No, not the paperwork, it’s all about the practical experience.
Perhaps it’s trying to keep your business and personal finance completely separate.
Maybe it’s the tax issue.
Maybe it’s trying to find that first customer.
Maybe it’s the realization of the amount of time spent on activities not related to the core business at all.
What is one unexpected aspect of operating an LLC?
While creating the LLC seemed tough at first, the reality struck when tax season came and I figured out what I had gotten myself into. Here’s how it can surprise a newbie like you:
Self-employment tax takes many by surprise: The earnings from the LLC flow through to your personal tax return and you have to pay 15.3% self-employment tax apart from the income tax. You will be surprised that nobody told you that you have to pay another type of tax, which is completely separate from the income tax.
Quarterly estimated taxes are compulsory: In case you expect to owe more than $1,000 annually, the IRS requires you to pay quarterly estimated taxes. In case you miss them, you incur penalties, even when you make the entire payment in one shot. Most new LLC owners learn about it the hard way.
Your state may tax you even if you made nothing: The minimum franchise tax of California of $800 is the best-known case, yet other states also charge fixed rates not dependent on profits. “My income is zero” does not necessarily mean “I do not need to pay taxes.
S-Corp election cannot be done automatically – time is crucial: Many people consider “S-Corp election helps me save taxes” and take it as an obvious thing. But that is not how it works. To elect S-Corp, you need to fill out Form 2553 in a timely manner, and it makes sense only when you are profitable on a regular basis.
Mixing personal and business expenses ruins your deductions: When your record keeping is in chaos, your CPA is not able to make deductions that you deserve – and the IRS has every right to deny those deductions during an audit. Not having separate accounts isn't something to consider, it is imperative.
LLCs with multiple members need a separate tax form: If you've got a partner in there, your LLC will be filing its own tax return (Form 1065) before any of it touches your personal income tax. Lots of people mistakenly think that is just like having a single member LLC. It is not.
All of that doesn’t mean that LLCs are a bad choice since they remain one of the best options for small entrepreneurs. However, please, don’t believe that the tax system will be easy, because this is where most troubles await.
What was your biggest tax shock after establishing an LLC?
LLC Myths That People Fall for and End Up Paying the Price
There's plenty of wrong information on LLCs out there. Let's set the record straight:
Myth #1: "Just forming in Delaware will save me money"
If you're running your LLC in any other state, you have to foreign qualify, incur costs in both states, and have dual registered agents. In almost all cases, this is more expensive than doing otherwise.
Myth #2: "An LLC protects me no matter what I do"
Lack of liability protection is guaranteed when you commingle assets, fail to follow formalities, or sign personal guarantees. Your LLC is as good as you take care of it.
Myth #3: "Operating Agreement is optional if there's only one member"
That is until you decide to form an LLC partnership, apply for a business loan, or get involved in litigation.
Myth #4: "Starting an LLC will change my taxes."
An LLC by default is still taxed like a sole proprietorship. There's nothing that will happen automatically, you must elect differently from the IRS.
Myth #5: "After forming my business, I'm finished."
Annual reports, state fees, registered agent – there's a lot more that needs to be done in order to remain compliant and not face the dissolution of your LLC through the silent process.
What myths have you come across? Drop them below, happy to clear things up!
-Do not automatically choose the state that you live in. There are many states like Delaware and Wyoming that are specifically formed for the ease of businesses.
-Operating Agreement isn't always required, but trust me, the day you bring in a partner, you'll be really glad you had one in place
-Apply for an EIN number. This step should be completed within 10 minutes, and the entire process is free.
-Make sure to open a business checking account as soon as possible, or else you might accidentally forfeit your LLC protection by mixing finances.
-Be aware of all the necessary annual fee payments of your state, or you could unintentionally terminate your LLC business.
Feel free to ask me any questions if needed!
Any of you who has been on the MATCH list and has been able to use a good processor?I'm just curious as to how others in the same boat are managing. It looks like all of them just close their doors on you. Am I alone in feeling that having your company on the MATCH list is just a death sentence?