I can’t count how many discussions I’ve been involved in when clients/prospects/WCI forum readers have brought up the need to set up an LLC for their side hustle. Tax advisors seem to thrive on recommending clients use an LLC whenever a professional has a smidgeon of side income, but that may not be the correct choice.
LLCs are fairly harmless creatures if you’re working on your own, to be truthful. You just file a form with your Secretary of State, pay the fee, and add “LLC” at the end of your business’s name. You’ll continue to file a Schedule C or Schedule E for business results on your 1040 and renew your license every year. Not too difficult. But what you need to know is:
- Having an LLC will not afford you any deductions that are not available to you as a sole proprietor;
- An LLC will provide no professional liability protection to you. If that’s what your side gig (or main gig) is for, you need a proper malpractice policy instead; and
- You’ll have to renew your state registration periodically (annually or semi-annually) and pay a fee to your Secretary of State to prevent administrative dissolution of your LLC. In some states, that fee is as low as $15. In California, it’s a minimum of $800 per year, which you could probably find a better use for (although you will get an $800 deduction😁).
So, you may wonder why LLCs exist. It’s because they do provide liability protection in the right circumstances. Liability protection that may be the only barrier between you and your creditors in a lawsuit. In the event of a loss on your part, creditors will be able to recover only the LLC’s assets. So, when should you consider an LLC?
- To hold rental real estate If your tenant throws a wild party and someone gets drunk and shoots another party-goer, their family is going to be looking for the owner of the premises where said wild party occurred, particularly if that owner is a physician with (as always assumed) deep pockets.
- Note that, if you hold multiple pieces of real estate in a single LLC, all properties would be subject to loss. Some states have “Series LLC” laws allowing people who own multiple pieces of real estate to set up an umbrella LLC with a pocket of protection for each property.
- An alternative to the LLC is to buy adequate umbrella insurance.
- When you have employees An LLC won’t protect you from judgments for professional acts as a physician, but it will protect you if you send your office manager out to buy lunch and he runs over a pedestrian while he’s toodling through town.
- When you share ownership of your business with others By default, your organization is a “partnership” but you can elect “LLC” status for personal liability protection. At this point, the “partners” become “members”. Your liability as an LLC member would be limited only to any assets are owned by the LLC. For instance, you, personally, would be protected in the event one of the other members engaged in fraud in the name of the business or personally guaranteed a business loan. (The member who guaranteed the loan would be on the hook, but the innocent member(s) would not.)
- If it will be more tax-efficient for the section 199A small business pass-through tax deduction In some situations, an LLC might yield a higher tax deduction than would an s-corporation. To determine this, you’ll need to talk to your CPA. To learn more about the section 199A deduction, start here with Laura’s blog series.
If your side gig is listed about and you want to set up an LLC, the next step is to visit your state’s SOS website or talk to a corporate attorney. For a one-owner LLC with no employees, it’s usually pretty easy to DIY, but I always recommend a professional otherwise. In my next post, I’ll talk about situations that may call for an S-corp.