Can someone explain LLCs to me?

10 years ago

My husband is a private practice Child and Family Therapist. He works for himself and has no employees. He does have a business license and liability insurance through NSAW. We realize he needs to set up his business as an LLC or something like that to protect our personal assets if someone were to sue him. We live in Wyoming.

-Should he apply for a regular LLC or is there some other kind we need to know about?

-Does he need to pay himself a salary? His work comes in waves, some times he is really busy and some months not so much so he can't completely predict how much he will make in a year.

-Is there anything else he needs to do or know about other than fill out an application and pay the fee?

We are both clueless when it comes to this kind of thing so appreciate any advice. Thanks!

Featured Answer

bry911

10 years ago

last modified: 10 years ago

First, this is one of those times where a few hours with an experienced attorney or CPA can really help you. Setting up your business as an LLC is simply not enough. For the liability shield provided to be of any real use, you have to run your business as an LLC. So it is a lot more than filling out forms, you have to set up the accounts of the business and conduct business in a specific way. The very short version is that your business funds must be kept separate from your personal funds. You can't do things like make your boat payment out of your business checking account, which so many people do.

Personally, I have a consulting business and it is an LLC with the S corp tax election. I highly recommend that form of business for small businesses. It avoids most of the pitfalls for setting up a corporation and most of the income distribution pitfalls of an LLC.

There have been many articles written on this and it will serve you well to do some research on Google. Here is a good place to start.

Edit: To briefly and roughly answer your question - There are basically 5 things that we look at when considering the advantages of business types (1) Ease and expense of formation and operation (2) Agency - who can bind the business to a contract (3) Liability - who is on the hook when things go bad (4) Taxes (5) Capital generation.

Partnerships & Sole proprietors - (1)They are by far the easiest to form and operate. (2) Any partner can obligate all partners (this really doesn't matter to a sole proprietor). (3) They have unlimited liability, you are personally responsible for all business obligations. (4) They have lower taxes as all the income of the business flows through to the owner and is taxed at his normal rate (there is only one tax paying entity). (5) It is pretty hard to generate paid in capital so big projects mean loans.

Corporations (not S corp). - (1) More expensive to form and harder to operate (2) Officers of the corporation can bind corporation (3) Liability is limited to investment (4) Two taxpaying entities - the corporation is taxed and the owners are taxed when they get money (5) Easy to generate capital - you just issue more stocks.

Limited Liability Company - (1) cheaper to form than corporation, more than partnership - cheaper to operate (2) Members (partners) can bind the company (3) Liability is limited to investment (4) Basically the same as a partnership (the IRS doesn't have an LLC tax status so LLC's pick how they want to be taxed). (5) Allowing new members is harder than corporation but easier than partnership.

S - Corp (for taxes) - Mostly the same as a corporation within certain size and revenue limits but enjoys the flow through taxation of a partnership.

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Comments (8)

Xty G (z4)
Original Author
10 years ago
Wow! Thank you so much for your detailed answer.

I see that you are right about seeking out a CPA. It is way more complicated than I thought.

We use my family's accountants in NJ for our taxes because they know the ins and outs of various family holdings and we have had a long term relationship with them. Could they help with this or should we find someone locally that knows the WY laws. Are there differences between states?

Thanks again!
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Elmer J Fudd
10 years ago
I disagree with a number of points in bry911's comments but it's not necessary to say more.

You should get your legal advice from a Wyoming lawyer (yes, rules do vary from state to state) and if the family accountants in NJ are competent, their direction on the tax choices should suffice.

This is a relatively straight forward, well-trodden path with a few choices but little complexity. If you find the lawyer or the accountants struggling or trying to suggest there's any difficulty, find someone else to work with.
jlhug
10 years ago
LLC stands for Limited Liability Company. It is a type of business recognized by your state. An LLC can be a sole proprietor, a partnership, a C corp or an S corp. I'd suggest talking to an attorney AND a CPA or Enrolled Agent to help you decide which is best for you. The attorney can give you legal advice and the CPA or EA can give you information on how each type of entity is taxed. To the best of my knowledge, CPAs and EAs can't give legal advice unless they are also attorneys. Good Luck.
bry911
10 years ago
last modified: 10 years ago
An LLC can be a sole proprietor, a partnership, a C corp or an S corp. - I don't know of any state where the above is true. There are different tax elections available, but that doesn't mean that you are organized as two types of businesses.

I'd suggest talking to an attorney AND a CPA or Enrolled Agent to help you decide which is best for you. The attorney can give you legal advice and the CPA or EA can give you information on how each type of entity is taxed. To the best of my knowledge, CPAs and EAs can't give legal advice unless they are also attorneys. - As a CPA with a J.D. this is not true either. A CPA is qualified and licensed to give various types of business advice, almost all of which are legal advice. Even tax advise is legal advise. A good CPA will know when it is time to refer you to an attorney, and a good attorney will know when you should see a CPA. In short, find experienced professionals you trust, and listen to them.
Elmer J Fudd
10 years ago
last modified: 10 years ago
A few of these words are entity types, a few are used to describe tax categorization, a few are both. Munge them all together and the meaning or the thought trying to be conveyed becomes ambiguous.

LLC, corporation, sole proprietorship, partnership, are terms describing types of legal entities or forms of business under the law.

C Corp, S Corp, partnership, sole proprietorship are words used in the tax law to describe how a particular business and its owners are taxed.

An LLC can be treated as a C Corp, an S Corp, a partnership or even a sole proprietorship for tax purposes, depending on the circumstances and alternatives available to its owners.

A partnership can be treated as a partnership or a C Corp for tax purposes.

Et cetera. So to say "this is an LLC" describes the entity and which rules under the local state's corporations code apply but says nothing about its tax status.

bry's explanation of the practice of law vs accounting is roughly correct with some rough edges. CPAs can't practice law and lawyers can practice accounting. It's not possible (or expected) that one from either camp who advises clients on business and investment matters can avoid incursions into the territory of the other in the normal course of providing services. The border can be gray. But just like opinion of Justice Stewart concerning pornography, to the effect that "I can't define it but I know it when I see it", the very best experts are as aware (or more aware) of what they don't know, as what they do know. When help or a team approach is needed, a competent adviser will always say so and work collaboratively.
jlhug
10 years ago
Sorry I wasn't clearer. I was speaking about tax elections that a LLC may make. The tax election doesn't change the state designation of the entity as an LLC.
Xty G (z4)
Original Author
10 years ago
Thank you all for your advice. It is really helpful! I will first talk to our CPA in NJ and see what he suggests as far as looking for a lawyer or CPA here in WY. We value his opinion very much.

Can someone explain LLCs to me?

bry911

Comments (8)

Xty G (z4)
Original Author

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Xty G (z4)
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Can someone explain LLCs to me?

bry911

Comments (8)

Xty G (z4)Original Author

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Elmer J Fudd

jlhug

bry911

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Xty G (z4)Original Author

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Xty G (z4)
Original Author

Xty G (z4)
Original Author