Close to 630,000 businesses start each year in the United States. One of the most important decisions that business owners make when they open their business is their legal status.
Some choose to be an LLC, others become C-corporations, and others start out as sole proprietors. There are legal and tax implications with each option.
Business owners choose to remain, sole proprietors, because they want to remain a small businesses. Do you think that by filing as an LLC, you’ll no longer qualify as a small business?
Read on to learn what qualifies as a small business and how becoming an LLC impacts your small business status.
What Is a Small Business?
The Small Business Administration has a very broad definition of what qualifies as a small business. It actually has hundreds of different definitions based on industry.
For instance, one industry can have $25 million in revenue with 750 employees and still qualify as a small business. Another industry can have 100 employees and $7 million in revenue.
Why is it important to qualify as a small business? The SBA and other federal government agencies offer small business grants, government contracts, and small business loans.
Of course, they use the SBA’s definition of a small business.
It doesn’t matter if your legal entity is a sole-proprietorship, LLC, or corporation. As long as your business meets the revenue and size requirements for your industry, you’re a small business.
Advantages of an LLC
Your ability to qualify as a small business isn’t impacted by choosing LLC as your business entity. That being said, you can consider filing as an LLC instead of a sole proprietor or other entity.
An LLC stands for limited liability company. This is a business entity that separates you from your business.
Sole-proprietors make up close to 75% of all small business entities. The main reason why many choose this route is that it’s easy.
It doesn’t mean that you have the same advantages as an LLC. Legally and from a tax perspective, you and your business are one and the same.
This distinction matters because you can’t protect your personal assets from your business assets when you form a sole-proprietorship.
Let’s say that you have a small personal training studio. You also own a home, have a healthy savings account, car, and other personal assets.
If someone gets hurt at your studio, your business insurance normally covers injuries and damages. If you have a small policy, insurance won’t cover the entire settlement. The damages don’t end at your business assets. Your personal assets are at stake.
A sole-proprietorship doesn’t protect you from these situations. An LLC (and good insurance) will.
It’s the same if you were personally involved in an incident, like an accident. A person could sue you and go after your business because you don’t have the legal protections in place.
Intellectual Property Protection
Do you have valuable intellectual property assets? T-shirt designs, crafts, recipes, software code, and logos.
LLCs can protect your most valuable intellectual property. Many businesses have separate LLCs that contain the assets.
What they do is they create one LLC to hold the intellectual property. That LLC leases the intellectual property to their actual business. This creates legal separation for additional protection.
LLCs and Taxes
How LLCs get taxed depends on your business. If you’re a sole-proprietor and form a single-member LLC, you are taxed the same. You still file Form Schedule C and report your business income and expenses along with your personal income tax return.
For LLCs with multiple members, each member pays their share of the business profits. If you own 40% of an LLC, you pay taxes on 40% of the profits.
There are other forms you’d need to fill out, such as Schedule K-1 and Form 1065.
How to File as an LLC
You have to register your business as an LLC in order to gain the advantages of this business entity. One question that many people have is where they should file.
Some states have income tax and legal advantages over others. That’s why many choose to incorporate in Wyoming or Delaware.
If you register your business in one of these states and do business in another, you have to qualify your LLC to operate. Qualifying an LLC that is registered in Wyoming to do business elsewhere takes a few steps.
You’d have to register as a foreign corporation in the state where you do business. This often costs more money than filing only in the state where you do business. You have to weigh if the benefits outweigh the extra costs.
There are some documents that you need to file an LLC, no matter where you file. You need to have an Operation Agreement and Articles of Incorporation. Fill out the application and get ready to pay the filing fee.
Most states require that you have a registered agent for your business. This is a business address that accepts legal correspondence from the state.
Some states let you list yourself and your address as the registered agent. This isn’t advisable because your address and name are searchable in a public database. People can easily locate your information and that is a privacy risk.
Protect Your Small Business
If you file as an LLC, will you retain your small business status? You absolutely will. Your business entity doesn’t impact your small business status. The industry, number of employees, and annual revenue decide if you qualify as a small business.
Choosing an LLC as your business entity is a smart move. There are many protections for your business and personal assets. It’s relatively simple to start an LLC, too.