CORPORATE STRUCTURE

Corporate Structure Questions

 Frequently Asked

Do I have to become an LLC? What are the benefits?

You don’t have to ever become an LLC, if you don’t want to. There’s no legal requirement to set one up. You would be considered a Sole Proprietor, and it’s fine to run your business that way (but we still recommend you have separate business/personal bank accounts!) 

However, you may want to consider becoming an LLC for the legal protection is can offer to you. Let’s say, for example, you are operating as an LLC and your business is sued. Only the assets of the LLC are subject to the lawsuit, not any of your personal assets like your personal bank accounts, your home and more. Likewise, if you are sued personally, none of your business assets can be attached in the lawsuit. You are essentially building a brick legal wall between your personal assets and your business assets. Without an LLC, your business and personal assets are all fair game in the lawsuit. 

And, of course - this assumes that you are in compliance, operating the LLC properly, not commingling funds and other things - more on that to come later! 

From a tax perspective, the LLC pays their taxes just like the Sole Proprietorship, on your personal return as a Schedule C, and all of the profits are subject to self employment, federal & state income taxes. That can get expensive as your profits increase. Once you start generating a consistent profit in your business, you will want to look at some other tax elections you can make, but your legal structure can always stay an LLC, no matter how much profit you make. 

So, the LLC gives you great legal protection and also a head start on some future tax strategies. It’s a great best of both worlds choice!  

Is there a certain time I should become an LLC?

There’s no “right time” so don’t worry that you missed out. You don’t have to create an LLC to start your business, but there are a lot of benefits to creating one. You create your LLC with the state where you live, and depending on which state that is, it will cost you between $200-500 to create your LLC, and then there can be different annual fees as well.  
A popular tax strategy of electing S-Corp can only be done if you are already an LLC, so it’s good to set it up when you have the budget available, it will set you up for your future growth & success. 

Creating an LLC seems pretty easy, can't I just do it myself?

While we usually think there’s a DIY option for just about everything, this is one area where the investment into a professional service is worth every penny! We have had to do lots of terrible cleanup projects & IRS communication for clients who tried to DIY or worked with an online option and it was NOT great. :) Completing the paperwork on the state website to create your LLC doesn’t actually creat the legal entity, it just registers the name. Save yourself the future headache and do it right the first time!

Any business attorney can help you set up your entity, but we find it’s great to work with someone who specializes in this work and can also help with the ongoing maintenance & compliance to keep you in good shape with your state!

We love working with CorpNet for this (information included below in the resources section). Their team will ask you some key questions about your business and then make a recommendation for you based on your business and your location. Tell them we sent you, and they will take great care of you!

They will file the paperwork with your state and depending on your state, you will receive the official paperwork back in 2-4 weeks. You’ll want to be sure you provide this paperwork to your accountant and also keep a copy in your permanent company files. CorpNet can also help with other pieces of the paperwork for you too, they will explain all of the options for you!

What's the difference between Legal and Tax Structure?
Aren't they the same?

The proper legal & tax structure of your business is one of the most important decisions that you make in your business. The correct legal structure can protect your personal assets and the correct tax structure can save you thousands in taxes. It’s a foundational piece of any business strategy that we put together for our clients and one of the most common questions we are asked from potential clients.

Your business’ legal structure is created by filing paperwork in the state where you live. This is what offers your personal assets the protection from any business liability. It basically creates a brick wall between the business and you (and your family). Ex. LLC, Partnership or Corporation.

Your business’ tax structure is elected with the IRS and impacts how your business is taxed, how you file your tax returns & what your tax responsibilities & due dates are. These are two separate things (legal & tax), which is why it’s important to speak with both a legal and tax advisor to be sure you are considering the right fit for your business from both angles. 
 

What does corporate compliance mean?

In order to maintain your status as an LLC or Corporation, you need to follow your state's regulations, guidelines and keep up to date on any filing fees. When working with a company to create your legal entity, these guidelines will typically be provided to you and they sometimes offer compliance reminders as well. Some of these “internal” procedures (meaning you keep on your end) may include: bylaws, annual meetings with meeting minutes. You also have to file certain things like annual reports, pay taxes with the state, and file income taxes with the IRS. It’s important to note these items and when they are due, because there can be fines and penalties if you miss deadlines. 

Does my LLC need a Tax ID Number? or EIN?

An EIN (Employer Identification Number) and Tax ID Number are the same thing. They are an identifier used by the IRS to keep track of your business and to make sure the entity is keeping up with their tax responsibilities. It’s basically a Social Security number for your business. A business does need an EIN/Tax ID Number in order to remain in compliance with tax laws, and typically you get this when you become an LLC. It’s used when opening bank accounts and taking out loans in the company’s name. 

We typically recommend getting a EIN/Tax ID Number if you plan to have contractors or employees in the future. You don’t technically need one until that point, but then you will have to give out your social security number to folks who need an identifying number for your business, and that can get messy.  

If you are planning to create an LLC you will need to get a new EIN/Tax ID Number for that LLC, so if that’s happening very soon in the future, you can just wait and get one number. If you got a EIN/Tax ID Number while you were still a Sole Proprietor, this is associated with you personally so you will need a new one for your LLC once that is set up.

Once you have that LLC and EIN/Tax ID Number set up, if you change location or name of your business, you DON’T usually need a new LLC or EIN/Tax ID Number, you can just file name/location change paperwork. 

Resources

Additional

Corporate Filings

Free Downloads

Corp Net
Amanda J. Beren
aberen@corpnet.com
Direct: 888-449-2638 Ext. 105

Business Entity Checklist

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