Ep. 157 | Steps For Forming An LLC
Download MP3Hey, everybody, and welcome back to the teaching tax flow podcast episode 157. Today, we are visiting an old friend called the LLC. And as we explore the steps in forming an LLC, here's the quiz question for you. Do you know what LLC actually stands for? You may you may be surprised, but before we do that, as always, let's thank our episode sponsor.
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John Tripolsky:Alright, everybody. Here we are back again on the podcast, and we're gonna answer that question that you probably heard there in the intro on what the actual definition or I shouldn't say definition. What LLC actually stands for. And to answer that question, nobody better comes to mind than my cohost Chris Pacquero. What's happening, man?
John Tripolsky:How are you?
Chris Picciurro, CPA:I am well. How are you doing today?
John Tripolsky:I am doing good, man. I'm excited about this one because you know, old friend, that this is the one that I like to poke your poke the bear, push the buttons with a little bit. Our friend, the LLC. Right?
Chris Picciurro, CPA:Oh, absolutely. And we know that there's a lot of misnomers about LLCs. And, obviously, this is teaching tax flow, the podcast legally and ethically reducing the tax you pay in your lifetime. An LLC is a legal entity, but there so we're gonna focus on the steps to forming an LLC, and then we'll mention some of the the tax ramifications of of forming one as well. So, yeah, it's, it's a topic that's very, very popular, and, you know, for some reason, many taxpayers think that that just forming an LLC provides you with a bunch of wham bam, thank you, ma'am, tax benefits.
Chris Picciurro, CPA:But an LLC is a very important tool when it comes to risk management, and operations, and it and it can definitely provide some benefits. It's just not an automatic gateway to dancing around and paying no taxes.
John Tripolsky:So, really, Chris, with with an LLC. Right? So I I know we're gonna get into debunking some myths with this and define and remind everybody what it actually stands for. But, really, with this, to what you said there, your attorney would be more excited about an LLC than your tax professional is what I'm taking from it. Right?
Chris Picciurro, CPA:Yeah. And quite frankly, there are a lot of times where your tax professional and your attorney have a different opinion about how you're you should be structured. You know? And we we talk about this in the teaching tax law community. Your your your entity structure should mirror the complexity and the risk of your operations.
Chris Picciurro, CPA:So if you don't if you have a lot of complexity, you have a lot of risk, you just have a more complex structure. But a lot of times, I feel like people overdo it. You know? Might buy one rental property but form five LLCs because you need this management company and this holding company and this and that and other thing. But we're gonna jump into that, and we're gonna talk about the LLC.
Chris Picciurro, CPA:An LLC stands for limited liability company. A lot of people don't understand that. So, yeah, an LLC is a limited liability company, and let's talk about the steps. The first step when you're forming an LLC is quite simply come up with a name. Right?
Chris Picciurro, CPA:Gotta come up with a name that is that is not utilized already. And when you come up with a name, the name must include LLC in it or limited liability company, but you're gonna wanna check with your state secretary of state database and the, United States trademark database to make sure no one took your name. So, John, you can't just go create Coca Cola LLC, unfortunately.
John Tripolsky:That's true. And you know what? Looking back a little bit in history, I I don't remember where I was exactly. But as weird as this is, and I don't know if I've ever actually told you this, I remember being on the phone with you. I remember I was driving Mhmm.
John Tripolsky:Somewhere, and I was telling you I was gonna start a marketing agency. So, I mean, we're going back, almost twenty years.
Chris Picciurro, CPA:Right. Way back twenty years.
John Tripolsky:And I remember even then, I was like, well well, what do I gotta name this? You're like, I I don't care what you name it. It doesn't matter. Like, name is it could be, you know, 13 initials, which you'll see, I think, you know, for some investment, you know, investment groups in that. Right.
John Tripolsky:But the name does not matter. Right? It's literally just something that's unique, identifiable. I mean, as everybody else. Right?
John Tripolsky:We we're not gonna get into on this, but there's DBAs that doing business as, but the LLC is that, layer of liability protection.
Chris Picciurro, CPA:Yeah. It's it's the name it's the name of the business. So you foreign you pick a name, and then the second step is you select a registered agent. So every LLC has to have a registered agent in the state that it operates in. It doesn't have to be you.
Chris Picciurro, CPA:So you could you could be your own registered agent. You can use a third party. You can use a virtual registered agent. In other words, that that has locations all over The United States. You can use an attorney.
Chris Picciurro, CPA:You can use anyone that but someone has to have a physical location in the state that you form your LLC, and that's important. So the registered agent is the one that actually receives all of your legal and tax documents for the LLC, and you could be your own registered agent. Now, you know, shameless plug. We we we have a registered agent that we work with in the teaching tax law community called Corpnet. They help people form LLCs and and act as registered agent all over The United States.
