General Business

10 Things to Know About an LLC

May 24, 2019 by BGMF CPAs

Whenever we meet with clients who want to start a business or invest in real estate, the discussion of what type of entity to select is always part of the discussion. The LLC has become a very popular entity for businesses for many reasons including protection, tax planning, flexibility and other reasons we won’t cover in this post.

An LLC may not always be the right choice for entity selection, but that is something we discuss during those consultations. Below we share some insights to help you decide if an LLC is the right way to go for your business.

You probably know of several businesses whose formal names end with the acronym LLC. And you probably also know that LLC stands for limited liability company. Here are 10 things you may not know.

An LLC generally protects its owners from personal liability for business obligations in much the same way a corporation does, but an LLC is not a corporate entity.¹
Like a corporation, an LLC can do business in multiple states, although an LLC must be organized in a specific state.
The owners of an LLC are called members. There is no limit on the number of members an LLC can have, and members don’t necessarily have to be individuals. Members’ management roles are typically spelled out in an operating agreement.
Upon formation of an LLC, the members contribute cash, property, or services to the LLC in exchange for LLC shares or units.
An LLC may borrow money in its own name and is responsible for repayment of the debt.
An LLC is usually treated as a partnership for federal income tax purposes if there are two or more members. If there is a sole member, it is considered a disregarded entity for tax purposes.
(The remaining four points assume partnership treatment.)
Like partners, LLC members are not considered employees of the company. However, an LLC can have non-member employees.
LLC members are taxed directly on company income. The LLC itself doesn’t pay federal income taxes.
If an LLC has a loss, its members generally can deduct their share of the loss on their own tax returns.
For tax purposes, an LLC’s income and losses are divided among its members according to the terms of their agreement. Tax allocations must correspond to economic allocations of profit and loss.

An LLC is but one structure you might consider using for a business venture. The input of a professional may be helpful in determining which type of arrangement will best meet your objectives.

BGMF CPAs can help guide you through the entity selection process as part of your planning and strategy to start and operate your business or real estate venture. There are some great tax planning strategies that can be utilized through the LLC that can also be discussed. Talk with one of our advisors today.

Source/Disclaimer:

¹Each state has its own laws governing LLCs. Consult with an attorney before establishing an LLC.

Home Office Deduction

December 27, 2018 by BGMF CPAs

Do you take advantage of the home office deduction?

Under the new tax laws, with the increased standard deduction where many taxpayers won’t obtain deductions for their mortgage interest and real estate taxes, they can potentially take advantage of a portion of those deductions against their business income.

If you haven’t considered this deduction due to being informed this was a red flag with the IRS or other factors, you should re-consider your position.

Working from home can potentially deliver some attractive tax advantages. If you qualify for the home office deduction, you can deduct all direct expenses and part of your indirect expenses involved in working from home.

Direct expenses are costs that apply only to your home office. The cost of painting your home office is an example of a direct expense. Indirect expenses are costs that benefit your entire home, such as rent, deductible mortgage interest, real estate taxes, and homeowner’s insurance. You can deduct only the business portion of your indirect expenses.

What Space Can Qualify?

Your home office could be a room in your home, a portion of a room in your home, or a separate building next to your home that you use to conduct business activities. To qualify for the deduction, that part of your home must be one of the following:

Your principal place of business. This requires you to show that you use part of your home exclusively and regularly as the principal place of business for your trade or business.

A place where you meet clients, customers, or patients. Your home office may qualify if you use it exclusively and regularly to meet with clients, customers, or patients in the normal course of your trade or business.

A separate, unattached structure used in connection with your trade or business. A shed or unattached garage might qualify for the home office deduction if it is a place that you use regularly and exclusively in connection with your trade or business.

A place where you store inventory or product samples. You must use the space on a regular basis (but not necessarily exclusively) for the storage of inventory or product samples used in your trade or business of selling products at retail or wholesale.

Note: If you set aside a room in your home as your home office and you also use the room as a guest bedroom or den, then you won’t meet the “exclusive use” test.

Simplified Option

If you prefer not to keep track of your expenses, there’s a simplified method that allows qualifying taxpayers to deduct $5 for each square foot of office space, up to a maximum of 300 square feet.

The home office deduction can help reduce your tax liability as long as you follow the regulations. In today’s marketplace many individuals are running businesses from home. This reason and the new tax laws make this potential deduction more viable in your tax strategy.

Contact our firm today to review if you’re taking advantage of all deductions available to you!

Is a Sole Proprietor the Best Option

December 7, 2018 by BGMF CPAs

Sole Proprietor versus Other Entity Structures…

Are you thinking of starting a business or currently operating as a sole proprietor? We want you to consider this may not be a viable option for your business moving forward.

Below are a few reasons why being a sole proprietor is a poor choice for operating your business and we want to explain why and help you understand how to solve this problem.

