LLC Formations

What is an LLC?

An LLC is short for Limited Liability Company. An LLC is a separate legal entity that protects your personal assets if your business is sued. A Limited Liability Company is a corporate form with a separate legal identity. As the name implies, it limits your liability to the value of the asset. An LLC can be used to run a business, hold large assets (such as real estate, vehicles, boats, or aircrafts), or be used as a tax planning tool.

An LLC gets to choose how they want to be taxed and can be: pass through (reported on 1040 of owner), partnership (1065), or corporation both C corp and S corp (1120 or 1120S). The LLC has the flexibility, whereas other entities may not.

Who needs an LLC?

If you are included in any of the following categories, you need an LLC:

  • Have a sole proprietorship or DBA;
  • Starting a business/partnership with other parties;
  • Receive Independent Contractor or 1099 income;
  • Own Rental or Vacation Property;
  • Own a Real Estate flipping business; and
  • If you own any other large assets that invite liability (think boats, airplanes, and summer homes).

Why do you need an LLC?

An LLC provides protection to your personal assets.

  1. Legal Considerations – In a lawsuit, third party individuals who sue are known as creditors. If a creditor sues an LLC, they will only be able to get what the LLC owns. Let’s take an example of owning property. Tenants, vendors, guests of tenants, the mailman, UPS, the cable guy — in other words, anyone who ever sets foot or sells anything related to the property is a liability, and thus potential creditor. Anything from a slip and fall on the property — or if they claim they slipped and fell even if they did not—or any other injuries or damages sustained might give rise to a potential lawsuit.
    1. If the property is owned by an LLC, the LLC is the debtor. If you own the property in your personal name, YOU are the debtor. If an accident happens and the LLC owns the property, the extent of reach by the creditor would be limited to what the LLC is holding.
    2. If you own the property in your personal name, and the property is not worth enough to satisfy the judgment, then the creditor may be able to take the property AND go after your personal assets — that means your house, your car, your 401(k), your children’s 529 plan, your baseball card collection, or your bank account.
  2. Tax Considerations – New Tax Reform passed in December 2017, the Tax Cuts and Jobs Act of 2017 (“TCJA”), allows for 20% discount on all qualified business income to an LLC for all income under $157,500.00 for those filing individually, and $315,000.00 filing joint. This means that taxpayers using an LLC will get 20% discounted tax liability bracket.
    1. Example: Individual business owner with no LLC makes $100,000.00 in 2018. This would typically be taxed in the 24% tax bracket = $24,000 in taxes.
    2. TCJA 2017: Business owner with LLC makes $100,000.00 in 2018. New tax rate is 19.2% = $19,200.00 in taxes. Coupled with the flexible tax planning availability of an LLC, SAVINGS OF OVER $5000.

LLC also offer more tax planning opportunities than a sole proprietorship or DBA. A discount may still be available for income above  the listed threshold, contact us for more information.

When do you need an LLC?

An Ounce of prevention is worth a pound of cure.

Ideally, the LLC would be in place at the onset of the business venture or at time of purchase of asset. LLCs can be created and applied retroactively, to an extent, but it would be a cleaner transaction to get off on the right foot.

How do you form an LLC?

Use the online portal under the Get Started or Pricing tab above. We will walk you through the process by gathering information and asking you questions. Once you complete the information and payment, we can schedule your optional consultation. If you do not wish to participate in a consultation, we will submit your formation documents to the Texas Secretary of State immediately and you will receive your completed and filed corporate documents within 3-4 business days. If you would like a consultation, our Houston Attorney will have all your information reviewed and ready to discuss with you. Once the consultation is completed, we will file your formation documents to the Texas Secretary of State and you will receive your completed and filed corporate documents within 3-4 business days.

Corporate Formations

LLCs and Corporations are LEGALLY similar. They provide the same type of legal protection in that, they are a separate legal entity. They both provide asset protection and a segregation of risk. There are certain instances when a Corporations should be used as the main operating entity, including, when a client intends to become a public company by participating in the public stock exchange. Corporations have to adhere to rigid corporate formalities such as detailed minutes in meetings involving shareholders and directors, and maintaining financial books and accounts for public view whenever requested.

The biggest difference between a corporation and an LLC will be with regard to taxation.

Corporations file an 1120 and they are subject to double taxation. Once when the money comes in to the corporation, and again when the shareholder receives their portion of dividends.

  1. C Corp – Double taxation
  2. S Corp – Same legal protection – different tax treatment. Allows for “reasonable salary” and then “distributions free of Self Employment Tax (15.3%).”

If you have questions about whether or not your entity selection should be an LLC or Corporation, give us a call at 713-300-5075.

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