Chris Picciurro, CPA:Even if if, if that's something you need, definitely leave a comment in, in our comments area, and we will reach out to you or go to the teaching tax law hub. John could put that link in in the in the description, and we can help guide you in the right direction. So the point is you don't have to be you could live in the state of Michigan, John, and form an LLC in the state of Florida if you wanted to. Again, talk to a tax professional. More or less talk to your legal counsel before you do that.
Chris Picciurro, CPA:But when it comes to that implementation, we have those tools for you. Implement ideas are cheap. Implementation is valuable in the teaching tax law system.
John Tripolsky:And we don't wanna give any bad advice. So here's maybe some good one. And, Chris, and tell me if I'm extremely wrong in this one. So there's the disclaimer. Don't do this.
John Tripolsky:Don't just do a Google search on Forming an LLC and click on the, the first link that tells you to register it in Delaware. Delaware. Let's be honest. Because that usually is one of the first ones that come up, and we won't get into that.
Chris Picciurro, CPA:But So yep. So file so select the registered agent. It could be yourself. But remember, whatever address you put as a registered agent is where all your official mail goes and and can be found. So I can go into any state database and look up an LLC.
Chris Picciurro, CPA:And and I want you to think about it. Do you want your if you're using your home address and one of your LLCs, that means someone could easily find that. So just something to think about. The third, file your articles of organization. That those articles of organization do not I wanna stress this, do not get sent to the internal revenue service.
Chris Picciurro, CPA:They get sent to the state, the secretary of state office, and maybe you could file them online, depending on the state, where you're registering your LLC. This is what officially creates your LLC. And in when you file your articles organization, you are providing your business name, your address. You have to identify who your registered agent is in your management structure. So are you member managed?
Chris Picciurro, CPA:Are you manager managed? You have to figure that out, and then you file those articles organization. That is basically the birth of your LLC. Filing fees are gonna range. Some states are I've seen as low as $25, $30.
Chris Picciurro, CPA:Some states, California, you know, they're about you're gonna be up to $800 per LLC. Way to go, California. File.
John Tripolsky:Yeah. And, Chris, it's funny that you mentioned the, the reference of the birth. Right? Like, that articles of org doc really is the the birth certificate of
Chris Picciurro, CPA:your LLC. Way to
John Tripolsky:say it. And I'm so glad and it's funny. I didn't you know, we did not talk about that, so I'm super glad that you referenced it that way. And then here's some more advice. Take it from somebody who had a hard time tracking one of theirs down a long, long time ago.
John Tripolsky:Keep it where it's easily accessible. I think now you can probably get them a lot quicker Right. From your secretary of state online, but you'll need those. But at the Absolutely. Times you think you won't, they will be asked of you.
Chris Picciurro, CPA:It's a a a great way to say it. It's like a birth certificate for your business. You're going to need it. You will need it. Now once you file your articles articles organization, then you need to create an operating agreement.
Chris Picciurro, CPA:You I highly recommend you have a formal operating agreement that is written, that is a living, breathing document even if you are a single member LLC. Now we're gonna call time out here. I want to stress. Remember, a single member LLC by default is a disregarded entity for federal tax purposes. So, John, if you run a business and you form an LLC, you own a rental property, you do form an LLC, you don't have additional filing requirements on the federal level just by forming an LLC.
Chris Picciurro, CPA:However, you should have an operating agreement. The operating agreement is gonna lay out the ownership, the profit splits, the management, and how you resolve disputes. This is your blueprint. These are the rules for the organization. So if you were going to if you have a dispute, if you are giving someone the authority to act on behalf of the LLC, even if it's yourself, that's written out in the operating agreement.
Chris Picciurro, CPA:Now an operating agreement is not legally required by every state, but I can't recommend it more highly. So even if you want to use an online service, if you feel that's appropriate based on the complexity and risk of your LLC, that's fine, or consult an attorney. But the operating agreement is a living and breathing document that could get amended quite often too.
John Tripolsky:Yeah. And, Chris, here's a question for you, not to deviate from it all, but I'm sure pretty much everybody's seen it. Right? Like, there I feel like law firms usually have it, whereas PLLC. What's that p stand for?
Chris Picciurro, CPA:Yep. Professional. Professional limited liability company. So many many industries are required to to to be a PLLC, and you're gonna see that, yeah, usually in a a law firm, accounting firm, and and that sort of stuff. And there could be a couple different statutes based on what state you're in.
John Tripolsky:So it's the same thing, just an identifier.
Chris Picciurro, CPA:Yes. It's a special type of LLC so for professional service companies. Next step, I obtain a federal identification number or EIN. Now that can be done online. It has to be done online now.
