Misconceptions about the LLC

The Limited Liability Company or LLC is a popular form of business entity these days.  When looking at incorporations versus LLC’s, ninety percent of those new business entity filings in the State of Wisconsin are LLC’s.

Our great State of Wisconsin has capitalized on that trend, and requires not only a $130 registration fee (that’s for online registration; otherwise, it is $170 on paper), but also an annual $25 registration renewal fee to keep the LLC registration active.

Now here’s the big misconception:  Limited Liability.  That “limited liability” might only be with trade creditors, however.  The Wisconsin Department of Revenue and the Internal Revenue Service both have the means to recover money owed them from the “responsible” parties in the LLC.  Anyone signing the checks is a responsible party.  Anyone filing sales tax, payroll tax or income tax returns is a responsible party.  And of course, anyone with ownership in the LLC is a responsible party.

If a financial institution lends money to the LLC, they are certainly going to get some personal guarantees from ownership before lending that money.  There is no limited liability with that transaction.

If the LLC’s business involves services provided by individual persons, there is the concept of personal negligence from which the LLC form of business entity can NOT protect.  Insurance can provide protection from acts of personal negligence; realtors have errors and omissions insurance and most other professions have malpractice liability insurance.

What the LLC structure can protect an individual owner from is the personal negligence caused by the actions of other owners of the LLC.  In other words, when an LLC has multiple owners, it is wise to use the LLC form of entity  organization.  If you are a single member LLC, the extra fees paid to form and maintain an LLC registration do not buy you anything more in the form of protection, except from trade creditors.

Unless you are planning to stiff your trade creditors, there is no reason to form an LLC for a single member LLC which will be a disregarded entity.

There may be reasons to be an LLC, especially when you have multiple owners, but if you are a sole proprietor, providing services to others or other business entities, the LLC form of business will probably be just an added expense with no benefit for the extra cost over being the sole proprietor.

Thirty years ago, it was fashionable to incorporate.  This only created a second set of tax returns, extra accounting fees, banking fees for separate checking accounts and confusion for the owner.  But there was this “mystique” that incorporating would save taxes.  Hogwash!  The extra paperwork created more expense and even more taxes in the long run for most very small businesses.

Now it is fashionable to create an LLC which may not require separate tax returns, but it certainly requires separate checking accounts and extra registration fees with the Wisconsin Department of Financial Institutions.  Before jumping into this trend, ask yourself if it is necessary:

Does the LLC have multiple owners?  If yes, then an LLC is probably necessary.  Otherwise, NO…..a sole proprietorship is better.

And there is one MAJOR DISADVANTAGE to being an LLC versus being a sole proprietor.

For the LLC, tax law mandates that single member individual owners of LLC’s provide your Social Security Number to your customers for reporting your nonemployee compensation on Form 1099-MISC.   Check out the instructions to the W-9 here which have been highlighted so that you can see this issue:

https://poppycpa.sharefile.com/d-s81b85e589cc4fbfa

Do you want to be handing out your Social Security Number to your LLC customers?

For a sole proprietor, the Internal Revenue Service prefers, but does not mandate, use of the Social Security Number on Forms 1099-MISC.  As a sole proprietor, you can apply for an employer identification number, EIN, and then provide this number to your customers for reporting service payments (nonemployee compensation) to you on a 1099-MISC.   I personally believe this is a much safer route to go than handing out your Social Security Number to all of your customers.

/0 Comments/by

Entrepreneurial Eight Ball

This is an article I wrote 10 years ago for a local newspaper.  There are so many people starting their own businesses today that it bears repeating all of this information.

Here are eight essential edicts for establishing an entrepreneurial enterprise.

Remember Calvin and Hobbs with their CalvinBall game? The players made up the rules as the game was played. The only real rule was to let the other person know the rules, but only after the other person broke a rule. In order to win, you had to outwit while out-ruling your opponent. This is a lot like starting your own small business. If you want to win in your own business, here are the rules to the game, in order of importance, to outwit while out-ruling your competition.

1. Have customers. A good idea alone will not work. If you don’t have customers already, you will need a lot of cash for those operating losses you will have until you build up a steady flow of incoming customer revenues. Do you have the cash to throw away like this?

2. Comply with the rules and regulations governing your business. There are local ordinances, State and Federal laws, licenses and permits that you will need to obtain before making your first sale. You can have customers but if you don’t operate by the government agency and general business rules, you can be shut down before you make your first bank deposit. Do you know all about sales taxes, employment taxes, income taxes, excise taxes, local zoning ordinances, and sign permits? Professional legal counsel and Certified Public Accountants aren’t just for getting you out of trouble; they are best used to prevent trouble from happening. Find yourself a good team of business counselors to learn all you can. Ask your friends and business contacts whom they would recommend.

3. Keep control of and understand your financial records. How do you know if you’re making money? The easiest gauge is to see if you have any money left in your pocket at the end of the week. But what if you spent all your profits on personal things, before you paid income taxes? You could be in for a real big surprise on April 15th. What if you need to borrow money? Lenders don’t go on your word alone, they need to see financial statements. You also need to be sure your customers are paying you on time. The biggest killer of small business can be delinquent customer accounts. You need to be organized and you need to know the numbers to get your own answers about how you are doing financially.

4. Communicate and connect with everyone you know. Be proactive, ask questions more than once and get confirmations that you’ve heard correctly, get understandings down in writing (customer contracts, employee policies, and buy-sell agreements with partners, etc.). If it isn’t in writing, it didn’t happen according to you, but rather according to someone else’s perception, which will always differ from yours.

5. Choose your business partners and key employees with as much or more care as you might choose a marriage partner. The same things work in both relationships… you need to complement each others’ skills, there has to be trust between you, and everyone has to have a commitment to the same goals. To prevent your optimism from taking over common sense in the interviewing stage, start with a half full glass, and see if it is still full after you subtract the negatives. Learn as much as you can about what motivates people to do anything, especially wanting to work for you!

6. Don’t spend money unless absolutely needed for survival. A dollar spent for business is a dollar gone. A dollar spent for personal reasons is between $1.37 and $1.50 gone, depending upon your tax bracket. You still have to earn the money to spend it. And you have to pay income tax on anything spent for personal, nondeductible purposes. The difficult part is when you’ve spent all the profits on personal things and then you are faced with one huge April 15 tax bill. Conserve your money when starting a business. You can always spend a chunk on equipment on the last day of the year, and deduct it immediately, known as the “Section 179 Election”, for at least $25,000 for Wisconsin tax laws.  But the used equipment financing market is pretty bleak when you find you need the cash more than the equipment. Even worse for converting past purchases to cash are household rummage sales. Don’t spend…

7. Offer more service. The difference between products and services has become very blurred. Make sure you have the service edge working for you. The more you can do (and get paid for) the more revenues you will generate. Do not go in as the price underdog. There is no customer loyalty in low price. You will only trap yourself into always being a starving entrepreneur.

8. If you go under, it’s no one’s fault but your own. You are behind the eight ball, controlling its every movement. Recognizing, or ignoring any of the above, is your own choice. You may feel pressured to go one way or another, but it is still your choice. Make the right choices and when you succeed at Entrepreneurial Eight Ball, it’s all your money, after taxes.

/1 Comment/by