Using LLC to Avoid Taxes: Overrated Strategy
Content provided for general information. Talk to your advisor to learn about recent updates or other rules that may apply to your situation.
Many people view LLCs as magic wands that can erase taxes. The truth is, just having an LLC could actually make things worse.
What is an LLC?
LLC stands for Limited Liability Company. It’s a special tool under state law that helps business owners protect their personal assets from business debts and losses.
The Internal Revenue Service doesn’t actually recognize LLCs as a business structure for tax purposes. Instead, you have to choose whether you want your Limited Liability Company taxed as a sole proprietorship, partnership, or corporation.
What are the disadvantages of having an LLC?
Let’s start with the disadvantages of having an LLC since they’re simpler. The disadvantages really center around money.
- Most states charge a filing fee to create an LLC
- You may decide you want to hire a lawyer to create your LLC
- Most states charge an annual fee to renew your LLC
- In some states, you may have to pay an LLC tax that’s higher than the tax you would have paid as an unregistered sole proprietorship
So as you can see, you’re already losing money when you’re trying to save money.