When thinking about independence — in a philosophical, or financial sense — many people may find themselves thinking about starting their own business, or at least forming a business entity. What’s more “independent” than taking charge, and becoming your own employer, after all?
While you may start your own business one day, or maybe you already have, a popular way to do so is to form an LLC. An LLC is a limited liability company, and is a business structure that is designed to protect its owners from personal liabilities — such as debts that the company accrues. There are many types of business structures, but LLCs are the most popular, and for good reason.
But some people often think that LLCs are a different type of “money vehicle.” Specifically, one that may help them avoid taxes.
As our founder and CEO, Jed Collins, recently wrote in an issue of our newsletter, he’s often asked by NFL players whether forming an LLC will help them avoid paying taxes. The answer is no — forming an LLC in an effort to avoid paying taxes will not work, despite what you might see or hear on social media (remember, social media is likely a bad place to look for financial advice!).
The main idea here is that businesses or corporations aren’t taxed the same way, or at the same rate, and thus, owners may be able to save some money by becoming a business. There’s a little bit of logic to it, but it’s misleading, and when you dig a little deeper, the plan falls apart.
It’s actually pretty confusing, and if you’re even considering forming a business entity — be it an LLC, or something else — you should probably speak with an accountant or other financial professional for guidance. You may end up doing something you didn’t intend, and depending on your specific state, there may be specific things you need to do to form an LLC. For example, in New York, there’s a rule on the books that says you need to actually publicize the fact that you’ve formed a new business by purchasing ad space in newspapers — seriously!
But back to it: When you form an LLC, it’s often a “pass-through” entity, which means you don’t actually save any money at all on taxes, as the money “passes through” it and is taxed as it would in any other way. You’re not a corporation or anything else, you’re you! That may change, of course, if there are other people involved, so that’s something to keep in mind.
Another important thing to remember, though, is that LLCs do allow you to deduct “business expenses.” That may help you reduce your taxable income, and potentially save on taxes. But that would involve making money as a business. So, if you’re working a job and get a W2, rather than a 1099, from your employer, you can’t deduct expenses related to that job — which would include transportation, etc.
That may be advantageous to some people, but you’re not avoiding taxes in this case, as you still had to spend money to generate a business expense. So, you didn’t keep any of it, it was just redirected.
Then there are S-corporation considerations, and other business structures that may or may not help some people save money on taxes. But again, this is complicated stuff, and you probably shouldn’t engage with it unless you’ve spoken with a professional about what you’re doing and why you’re doing it. In most cases, you’re not going to save enough money to make any of it worth the time and effort, as there are costs associated with forming a business.
If you’re really looking at ways to avoid taxes, your best bet is to speak with a certified public accountant — a real CPA, too, not your friend, not someone with a YouTube account. There will be costs to doing this, too, but you’ll get some actual advice that’s tailored to your specific situation.
LLCs and other business entities may be an option, for those in specific situations. Just don’t think it’s a cure-all for your tax woes.
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