Fortunately, I got a first hand view of how effective and ineffective this entity is. Under the pretense of asset protection, real estate investors with multiple properties were advised to create one LLC, and then add the other properties as series LLC or sub-LLCs. For the extremely active real estate investors with a monster portfolio of properties the Series LLC would reduce the time and expense of managing a large real estate portfolio. For the newbie real estate investors with five properties, living in Maryland the Series LLC is not beneficial. Investors spent on average $2,400-$5,000 to set up these Series LLCs just to discover that Maryland State did not recognize this entity type.
The Series LLC is the latest entity formed in the state of Delaware. A Series LLC is similar a single LLC with sub-LLCs associated with it. The series LLC is similar to a Corporate with different subsidiary, but considered easier and less expensive to manage. Although this business entity will be extremely beneficial in years to come, presently only 5 states recognized the Series LLC. The Series LLC has become popular amongst real estate investors and until it is adopted by the state of Maryland I would recommend avoiding this entity type. A good theory, but Marylanders should avoid until it is adopted by the state.
To learn more about operating as a LLC, visit my site at
www.tsbdg.com.
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