It’s easy to form an LLC but what it can and can’t do might surprise you.
Susan Karow formed an LLC to protect her suite’s business name, Simply Gorgeous. Located inside Salon de Luxe in Sun Prairie, WI, Simply Gorgeous is branded as the place where everyone feels gorgeous.
Says Karow, “I did it right after I opened my own suite in 2011. My accountant recommended it but not for financial reasons. I had mistakenly named my salon the same as another, and becoming an LLC protects the name of my business. I had to go through rebranding once and didn’t want to do it again!”
How easy was it? Karow says it took her half an hour to fill out an online form. “You do have to file an annual report, but that’s really easy,” she adds.
The DYI Conundrum
Lots of websites let you create an LLC online. Just Google LLC and your state, and you’ll find plenty of options. Fees can be as low as $25 on state sites; national Legal Zoom charges $149 plus fees. But, is really that simple? Naturally, the answer is yes and no.
Some states require a professional license for a professional LLC, others have just one type. Many states have LLC renewal fees. At IncFile.com, an interactive map lets you see the basics in your state—for instance, the state fee in IL is $500 and you must have an in-state agent. But, there’s no indication how current some online information is, and some sites contradict one another.
Says John Blake, CPA, who is a partner with the NJ-based accounting firm of Klatzkin & Company LLP, where he specializes in taxation of small businesses, closely held companies and high-net-worth individuals, “ It is easy to miss something that is state specific if you use a legal website. We always tell our clients to make sure that they have consulted with a business attorney to make sure that they have set up their business the way that is best for them. Usually, state websites are helpful but you have to dig around to find what you are looking for.”
When it comes to state-to-state differences, he says, just a few factors to be aware of include: “Whether or not they are subject to sales tax. Whether or not the state has a franchise tax which is different than income tax. Whether or not there is an annual report that needs to be filed.
And, is there an added tax for a professional license?”
The upshot: Nearly all suite renters who replied to a Facbook post about forming an LLC said they did it online, but most professionals recommend using a business attorney—and not because they just want your money. In fact, many renters may be forming LLCs for all the wrong reasons.
Myths and Reality
According to Blake, from a tax perspective, there is no difference between a single-member LLC and a self-employed individual. “One of the biggest adjustments that has to be made is the fact that the owner now has to make estimated tax payments quarterly,” he notes.
However, there are some major myths. For instance, the idea that an LLC protects your personal assets if you are ever sued. Not so, says Blake, “Generally speaking, if the owner of a single-member LLC does something that is negligent, then he or she can be sued personally.”
An LLC stands for Limited Liability Corporation and it’s the limited part renters need to understand. An LLC acts as a “veil” of protection against business liabilities (loans, debts), not a “wall.” A legal tactic called “piercing the corporate veil” is often sought in court by those looking to hold an LLC owner personally responsible for things like debts. Usually, it comes down to creditors showing that the LLC and you are not really separate and distinct. If you paid business bills with a personal check, accepted business checks not made out to the LLC, did something illegal or mixed assets and finances (among other things), chances are good your “veil” will be pierced.
Additionally, in every state, those with an LLC are still personally liable for wrongdoing committed in the course of business, such as burning a client’s scalp due to negligence. If your LLC has more than one member, this gets even more complex.
Blake notes that renters who share a suite and an LLC should have a partnership agreement and understand that a partnership tax return must be filed. These are just a few of the reasons you should speak to a business attorney about forming the type of business that offers the protection you want.
Another myth is that you can deduct more business expenses if you form an LLC. (This idea actually appeared on a salon-industry focused website.) Says Blake, “It is not true that you can deduct more expenses as a LLC vs. a self-employed individual. You can deduct the same expenses on both, as long as you can justify them as legitimate business expenses.”
What’s in a Name
Lastly comes Karow’s name protection. She achieved her goal in that she’ll never have to rebrand again, because state agencies won’t allow two businesses to have the same name. However, her name claim only applies to her home state and formal business entities—not individuals.
No matter unless you have clients flying in from Paris. But if you think that one day, you’ll launch an international hair care brand, there are other ways to protect your business name. Start here for a few ideas, then talk to an attorney.
NOTE: This article is not intended as legal advice. It is always recommended that you work with a local business attorney when forming a legal entity.