Why Your LLC May Be Worthless (Part 1)

Congrats! On starting your Limited Liability Company (LLC) and embarking on your journey as an entrepreneur. While LLC’s have become extremely popular and have many benefits there are some key highlights you may want to look out for. LLC’s provide the legal liability of a corporation yet are far more flexible and don’t typically require the upkeep of a corporation. Here are a few items that can leave your LLC vulnerable:

Out of Compliance: Unfortunately, it happens all too often where business owners are just not aware of all the filings and documents needed to keep their business entity up to date and fully compliant. Although every state is unique in its requirements, most states require an annual filing report and annual fee be paid. According to Section 301(e) of the Limited Liability Law in NYS, LLCs are required to file Biennial Statements every two years. In addition, NYS LLC’s are also subject to annual Filing Fee’s and informational reports (IT-204-LL-1).

No Tax Benefits (potentially): Many clients form their LLC and after one year in business they expect to see many different tax benefits from their new entity. However, single-member LLCs are taxed as disregarded entities. Disregarded entities simply mean the IRS doesn’t view them as a separate legal structure and thus are considered ‘disregarded’. This means single-members LLC owners are taxed the same way they would be had they not incorporated, which for most small business owners is reporting on Schedule C. So, a small business owner operating as a sole proprietor reporting his/her income on a schedule C and forming an LLC after the second year in business would still be reporting under a schedule C and thus see no tax benefits. There is a common misconception that certain entities are allowed more tax benefits than others and although that may be true for officer benefits, generally the deductions are the same. They are limited to what the IRS considers ordinary and necessary expenses incurred while carrying on a trade or business. However, LLCs are able to elect to be taxed as a corporation which you may want to speak to your tax advisor to see if/when it is beneficial to do so.

Commingling funds with your personal finances: Commingling your personal and business finances can create many issues that could be easily avoided. Commingling funds will most likely add extra work and fees from your bookkeeper. Many business owners do this in an attempt to find additional tax write-offs. However, you still are only allowed tax write-offs that are ordinary and necessary and but omit most if not all personal expenses. Misuse of finances may also assist attorneys in piercing the corporate veil that the LLC was setup to protect in the first place. Speak with your business attorney to assist in setting up formalities that will allow you protect the corporate shield of your business. You should also speak with your tax advisor on the proper documentation and procedures needed when borrowing funds from your business.