Chris Picciurro, CPA:And for many people, it's actually required. You can just get one on IRS website, irs.g0v. Even if you're a single member LLC, you should get a federal identification number that separates it from your Social Security number. You're gonna want that for potentially anonymity. You're gonna want that for asset protection.
Chris Picciurro, CPA:You're gonna want that for banking purposes. So get an EIN number or work with someone to get you an EIN number. And you can do that right online on irs.gov. It takes about five minutes. However, don't screw it up.
Chris Picciurro, CPA:There's some very important questions in that EIN number that if you click the wrong button, the IRS is gonna think you're not what you want to be, if that makes sense.
John Tripolsky:Mhmm. And don't lose the number.
Chris Picciurro, CPA:Oh, correct. Again Like, somebody who knows. Number. You know, that's your Social Security. That's your, you know, that so you've got a birth certificate, right, which is we've discussed.
Chris Picciurro, CPA:But DIN is like your Social Security number. So you need that. Don't lose it. And when you get a you know, store that as when you apply for it, it'll get mailed to you, but it's gonna pop up on your computer, a downloadable PDF of that EIN. Definitely download it.
Chris Picciurro, CPA:Download that thing. The next, you're gonna now now that you've formed your you've gotten formed, you have your operating agreement, you've got your EIN, you're gonna wanna register for state and business licenses or taxes. Just depends on your state where you're at. That could be sales tax. It could be franchise tax.
Chris Picciurro, CPA:It could be with holding tax. It could be permits and business licenses. So, John, let's say let let's think about your situation. Let's say you formed an LLC to have a marketing agency. Awesome.
Chris Picciurro, CPA:Marketing agencies are a service based business, so you're typically not going to have sales tax unless you live in a state that that taxes professional service or yeah. It's it that'd be rare. But once you hire employees, you're gonna have withholding tax. You're gonna have to register with the state, or you're probably gonna have an excise tax or or franchise tax. You can't register for this in the states that you're supposed to file in until you have the IIN number and the operating agreement, etcetera, etcetera.
Chris Picciurro, CPA:The next step or step six is to get six is to get registered with state tax and business licenses. And then once you're registered, then go open your bank account. Try to keep your personal and business funds separate, not not even if you're the only only member of the LLC. And when you go to see and, John, you mentioned this. When you go to the bank, that's why you wanna keep track of all that stuff.
Chris Picciurro, CPA:You say, hey. I formed an LLC. I wanna start a business bank account. They're gonna ask for your EIN, your articles organization, and your operating agreement.
John Tripolsky:And there is no leeway. If you don't have those, you do Not pass go, and you do not collect $200
Chris Picciurro, CPA:or don't have a bank account, and then ultimately, you're really not an l you're you might form an LLC, you're not acting and walking and talking like a duck, so you're not a duck. So, yeah, absolutely. You wanna start that business bank account. And then once you're set up, it's at that point, you have responsibility. You, the person that formed the LLC, you have the responsibility to maintain compliance on an annual basis.
Chris Picciurro, CPA:That includes annual tax returns. Now some states are biannual for the LLC. So here's what happens, John. Let's say you form an LLC. I'm gonna use the the state of Tennessee, for example.
Chris Picciurro, CPA:In the state of Tennessee, you form an LLC. Every year, you have to you have to renew your LLC with the secretary of state and pay that fee. Separate from that, you have to file with the department of revenue a franchise and excise tax return. They're two completely different filings. The secretary of state renewal is something that is done has nothing to do with your income tax.
Chris Picciurro, CPA:It is a legal document that is filed by your registered agent. I can't tell you how many times taxpayers have their LLCs dissolved because they don't file their renewals. They lose their all the stuff they work for their asset protection, and they're thinking, well, I filed tax returns. Yeah. That's different than filing your renewal with the state.
John Tripolsky:And that's a that's something I bet you a lot of people don't know. Right? So it's I mean, I would say it's almost like a blessing and a curse. Right? Like, I could in the state of Michigan here, I think it's maybe I'm guessing here maybe $80 or a $110, something like that.
John Tripolsky:I could literally leave my desk, and by the time I get to my car, I could have an LLC formed, have an EIN, and I'm on my way to the bank. Like, it's that quick that things happen. And why I say it's a blessing and a curse, like, now it's so easy to do it. But the curse side of it is is I think some people jump into it like you had mentioned. They create so many of them thinking that, you know, oh, everybody's gonna love me.
John Tripolsky:I'm gonna be so organized because I have everything separated, but it almost becomes in a little bit of an admin headache at some point. And then you realize like, oh, wow. This really didn't help me on the tax side. Liability side maybe, but now my compliance costs, aka filing your taxes, now the cost of doing that just went up, maybe, because you have 40 LLCs for every
Chris Picciurro, CPA:And there are some states that allow what are cost a concept called series LLCs that you can kinda roll one into one one, but you've got yeah. You've gotta look on a state by state basis. As far as a maintain ongoing compliance is what we're gonna wrap it up on this is because we do have additional content. Your LLC is a the the one of the positives of it is it is a flexible entity, meaning it can always elect to be taxed as a c corporation. It could elect to be taxed as an s corporation.
