Episode 20: What Works Wednesday: An LLC Is NOT A Tax Status

Welcome to the 20th episode of the Self-Employment Success Podcast. In this first installment of What Works Wednesday Leland delves into LLCs and some common misconceptions about them, specifically the misconception that an LLC is a tax status. If you are a self-employed professional and navigating the world of LLC’s and taxes, this episode will give you incredibly valuable education and insights that you can take with you. So with that introduction here is the first installment of What Works Wednesday with your host Leland Gross

TRANSCRIPT

Leland Gross CFP (00:01.11)

All right, welcome to the first segment of What Works Wednesday. This comes from high demand from you, my listeners, who've actually reached out and said, hey, how do we get more tips and tricks and advice from you directly on ways that we should or shouldn't be running our business? Now I can't give advice to you directly on your business because I don't know your business, but this will be a segment that airs regularly on just

generalized education and things that I've seen work really well for my clients, things I've seen them do poorly or pitfalls to avoid so that as you are crafting your business, you can stay educated to make the best decisions you can possibly make for yourself. So we're going to keep doing the interviews that we've been doing with business consultants and other entrepreneurs because I think that's so valuable and fun for me, honestly.

but this is going to act as a secondary episode type called What Works Wednesday. That's me directly short, concise tips and tricks on the best ways to manage your business as a self-employed professional. So starting up number one, the thing that I see no holds bar all the time. This is the most common mistake I see people make is the misunderstanding that an LLC is not a tax vehicle.

I've even seen on social media these ads where people saying, you know, you need to set up an LLC in order to save on taxes. Well, that's wrong because an LLC stands for limited liability company. It in and of itself is not a tax vehicle. So you can have an LLC and still be taxed the exact same amount as you were being taxed before.

Instead, this is a liability protection vehicle, limited liability company. It's what LLC stands for. So what this is, is it's a legal vehicle that you set up to protect yourself personally from the liabilities and creditors of your business. So if you are just a sole proprietorship or a partnership, you are taking on all of the liability of your business. So should you take out

Leland Gross CFP (02:22.418)

a business loan and not be able to pay it. Or should you unfortunately come across a situation where you've made a mistake and now you are being sued. Without any sort of liability protection, those creditors, those people can come for your personal bank accounts, your house, your family's assets. So that's a lot of liability to take on. And therefore an LLC is a great vehicle to say, Hey, you can take anything in the name of the business.

but not cross over to my personal side. Now, that's an LLC. It is a limited liability vehicle where you can say my business is its own entity that I operate within, and if a mistake happens or creditors come, they can take what's owned by the business, not what's owned by Leland Gross personally. Now, the reason people think of it as a tax vehicle though, is because an LLC is kind of like

tax chameleon, right? So you could, as an LLC, choose how your LLC is going to be taxed. It can be taxed as just a single member LLC, which that would be the same as a sole prop. The exact same. It's just everything's passing through to you individually, but you have the limit, excuse me, the liability limitation from the company. You can be taxed as a partnership.

So if you already had a business partner, you guys were running this, you can create the liability vehicle, but still tax it as a partnership, or you can be taxed as an S Corp. And the benefit to that is you can kind of choose what the best way to file your taxes is based on your business, based on your income, your revenue, and how all of that shakes out for you. So an LLC is not a tax vehicle. Do not mistake that.

It is a liability protection vehicle. But as a limited liability company, the company needs to be coded as, well, how does it get taxed? Is it taxed as a single number or a sole prop? Is it taxed as a partnership or is it taxed as an S-Corp? All of those are options. Now, pro tip that you should know is if you set up an LLC, a best practice is to make sure you take the extra step to get an employer identification number.

Leland Gross CFP (04:49.194)

for that LLC. Oftentimes, I see LLCs that are in the business owner's social security number and therefore all the bank accounts of the business are held in the name of the business owner. And those are little loopholes, little holes in the protected vehicle when everything is in your name. So yes, you have this company, but the company's in your social, the bank accounts are in your name. So when someone comes to sue the business,

you have still effectively become the business. So a best practice is to get an employer identification number that says Leland Gross is personal. I've got my own Social Security number with my own personal bank accounts. And then I've set up business bank accounts at banks in the name and in the number of my company. And now we're creating real separation. We're providing real legitimacy to your business as its own separate entity.

And that continues to not only help from a tax perspective, a business finance perspective, keeping your business and your personal separate. We'll talk about that in another What Works Wednesday. But it also continues to strengthen your case and in the inevitable event or not inevitable, I should say the unfortunate event that you do come into some sort of legal litigious situation. All right. So action items, set up your LLC.

Make sure to take the extra step to get the EIN number and separate your business and personal. And then I always tell people to work with a tax professional to figure out what the best way to tax your business is, whether it's the single member of the S Corp or the partnership. Okay, happy Wednesday and I'll talk to you guys soon.