Three Reasons to Hesitate When Creating a Limited Liability Company

By Ruth K. Washington Last updated Nov 29, 2022

You may be considering the formation of a limited liability corporation (LLC). As a new business owner, there are three reasons why you should be wary about forming a limited liability company.

Table of Contents

A Quick Overview of Limited Liability Companies (LLCs)

In order to get started on the reasons why you might be apprehensive to form an LLC right immediately, I’d like to first discuss with you that LLCs can be an excellent vehicle for achieving financial success. It is especially important as a new business owner or a real estate investor because it has the ability to give you limited liability protection.

People become business owners for a variety of reasons, including the desire to safeguard and strategically build their personal wealth. LLCs can be of assistance in this regard. One way to think of an LLC is to imagine it as an entirely new person that you create that is absolutely independent of anything you put inside it. Anything outside of the LLC is not covered by liability insurance.

The first reason is the high cost of starting a new business.

When starting a new business, one of the factors to consider is whether or not to form an LLC straight away. This is because the fees of starting a new firm are high. In order to get your firm up and running, you will often incur starting and organizational expenditures. No matter how much time and effort you put into putting up your business structure, paying for online courses, or even investing money in your website or marketing, you may not be in a position to generate income just yet.

These expenses may be excessive, but you’ll only be able to deduct $5,000 in startup costs in the first year. Any amount in excess of that is included in the amortization charges.

Costs of amortization must be discounted over a period of 180 months or 15 years. Anything you spend more than $5,000 on will be depreciated over the course of 15 years. Now, for a new business owner, this could be a setback since you may have spent thousands of dollars getting your company off the ground only to find out that you can only deduct $5,000 in the first year and the rest must be amortized over 15 years.

Reason #2: It’s Expensive to File Tax Returns

When you’re starting a new business, it can take a long to get off the ground. Perhaps you’re beginning your own e-commerce business or have opted to pursue a career as a consultant. You may need to devote a significant amount of time to learning about your profession before you can earn a living, so you are recruited when you decide to form a limited liability company.

When you form an LLC, you establish an entity structure with the Secretary of State and the Internal Revenue Service, which means the IRS is aware that a new firm has been formed and must file tax returns on a regular basis. Filing an LLC tax return might be more costly than filing a personal tax return, especially if your state levies a franchise tax. Even if you haven’t made any money from your LLC, you may find that you have incurred additional costs as a result of its operation. This is one of the reasons it’s critical to conduct a study and, if possible, consult with a tax specialist before forming an LLC.

The third reason is that no two business owners are alike.

Although an LLC is one of the best business vehicles, you may not be sure if it is the right vehicle for your company. One of the most important things to do when forming a new organizational structure is to consult with your CPA or tax professional to determine if you should keep your LLC, convert to an S-corporation, or form a C-corporation based on your business objectives.

I wasn’t aware of the self-employment tax until I became a tax strategist when I launched my first business. It’s a 15.3 percent tax rate that LLCs pay. Like many of my customers, I learned how to use the various corporate formations to avoid self-employment tax and even take a deduction for putting myself on the payroll.

It entails gathering the necessary information, asking the appropriate questions, and analyzing the nature of your organization in order to determine which new structure is ideal for you. If you decide to become a realtor, you may need to form an LLC or an S-corporation, depending on your individual circumstances.

I wish you luck in deciding on the best company entity structure for you, and I hope this article was helpful in forming an LLC. It’s always crucial to think about your goals, your family situation, and your business exit strategy, so speak with a professional tax advisor who can assist you in making the best option possible.

This website does not provide investment, tax, or financial advice. For counsel on your individual circumstance, you should seek the opinion of a licensed professional.

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