Click here to read Part I: Sole Proprietorships of our Business Basics series.
In our second installment, we’ll discuss the mechanics of Limited Liability Companies (LLC) and how they can work for your business and your self-directed retirement plan.
The LLC is a favorite structure among small business owners. It’s known for simplicity and low formation costs. LLC owners are called members. An LLC can protect it members by creating a layer of protection between the member and the assets owned by the LLC. In the case of legal action against the LLC, only the assets owned by the LLC can be pursued. As a member, you are generally not personally responsible for the LLC’s liabilities.
There are two roles within the LLC: Member and Manager. LLC Members typically make capital contributions (funding). LLC Managers decide how the funds are utilized.
An LLC can be Member-Managed or Manager-Managed. The Articles of Organization, filed with the Secretary of State, will indicate whether an LLC is Member or Manager Managed.
- If an LLC is Member-Managed, all members play a role in managing the LLC.
- If an LLC is Manager-Managed, the manager(s) is/are responsible for managing the LLC. The Manager(s) may or may not be employed by the LLC.
All members will have to pay self-employment tax on the LLC’s earnings, based on their share of the company. LLCs are pass through entities. While the LLC will have a tax return, it generally does not pay taxes.
Registration and Upkeep
An LLC Operating Agreement outlines the roles of the members and managers. While an Operating Agreement is not required by the IRS, it is strongly encouraged as it will outline the policies of the company. It may also be needed if the business is ever involved in a lawsuit.
Many states will allow you to form your LLC online. After the LLC is formed and filed, obtain an Employer Identification Number (EIN) for your business from the IRS. Download a copy of Articles of Organization from the Secretary of State. The secretary of state will keep a copy on file themselves. Some states require an annual filing fee to keep your LLC active. Finally, have an Operating Agreement drawn up by a lawyer or online LLC creation service.
There are many online-based companies who can form an LLC for you, including:
Note: Nabers Group is not affiliated with any of these companies, nor have these been vetted personally by Nabers Group. You should always do your due diligence when researching a company and it’s policies before doing business with them.
Single-member LLC Basics
A Single-member LLC is the simplest LLC structure. In a single-member LLC, the owner is also the only member of the company. The IRS treats a Single-member LLC as a
sole proprietorship. Alternatively, the LLC can files Form 8832 to be treated as a corporation. A single member LLC taxed as a corporation is the simplest business structure, while still providing personal liability protection.
An LLC is a pass through entity and doesn’t file its own tax return. Income will be reported on the member’s personal tax return as profits and losses on Schedule C. The IRS outlines the basics of the single-member LLC here.
The ease of setup and tax handling makes the single-member LLC a great option for a lot of small business owners working alone.
Multi-member LLC Basics
The IRS treats a multi-member LLC as a partnership, unless it files Form 8832 to be treated as a corporation.
A Multi-Member LLC taxed as a partnership files Form 1065. Each each member reports his share of income, credits, and deductions on Schedule K-1 with their personal taxes. Each member is responsible for taxes on his/her share of income. The LLC itself doesn’t pay taxes, so there is no double taxation.
Retirement Plan Contributions
There are two types of contributions allowed in a retirement plan: employee and employer contributions. If you open a self-directed Solo 401k, you are both the employer and employee, so you have the maximum amount of contributions allowed!
You can make employee contributions with 100% of your net compensation up to $18,500 in 2018 and $19,00 in 2019. You can make employer profit sharing contributions of 20% of your net compensation up to $55,000 in 2018 and $56,000 in 2019. Contribution limits are 25% if your business is a multi-member LLC.
Total contributions as both employee and employer cannot exceed $55,000 in 2018 and $56,000 in 2019. Add an additional $6,000 in catch-up contributions if you are age 50 or older.
Using the LLC as the business to adopt your Solo 401k can be an excellent choice. It’s easy to set up, has a low annual cost, adds a layer of personal liability protection, and will still allow you to make the maximum amount on contributions to your Solo 401k!