When do I NEED to form and LLC for my business or side hustle?
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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.
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.)
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.
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.
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.
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.
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.
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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Have you ever wondered what an S Corp actually does for you?
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2) First, Self-Employment Tax (“SE Tax”)
If you are self employed - entity or not - and have no other sources of income, you will be taxed 15.3% of your profits to $137,700 of profit and 2.9% profits after $137,700.
It approximates payroll tax.
3) For example, let's say your business profits $150k, either as a sole proprietor or single member LLC.
In this example your SE Tax would be approx. $21,425.
Your country of citizenship may tax you on worldwide income, income earned in country, or a both.
Lawrence is a UK citizen, a Uruguay resident, and a “nonresident” for UK tax.
The UK only taxes income earned in the UK for nonresidents.
First Hurdle – Citizenship Country
As long as @lawrencekingyo stays out of the UK for all but 46 days a year, he should keep his UK tax nonresident status and not owe any income tax on any income he earns outside of the UK (presumably all of his income).
Someone that will not only do a nice job on filing your taxes, but will find you all the LOOPHOLES.
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Ask people similar to you who they use and if they are happy with the service.
If that doesn't work, google "[your city] + CPA.
While it's not necessary to have a local accountant you can meet with in person, it has it's benefits.
Visit some websites and get a feel.
Pick a few that you think you want to work with and call them.
Here's a script,
"I am in the business of [your operations], making about [your expected revenue] this year, and am looking for someone to help me with my books and taxes. Are you taking new clients?"
FACT: You LOSE at least 1/3 of your income to TAX! ...and if you are making a lot of money, it's over 1/2!!!
Think what you could do with that money, even just some of it?
If you could just take 10% back, what would that mean to your life?
If invested properly, could you retire 10 years earlier and enjoy more of the good life? What would you do if you could stop working 10 years earlier?
What would your vacations look like if you had 10% more of your income?
That's like going from a hotel inland to staying in the biggest house on the beach!
Maybe you would put it all in dividend stocks or real estate and enjoy the financial security of knowing you had regular dividends and rents coming in.