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.