Why LLC’s are Important
What is an LLC?
An LLC is a Limited Liability Company, it is one form of business entity you can create to run a business. It is favored by many over corporations because it still provides you limited liability but is easier to run.
Benefits of an LLC
Limited liability: As owner of an LLC, you will not be personally liable for any business debts. If there are any claims against your business, they cannot collect your personal assets to cover those claims.
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You get sued and lose the lawsuit, at a cost of $50,000. If your business does not have enough money to pay out that lawsuit, they cannot come after your personal assets (houses, vehicles, etc.) to settle that claim.
Tax advantages
Pass-through taxation: LLCs have pass-through taxation, meaning any profit or losses from the business pass-through to the owners personal taxes. This is a tax incentive for businesses which allows owners to deduct 20% of the net business income earned by the LLC.
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Let's assume you earn $100,000 in net income from your business operations.
Without an LLC
Net Income: $100,000
Taxable Income: $100,000
Federal Tax rate for single filers: $14,751 + 24% of the amount over $86,375 (click link for additional details)
Income taxes owed: $14,751 + (24% ($100,000- $86,375)) = $18,021
With an LLC utilizing pass-through deduction
Net Income: $100,000 (assuming expenses were already deducted from gross income)
20% pass-through deduction: $20,000
Taxable Income: $80,000 [$100,000-$20,000]
Federal Tax rate for single filers: (https://www.nerdwallet.com/article/taxes/federal-income-tax-brackets) $4,664 + 22% of the amount over $40,525
Income taxes owed: $4,664 + (22% ($80,000- $40,525)) = $13,348.50
Having an LLC in this example would have saved you $4,672.50 !!
2. Section 179: Used to deduct the full purchase/financed price of qualifying equipment/software in the first year rather than expensing over multiple years.
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Without an LLC
Net Income: $100,000
Taxable Income: $100,000
Federal Tax rate for single filers: $14,751 + 24% of the amount over $86,375
Income taxes owed: $14,751 + (24% ($100,000- $86,375)) = $18,021
With an LLC utilizing section 179 for an $80,000 vehicle purchase
Net Income: $100,000
Purchased a qualifying vehicle: $80,000
Taxable Income: $20,000
Federal Tax rate for single filers: $995 plus 12% of the amount over $9,950
Income taxes owed: $995 + (12% ($20,000-$9,950))= $2,201
With an LLC and access to utilize section 179 of IRS tax code you would save $15,820 in this scenario.
3. Small business deductions: the ability to write-off certain business expenses, thus reducing the amount of taxable income.
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Without an LLC
Net Income: $100,000
Taxable Income: $100,000
Federal Tax rate for single filers: (https://www.nerdwallet.com/article/taxes/federal-income-tax-brackets) $14,751 + 24% of the amount over $86,375 =
Income taxes owed: $14,751 + (24% ($100,000- $86,375)) = $18,021
*With an LLC deducting $30,000 of business deductions (rent, travel, car lease, etc).
Gross Income: $100,000
Business deductions: -$30,000
Net Income: $70,000
Now you would pass this income through using the 20% pass through deduction described above.
20% pass-through deduction = $70,00020%= $14,000
Taxable Income: $70,000-$14,000 = $56,000
Federal Tax rate for single filers: $4,617.50 plus 22% of the amount over $40,125
Income taxes owed: $995 + (22% ($56,000-$40,125))= $4,487.50
With an LLC and deducting business expenses you saved $13,533.50!
Credibility: build reputation and financial credibility to build trust with customers and lenders.
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