Having a limited liability company (LLC) is a great tool to have in your personal financial portfolio. An LLC allows you to operate a business as a single person or as a group of two or more with limited risk. An important feature of an LLC is that your risk is limited to the assets of that LLC and liability does not transfer into other companies that you may own. You should have an LLC if you have any assets that produce ongoing revenue to you, like a rental property or if you are the owner or partial owner of a company that creates revenue or has the potential to create revenue for you. Almost all entrepreneurs should own an LLC.
There are several fun reasons for you to own an LLC:
Naming the LLC is fun. LLCs have many crazy names. There is no real rule on what to name your LLC. You can name it anything you want because it doesn’t limit what you name your product or service. Think of your LLC as a warehouse in which you store all your assets. What you name that warehouse is up to you.
You can take advantage of losses on your taxes. If you have a job that pays you well and you need to pay fewer taxes, you can and should use your LLC to minimize your taxable income. Of course, you don’t always want to lose money, but in the startup or growth phase of your “side hustle,” you may be able to write off losses in your LLC against your income from your day job.
You can write off certain expenses that you might not be able to as an employee. Many expenses that are related to your business can be fully or partially written off. The key is the word “related” which has a wide variety of definitions. Items that can be written off include travel and lodging, educational materials, tools, clothing related to work, promotional materials or expenses which might include golf balls with your logo, gifts, and many more items. Just be certain you are aware that the IRS may disagree with certain expenses and ask you for more money after you submit your return.
You can take advantage of “flow through entity” strategies. This is a complicated strategy so you should ask your tax advisor about how to set it up and manage it. If your advisor doesn’t know what I am talking about then you need a new advisor. It is this simple. You can have multiple LLCs, which might include a company that manages all your individual LLCs. This managing entity, which you own, may charge the other entities a fee for managing them. Fees that flow through from one entity to another can decrease your taxes because some of those dollars flow through without a taxable event. You will want to ask a good strategist for help.
One thing to remember is that the downside of having an LLC is that you are required to pay tax on all income for that year even if you did not yet receive that income. You cannot carry it over to next year’s return when you get paid. Therefore, be certain to tightly manage your receivables and that will help you fully enjoy your LLC.