One major reason is you’ll be personally liable if an accident were to occur. Let us tell you a story of how this would work in real life…

Consider you have recently opened a small boutique in your town that you’ve dreamed of your entire life. You’ve saved, planned and now the dream is finally coming to fruition. You’ve waited for the day you could quit your job and do something you were passionate about knowing you could add more value to others.

Start-up capital is tight due to initial expenses during the opening. You decide to go against advice and not form an entity (even a simple LLC) to save money and figure you would do this once you had revenue. It’s your grand opening and you are excited to finally throw open your doors with a big smile and welcome the public into what you’ve put your blood, sweat and money into over the previous months.

Not a half hour into your opening someone slips and falls hurting themselves in your shop. You feel horrible for this person and do what you can to help them get immediate assistance. You go out of your way to ensure they’re alright. Unfortunately, a few days later you are served with a lawsuit because of this incident and before you know you are nearly out of business before it truly began.

Listen, you may be saying that’s not my type of business. We appreciate that thought, but there are additional reasons why operating this type of entity is a poor choice.

Let’s discuss those reasons now…

You put everything you own at risk if a lawsuit or judgement arises against the business.
You will pay self-employment tax at 15.3% on the taxable income from the business.
By operating in this manner, you aren’t building credit for the business.
You are more likely to be audited compared to other entity structures, especially if you are running at a loss (thereby risking hobby loss rules).
Based on the new 20% qualified business deduction, you are subject to phaseouts if your taxable income is above $315K.

Forming an LLC is one great option to pursue, but you will be taxed (if it is just one member) the same as a sole proprietor. This will give you asset protection, but you’ll have to deal with the other four issues.

Please note, this isn’t always the worst way to operate and we analyze that when we sit down with you to discuss your business that allow you to make decisions based on facts and figures.

If you would like to discuss starting a business, review your current operations or get help setting up the proper entity, please contact our of business advisors today!

How to Choose the Right Business Entity

November 30, 2018 by BGMF CPAs

Critical Choices: How the Business Entity You Select Impacts Your Taxes and Business Decisions

Entrepreneurs have a long list of special opportunities to save on taxes. However, your eligibility for some tax breaks depends on the decisions you make as you are planning and launching your business. One of the most critical choices is which business entity you will operate under.

The Amazon Best Selling book, The Great Tax Escape, walks you through each of your options, spelling out the benefits and drawbacks of the most common business structures. Although you can determine this on your own, you may want to consult an advisor to discuss the pros and cons of each type of entity.

Business Entity Basics

It’s no surprise that you must pay taxes on any income your business generates, but you might not realize that the same income can be taxed differently depending on how your business is organized. While some types of businesses are considered separate taxpayers from their owners, others require that you include your business income on your personal tax returns.

Your tax rates aren’t the only thing impacted by your choice of business entity. The structure you select affects whether you are personally responsible for business debts and whether you can be held personally liable if the business is sued.

When your business exists as a separate entity, the business itself can apply for credit, and these types businesses can continue to operate when you decide to move on or retire. During this process there is more to consider than just taxes so you don’t want to take this lightly.

These are a few of the most common options:

Sole Proprietorships and Partnerships

When you are starting out and working alone, it is easy to operate as a sole proprietorship. Essentially, you and your business are one and the same for tax and legal purposes. Simply register your business name with the state, and you are ready to launch. You can still have employees as a sole proprietor, but you own the entire company.

The simplicity of this structure makes it quite popular, but it isn’t always the best choice for entrepreneurs. Business income is treated the same way as other personal income for tax purposes, and you assume full liability for all business debts and legal issues. That puts your personal assets at risk.

Though there is slightly more paperwork involved, a partnership is quite similar to a sole proprietorship. Taxes and legal liability are the responsibility of all partners, and partners can be sued individually or collectively for the actions of one business owner.

Operating out of these types of structures could cost you thousands in unwanted taxes each year. This is why we recommend doing your research so you aren’t giving your hard-earned money away.

Limited Liability Companies (LLC)

It is common to see the initials LLC after many small and medium-sized business names, and there is a good reason for that. LLCs offer business owners many of the protections that larger corporations enjoy, without the complexity and cost associated with incorporation.

With LLCs, business owners are considered separate from the business itself for the purpose of taxation and legal liability. This can lead to significant tax savings, and it protects personal assets from business-related debts and lawsuits.

Of course, setting up an LLC is more complicated than operating as a sole proprietor, so some entrepreneurs choose to hold off on this step until the business begins to be profitable. Your choice of business entity can dramatically impact your bottom line tax bill, and it will affect your long-term level of risk as the organization grows.

Depending on your situation there are more decisions when operating as an LLC that can be considered to save in taxes. This is something our firm analyzes for each company.

In Summary

This is a very high level overview of how to choose an entity. We haven’t even covered incorporating or electing to be an S Corporation. With the new tax laws in place the review of entity selection has been an important part of discussions and planning.

Whether you own a start-up or a company that has been around, this topic has become critical to review and analyze.

If you are starting a company, want to consider the differences in each type of entity as it relates to your business or analyze your current company to determine if you need to consider a switch to a different entity, please contact us today!