When do I NEED to form and LLC for my business or side hustle?
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***Thread***
1) Upfront, you have to ask this question from multiple perspectives.
There is an answer for legal purposes.
There is an answer for tax purposes.
There may be an answer for commercial purposes.
I'm going to address the tax aspect directly.
There is an answer for legal purposes.
There is an answer for tax purposes.
There may be an answer for commercial purposes.
I'm going to address the tax aspect directly.
2) From a tax perspective, if you are the only owner (called a "Member" in an LLC), the IRS does not see the LLC as separate and distinct from you. It is "disregarded" from you for tax so it doesn't matter.
(You can elect to regard it, but that's another topic.)
(You can elect to regard it, but that's another topic.)
3) Thus, if you are just getting started and you are by yourself, then there really isn't a TAX reason to form an LLC.
4) Once you reach a certain level of profit (~ $30k if you have no W-2 income, up to $200k if you have sufficient W-2 income) then it might make sense to form an LLC and elect to tax it as an S Corporation.
5) If you have a business partner you still do not HAVE to form an LLC. You can carry on business as a partners and it will be taxed as a partnership WITHOUT and LLC.
If you and your partner form an LLC, it will also be taxed a partnership.
If you and your partner form an LLC, it will also be taxed a partnership.
6) Legal Aspects.
If you have a partner, having a formal legal entity like an LLC with an operating agreement COULD be beneficial if a dispute arises from a legal perspective.
An LLC COULD also offer protection from personal liability if the business is sued.
If you have a partner, having a formal legal entity like an LLC with an operating agreement COULD be beneficial if a dispute arises from a legal perspective.
An LLC COULD also offer protection from personal liability if the business is sued.
7) Legal Aspects (Continued)
Thus, there may be legal reasons to form the LLC, e.g., if your business carries certain product liability risks, potential partnership disputes, etc.
Thus, there may be legal reasons to form the LLC, e.g., if your business carries certain product liability risks, potential partnership disputes, etc.
8) Commercial Aspects
Certain vendors or customers MAY prefer you have a legal entity like an LLC to do business with you. However, there are plenty of exceptions to this. It is common to do business without an entity in the US.
Certain vendors or customers MAY prefer you have a legal entity like an LLC to do business with you. However, there are plenty of exceptions to this. It is common to do business without an entity in the US.
9) Commercial Aspects (Continued)
If you live outside of the US, but are doing business in the US, having an LLC MAY also facilitate opening a bank account or establishing relationships with vendors, but may not be the case.
If you live outside of the US, but are doing business in the US, having an LLC MAY also facilitate opening a bank account or establishing relationships with vendors, but may not be the case.
10) In the end, from a tax perspective, forming a legal entity, like an LLC often doesn't sense (and creates an administrative burden) until a business is profitable and is expected to continue to be profitable going forward.
11) In all cases, seek a professional to help you with advice on your specific situation.
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