What's an LLC and Why Does It Matter?

What’s an LLC and Why Does it Matter?

Ohio allows for the creation of a business entity called the Limited Liability Company (“LLC”). You’ve probably heard some of your friends say that they have an LLC. An LLC is a great way to protect your assets and make your life easier at tax time. You can think of an LLC as an imaginary boss. You do all your work for your boss, your boss is responsible for all the bills of the workplace, your boss pays you, and then at the end of the year he gives you a 1099 form (similar to a W2, but for self-employed individuals).

The LLC allows you to do business under its name, take out loans, get credit cards, and do anything else any other business would. A major benefit to the LLC is that the LLC is NOT taxed! Only YOU get taxed on the money you take out of the LLC.

How does it protect my assets?

Back in the day, many people would open their own business by simply opening a store front or setting up a side business with little thought. This is what’s known as a “sole proprietorship.” The danger here is that the owner is personally liable for everything. For instance, if a store owner takes out a $5,000 loan to fix up his store, but then sales hit rock bottom and he can’t pay back the loan with the store revenue, then he is personally liable for it. That means the entity that loaned the money could come after his house, car, or anything else he owns.

If the store owner opened shop under an LLC, then the LLC would be responsible for all the debt. So, in the example above, the store owner’s house, car, etc. would NOT be affected, because the store owner doesn’t own the store, the LLC does! So, in that case, the entity that loaned the money might be out of luck, but the store owner’s personal finances wouldn’t be affected.

How does it make my life easier at tax time?

LLCs have the flexibility of being taxed in several different ways. You can choose to be taxed as a sole proprietor, as a corporation, or another business entity. To figure out what works best for you consult a Certified Public Account ("CPA") or a tax attorney.

Wait, so can’t I just make an LLC and pay everything out of it and say I didn’t make any money at all?

Yes, and you can also rob a bank and you’ll be fine if you don’t get caught. Paying personal expenses out of LLC is an easy way to get the IRS involved and be charged with tax evasion. You don’t want to go down that road.

So then, what are personal expenses and business expenses?

The best answer I can give is: talk to a an attorney. Don’t try to be a know-it-all. Attorneys are trained and have the skills to answer these questions so that you’re well protected. Plus, if you’re engaged in a dispute with another business, the opposing party may be able to “pierce the corporate veil.” This means that the opposing party was able to show that you’re using your LLC as an alter ego and so should be held personally liable for everything. You don’t want this to happen to you.

Can’t I just use Legal Zoom?

Sure, if you want to be bound by a bunch of terms that you don’t understand that could ultimately hurt your business. An operating agreement for an LLC is a legal document and should be read and reviewed by your lawyer before you enter into an agreement.

If you have any questions about forming a business you can reach me at Anthony.alto@altolawllc.com