Avoid These MISTAKES BEFORE Starting an LLC!

Summary

The video discusses common mistakes business owners make when setting up LLCs. It explains the importance of knowing your income type to determine if an LLC makes sense, establishing the LLC before acquiring rental property, using your EIN number to build business credit history, understanding the tax forms you must file, properly reimbursing yourself for business expenses paid personally, and more. Following this advice will help business owners avoid issues, qualify for more lending and tax benefits, and properly structure their company finances.

Takeaways

• 😀 There are 3 main types of business income: ordinary, passive, and portfolio. Understanding them helps determine if an LLC makes sense.
• 🏡 Establish an LLC before acquiring investment property to properly protect assets and avoid issues.
• 🏦 Not using your EIN and business bank account makes it harder to build business credit and qualify for loans.
• 📄 Not knowing what tax forms to use (Schedule C, 1065, K-1, etc.) could lead to penalties.
• 💳 Have an accountable plan to properly reimburse personal expenses for your LLC.
• 🚨 Many LLC owners mistakenly think they have passive income when it's actually ordinary income.
• 🤝 Multi-member LLCs file a 1065 while single-member LLCs use Schedule C.
• 😎 The SS-4 form is critical for obtaining an EIN number.
• 📋 Contractors paid over $600 require a W-9 form to issue a 1099.
• 👩‍💼 Over 31 million Americans own a business, with LLCs being the most popular structure.

Q & A

What are the three main types of income that business owners need to be aware of?

The three main types of income are: 1) Ordinary income from wages or 1099 compensation 2) Passive income from investments or interest 3) Portfolio income from the sale of capital assets or rental properties.

Why is it important to establish an LLC before acquiring an investment property?

Establishing the LLC first allows you to purchase the property under the LLC name rather than your personal name. This provides liability protection and avoids transfer issues later when titling the property under the LLC.

What happens if you set up an LLC but don't use the EIN number for banking and expenses?

Without using the EIN, you miss out on building business credit and income/expense history tied specifically to the business. This can prevent qualifying for business loans, lines of credit, and government aid programs.

What IRS tax forms will an LLC business owner need to become familiar with?

Important IRS forms include: Schedule C for sole proprietor reporting, Form 1065 for partnerships, Form K-1 for partnership distributions, Form SS-4 to apply for an EIN, and Form W-9 for contractors.

How can an LLC owner properly reimburse themselves for business expenses paid from personal accounts?

Using an accountable plan, LLC owners can document expenses paid personally but related to the business, and then reimburse themselves from the business bank account while retaining the deduction.

What are some common mistakes business owners make with LLCs?

Mistakes include not understanding income types, not establishing the LLC before acquisitions, not using the EIN, not knowing required tax forms, and not properly reimbursing personal funds spent on the business.

What makes real estate passive income different from other small business income?

Real estate passive income is not subject to self-employment tax, while active small businesses are subject to self-employment tax on top of income tax.

When does an LLC need to file Form 1065 instead of Schedule C?

An LLC files Form 1065 when it has multiple members, making it a partnership. Single-member LLCs can report via Schedule C on the owner's 1040 tax return.

What does obtaining an EIN number allow an LLC business to do?

Having an EIN allows the LLC to open a dedicated business bank account, build business credit, qualify for loans/financing, and properly file tax returns.

Why are W-9 forms important for LLC contractors and expenses?

Getting a W-9 from contractors paid over $600 allows the business to issue 1099 forms documenting the expenses to the IRS.