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What has changed since ‘Rich Dad Poor Dad’ came out 20 years ago
Published: Apr 10, 2017 4:24
Robert Kiyosaki, the author of “Rich Dad Poor Dad,” has made headlines for
his bold and sometimes controversial opinions about the future of the
stock market, real estate and how to get rich.
The pros and cons of forming an LLC
Published: Mar 23, 2017 5:10 p.m. ET
What you need to know
LLCs provide some of the advantages of a partnership with the liability
protection of a corporation.
This article is reprinted by permission from NerdWallet.
The limited liability company was first offered as an option for structuring
businesses 40 years ago in Wyoming. By the late 1990s, all states had laws
authorizing the organizing of businesses under the hybrid structure. Today,
LLCs are growing faster than any other business type, according to the IRS.
What is an LLC?
An LLC is a business structure that combines the simplicity, flexibility and
tax advantages of a partnership with the liability protection of a
corporation. An LLC can have one or many “members,” the official term for
its owners. Members can be individuals or other businesses, and there is no
limit to the number of members an LLC can have.
About 2.4 million U.S. businesses identified as LLCs in 2014, according to
the latest figures available from the IRS. Take a look at these advantages
and disadvantages to help you decide whether an LLC is the right structure
for your business.
LLC: The pros
Choosing to structure your business as an LLC offers a number of advantages:
Limited liability: Members aren’t personally liable for actions of the
company. This means that the members’ personal assets — homes, cars, bank
accounts, investments — are protected from creditors seeking to collect from
the business. This protection remains in place so long as you run your
business on the up-and-up and keep business and personal financials
Pass-through federal taxation on profits: Unless it opts otherwise, an LLC
is a pass-through entity, meaning its profits go directly to its members
without being taxed by the government on the company level. Instead, they’re
taxed on members’ federal income tax returns. This makes filing taxes easier
than if your business were taxed on the corporate level. And if your
business loses money, you and other members can shoulder the hit on your
returns and lower your tax burdens.
Management flexibility: An LLC can opt to be managed by its members, which
allows all owners to share in the business’s day-to-day decision-making, or
by managers, who can be either members or outsiders. This is helpful if
members aren’t experienced in running a business and want to hire people who
are. In many states, an LLC is member-managed by default unless explicitly
stated otherwise in filings with the secretary of state or the equivalent
Easy startup and upkeep: Initial paperwork and fees for an LLC are
relatively light, though there is wide variation in what states charge in
fees and taxes. For example, Arizona’s filing fee for articles of
organization is $50, while the fee in Illinois is $500. These variations
aside, the process is simple enough for owners to handle without special
expertise, though it’s a good idea to consult a lawyer or an accountant for
help. Ongoing requirements usually come on an annual basis.
LLC: The cons
Before registering your business as an LLC, consider these possible
Limited liability has limits: In a court proceeding, a judge can rule that
your LLC structure doesn’t protect your personal assets. The action is
called “piercing the corporate veil,” and you can be at risk for it if, for
example, you don’t clearly separate business transactions from personal, or
if you’ve been shown to have run the business fraudulently in ways that
resulted in losses for others.
Self-employment tax: By default, the IRS considers LLCs the same as
partnerships for tax purposes, unless members opt to be taxed as a
corporation. If your LLC is taxed as a partnership, the government considers
members who work for the business to be self-employed. This means those
members are personally responsible for paying Social Security and Medicare
taxes, which are collectively known as self-employment tax and based on the
business’s total net earnings.
On the other hand, if your LLC files forms with the IRS to be taxed as an S
corporation, you and other owners who work for the company pay Social
Security and Medicare taxes only on actual compensation, not the whole of
the company’s pretax profits.
Consequence of member turnover: In many states, if a member leaves the
company, goes bankrupt or dies, the LLC must be dissolved and the remaining
members are responsible for all remaining legal and financial obligations
necessary to terminate the business. These members can still do business, of
course; they’ll just have to start a whole new LLC from scratch.
How to start your LLC
Choose a name: Register a unique name in the state where you plan to do
business. To make sure someone else doesn’t have your business name, do a
thorough search of online directories, county clerks’ offices and the
secretary of state’s website in your state — and any others in which you
plan to do business. For a fee, many states let applicants reserve an LLC
name for a set period before filing articles of organization.
Choose a registered agent: The registered agent is the person you designate
to receive all official correspondence for the LLC. It’s crucial that you
nail down who this person will be before filing articles of organization,
because states generally require you to list a registered agent’s name and
address on the form. Though people within the company are usually allowed to
serve in this role, states maintain lists of third-party companies that
perform registered-agent services.
File articles of organization: This is the step that essentially brings your
LLC into existence. States request basic pieces of information about your
business, which, if you’ve thought through your business plan and structure,
should not be hard to provide. You’ll be asked to supply details like name,
principal place of business and management type.
Get an employer identification number: The IRS requires any business that
has employees or operates as a corporation or partnership to have an EIN, a
nine-digit number assigned to businesses for tax purposes. The rule applies
to LLCs because, as creations of state laws, they’re classified for federal
tax purposes as either a corporation or a partnership.) Applying for an EIN
is easy, fast and free.
Draw up an operating agreement: Your operating agreement should include
specific information about your management structure, including an ownership
breakdown, member voting rights, powers and duties of members and managers,
and how profits and losses are distributed. Depending on the state, you can
have either a written or oral agreement. Many states don’t require one, but
they’re a useful thing to have.
Establish a business checking account: It’s generally good housekeeping to
keep business and personal affairs separate. Having a separate checking
account draws a bright line between the two. This is critical if you want to
mitigate any potential risk to your personal assets if a lawsuit calls into
question your business practices.
Learn how to start your business
NerdWallet has rounded up some of our best information on starting a
business, including structuring and naming your company, creating a solid
plan and much more. We’ll help you do your homework and get started on the
right foot. Read our Starting a Business Guide.
Andrew L. Wang is a staff writer at NerdWallet, a personal finance website.
Email: ***@nerdwallet.com. Twitter: @andrew_L_wang. NerdWallet writer
Claire Tsosie contributed to this article.