Chris Picciurro, CPA:It could bring on new members. But if the LLC goes moves from a single member to multi member, the tax reporting completely changes. So just make sure that you understand that concept of price versus cost. Yes. It might be inexpensive to create an LLC.
Chris Picciurro, CPA:It doesn't mean it's going to be a low cost to maintain it. You know, I've I've got tons of terrible stories of people buying, you know, one rental property. They've got eight partners, and they don't realize now, oh gosh. It's gonna cost me $3,000 a year just to file a tax return. It doesn't matter if the rental property is an $80,000 property or a 10 unit apartment building.
Chris Picciurro, CPA:It's the same amount of reporting. LLCs could be great. They can help you out with asset protection. They could be a tax planning tool. They can give you peace of mind.
Chris Picciurro, CPA:However, make sure you talk to your centers of influence, your tax professionals, and most importantly, your legal counsel to apply these concepts. Again, ideas are cheap. Implementation is valuable to you, to your situation, and if it makes sense to form an LLC. Also, you've gotta put the asset in the LLC. I can't tell you how many times.
Chris Picciurro, CPA:Well, I formed this LLC. Oh, did you did you do you have a piece of real estate? Did you put it in the LLC? No. Not yet.
Chris Picciurro, CPA:Okay. Well, John, it's like packing a bag, checking a bag at the airport, rather checking a bag at the airport with nothing in it, but you paid for that car. Hey. I can promise you it's gonna be underweight. That's for sure.
Chris Picciurro, CPA:So it's a team sport. And if you're gonna form an LLC, make sure you not only file those steps we talked about, but maintain the ongoing compliance as well.
John Tripolsky:And that's a great example. Right? Because an an LLC could be as small as a startup cookie company, But then they can also be as large as think the example that we actually brought up on the last podcast we did on this couple years ago now was, was Stellantis, with, which is actually Chrysler. Right? So it was Chrysler, which is Stellantis, I think, owned them.
John Tripolsky:It's if I remember right, some form of that name was actually, an LLC. So it's a you know, obviously, it's cheaper to do compliance for, for the bakery, I'd imagine, than a auto manufacturer. So just an example. And let's close it on that. If anybody is interested, obviously, in any more information that we have on LLCs, really just get on our YouTube, check out all the content we have on there, and really just look at what's there.
John Tripolsky:Just look at it. Search LLC. Search any topic you can think of on there. Tons of stuff is gonna come up. You're gonna find reels.
John Tripolsky:You're gonna find podcasts. You're gonna find all kinds of things. I think we had guests on there talking about different types of them. Check them out. There's an endless amount of information.
John Tripolsky:I promise you, you will find the answer that you're looking for. So, Chris, as I was just mentioning here, right, is, you know, sending people to YouTube. Do a search. You're gonna find a ton of LLC stuff. And I I was given the example, right, of Stellantis being an LLC and the startup cookie company being an LLC, but the compliance costs and efforts are a lot different than the two of those.
John Tripolsky:So any any final suggestions you have for somebody if they're thinking of forming an LLC besides don't go over the top and
Chris Picciurro, CPA:form one for your LLC? Listen to this podcast. Take our advice.
John Tripolsky:Bingo. So if you made it this far in the show, you've actually already taken the advice whether you knew it or not. So Absolutely. Place to end. So alright, everybody.
John Tripolsky:Again, any questions, drop us a line. We're here to help. Get on defeatingtaxes.com. That's a private Facebook group that we always mention on the show. You are welcome.
John Tripolsky:Here's your private invite. And then those show notes as well too. We'll put a link down there, as Chris mentioned, for the hub and reach out to us. If you have any questions, we're happy to catch you. We don't do that in teaching tax flow as far as for doing the registered agent side.
John Tripolsky:We don't do a whole lot, you know, in setting up on that at all. We have a partner that does it, and that's who we'll connect you with. So until next time, next week, same day of the week, different date, completely different topic here on the Teaching Tax Flow podcast. Have a good week, everybody.
Disclaimer:The content provided is for educational purposes only. We encourage you to seek personalized investment advice from your financial professional. For all tax and legal advice, please consult your CPA or attorney. Investment advisory services are offered through Cabin Advisors, a registered investment advisor. Securities are offered through Cabin Securities, a registered broker dealer. The content of this podcast does not constitute an offer of securities. Offerings can only be made through an offering memorandum, and you should carefully examine the risk factors and other information contained in the memorandum.
