5 Reasons For Not Starting Your Own Business As a LLC Formation

When you’re thinking about officially establishing your business, there are a number of options available: LLC formation, C-corporation, S-Corporation, LLP, and a General Partnership just for starters. While the LLC option is definitely a good option for some businesses, it may not be the right option for starting your business. “Why would I not want to start my own business via a LLC formation?” you ask. Well, here are 5 good reasons. best registered agents in Texas

First, let’s clear up a common misnomer: a LLC is a Limited Liability Company, not a Corporation. From the perspective of the IRS, a LLC formation is a partnership. If you’re looking to start a corporation, the LLC formation is not one.

1) Taxed as Earned Income

The cash-flow of a LLC formation passes through the company to the owners. All profit made through the business is taxed on each owner’s personal tax return in proportion to their ownership. This income from your own business is taxed as earned income. (This is different than a corporation, which can provide owners with passive income at a lower tax rate.)*

2) Phantom Income

If a Limited Liability Company purchases a large capital good, this income is not deductible, nor does the income pass through to the owners. This means that if you use $50,000 of your own business’s income to purchase a capital good, you will be taxed on that $50,000, even though you are not receiving $50,000 in your bank account. If that $50,000 was all the profit your company made, you will be taxed for $50,000 earned income while your real income is $0. This is what’s called “Phantom Income” in a LLC formation.*

3) No Control of Tax Year

As a Corporation, you can choose the beginning and end of your tax year, giving you more control over how much you are taxed as you exercise some control over your company’s tax bracket. This option is not available to the standard LLC formation.*

4) No Choice of Income timing

As a LLC formation, your company is taxed on the income your company received in that tax year, even if you did not receive it in that year. As a corporation, you can receive that income as you choose to pay it to yourself and to your employees.

5) No MERP advantages

The savings and employee retention benefit of a Medical Expense Reimbursement Plan are not available to a LLC formation.

So, when asking, “Is a LLC formation right for my own business?”, be sure to evaluate the above issues. If these 5 reasons don’t seem important to the structure of your business or you would for some reason prefer to form your company as a LLC formation yet be taxed as a corporation, than the LLC formation may be right for you. However, if any of the reasons above cause you to stop and reconsider, then keep learning and get more information.

(While the above is intended to help educate you to make an informed decision and written to provide as accurate and valuable information as possible, please do not consider any of the above as professional or legal advice. Always be sure to get advice from authorized professionals whom you know to be trustworthy.)

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