You’ve just started your LLC. You’re done working for other people and you’re going to bet on yourself.
This is an exciting time, but there are some things you’re going to need to be aware of as you get started on this journey.
Let’s jump into it.
Many choose to get started then worry about creating an LLC or some other entity type. This can work, but understand that you are opening up a lot of risks by not having separating the two. If something happens, they could then come after your personal assets.
Oftentimes, getting an LLC setup makes sense. But make sure you do your BOI reporting which is a new requirement.
Keep your personal and business finances separate by opening separate business checking accounts and savings accounts.
This will help maintain the liability protection afforded by the LLC structure and simplify accounting and tax reporting.
Consider getting a specific business credit card, as well. Your business expenses can help you amass a ton of credit card cashback/rewards. Currently, these rewards are typically redeemed tax-free.
Your money earned through your business is just that, yours. You can withdraw it at any time from your business checking/savings account. Just understand, those withdrawals have nothing to do with how you’re taxed. More on that later.
Understand your federal, state, and local tax obligations.
If you’ve been a W2 employee for your entire working life, you need to familiarize yourself with the implications of self-employment and how it will affect your tax situation.
In fact, as the owner, you can’t pay yourself a W2 salary, at all, in the LLC structure.
You no longer have withholdings coming from your paycheck and you’ll have to take a more active role in your tax planning.
Track all of your revenue and expenses. You’ll need both to determine your profit. That profit is then subject to self-employment taxes. This will align you with a traditional employee in terms of social security and medicare taxes. You’ll pay 15.3% on the first $168,600 you profit. Half of that 15.3% is deductible.
Most likely, you’ll need to submit estimated quarterly taxes to avoid penalties and also avoid settling up your tax bill all at once when you file in April.
Best practice to avoid penalties is to pay in 100% of your prior year taxes in even amounts each quarter.
For example, if you owed $20,000 in the prior year, you’d send in a federal payment of $5,000 on or before each of the following April 15, June 15, September 15, and January 15 of the following year.
Keep in mind if your AGI in the prior year was over $75,000 ($150,000 if married filing jointly), you’ll need to remit the lower of 110% of your prior year’s tax liability or 90% of the current year’s tax liability.
If you’re going to aim for 90% of the current year, you’ll need to have a solid understanding of your expected profit.
Most states have similar requirements and payment schedules for their income taxes, as well (minus CA of course).
It’s very important to make timely estimated payments, as you will incur penalties if your payments are late. Pay close attention to the schedules for your various tax payments.
Stay informed about ongoing compliance requirements for LLCs in your state, including annual report filings, tax filings, and any changes to regulations that may affect your business.
There are a few basic filing requirements yearly. Most of these are state specific, so I won’t be able to comprehensively cover them here. However, when you organize your LLC, your state will send you a letter explaining what is required for your annual report.
Don’t miss this deadline. It could result in fines or dissolution of your organization.
Newly introduced, the Corporate Transparency Act requires a new filing. You can read if it applies to you, here.
Unless you hire out your compliance, it all falls on you. It is critical you are aware of filing deadlines and what taxes are due. Penalties and fines can snowball and cause a ton of stress. Stay ahead of it!
Consider obtaining liability insurance, property insurance, and any other necessary coverage to protect your business assets and mitigate risks. Some professional service based businesses require certain insurances in certain states. Make sure you are in compliance to avoid penalties and fines.
I’ve talked at length about what insurances small business owners might want to consider, so I’m not going to rehash that here. Link to that post is here.
You got this! Starting a business is overwhelming in the beginning, I am not going to lie. But... you will get used to it and it will become easier.
Financial Advisor