Here's the text from our December 2007 chat with Lily Chambers of Virtual Office Goddess. She walked us through the basics of setting up an LLC and ran through a great Q & A. Thank you so much Lily, for sharing your experience and knowledge on the subject!
(This text has been edited for brevity - all informational text has been left intact.)

If you would like to follow up here with any questions or comments, feel free to post a reply!

Host - Virtual Office Goddess
Welcome to LLC Basics! This information is based on my own research so I don't guarantee the accuracy of anything contained herein.

When I decided to start The Virtual Office Goddess, I researched 2 types of business structures: SOLE PROPRIETOR and LLC; the 2
smallest, least complicated structures available.

I decided on LLC for 2 primary reasons:
1) If Goddess were to be sued as a sole proprieter, they could come after my personal property, i.e. bank accounts, vehicles, my home, etc. If they sued Goddess as an LLC, they could only go after Goddess's assets (yeah, right! Assets hah!)

2) Although either business structure has "pass-through" income (in other words the income is considered personal for tax purposes)
sole proprieter is taxed on GROSS income (all income) and LLC is taxed on NET income (income less expenses) both at an approximate 30% rate.

So – as a sole proprieter, if I earn $2400 for the year, I pay taxes on $2400. As a LLC, if I earn $2400 then subtract business phone line
($540), bus cards/letterhead/envelopes ($200), paper, pens, toner and other office supplies ($300), etc. my taxable income becomes $1360.

This means the difference between $720 in taxes and $408 in taxes. And we have to have phones, stationary, ofc supplies anyway, right? So why pay taxes on them twice (1x at store, 1x as income).

I set up a QuickBooks account to track all of my income/expenses and keep all receipts. I can also write off 50% of lunch meetings w/clients, and other expenses I incur as a business.

An LLC is required to deposit 30% of its NET income no later than the 15th of the month following each quarter - Jan-Mar/April 15, Apr-Jun/July 15, Jul-Sep/October 15, Oct-Dec/January 15 (Deposits are made through https://www.eftps.com/eftps/).

Questions, anyone?

Member: Is it possible to set up an LLC towards the end of a tax year and retro-actively file for the previous year's income? Or would I have to create the LLC and then the following year file taxes accordingly?

Host - Virtual Office Goddess
I believe you can only file taxes as an LLC AFTER you set up the LLC w/the secretary of state.

Member: Now, an LLC is state based yes? So what about people who move often? Is it not possible to set up an LLC until you're actually going to be in one place for an extended period? (I'm thinking in terms of military wives who work as VAs too)

Host - Virtual Office Goddess
You set up the LLC in the state you are living, but once it is set up it doesn't matter if you move elsewhere - the LLC remains registered
in the original state

I believe you can actually register a LLC in any state, even if you don't live there - I would check w/the secretary of state where
you want to set it up

Member: Yes, a lot of individuals register in DE. I think because it's less complicated. Correct me Lily if you know the difference.

Member: Delaware makes it easier then? I wonder if there is one state where it is the least expensive...

Host - Virtual Office Goddess
I think there are also tax differences in DE. I know in CA you have to pay an annual tax to the state if your LLC is registered there.
In colorado, you just pay an annual renewal fee of $10

Member: From start to finish, how much did it cost you in terms of time and money to set up your LLC?

Host - Virtual Office Goddess
It cost me approx 10 minutes and $10 to file in the state of colorado

Member: Wow, that's very inexpensive!

Host - Virtual Office Goddess
In Colorado, you go to the secty of state website and complete a quick form that says your company name, the registered agent name/address and pay the filing fee.

Member: Nevada rings a bell, I think it is cheap there as well

Member: I currently have a notary business, few rental properties and now virtual business. Can they all be under one LLC?

Host - Virtual Office Goddess
I believe so. you would need to transfer the rental properties into the name of your LLC, and "sell" your notary business to the LLC.
I would double check the transfer of the notary business with your Secretary of State, though to be sure

Remember, though, that if the LLC was sued the rental properties would become fair game...

Member: So if she puts everything under the same LLC then it all becomes 'liable' - better to have multiple LLCs then?

Member: That is why we were an S-Corp with our business in NJ. The liability scared me!

Member: Do we need 'Articles' (as you do for corporation, etc?) or anything similar when setting up?

Host - Virtual Office Goddess
I DID create articles and a business plan for my LLC. The form I filed with the secty of state WAS the articles. They only asked for the company name, agent name/address. And yes, the liability is the primary reason I went LLC

Member: What was the benefit of doing an S-Corp?

Member: The taxing structure is different. Losses go against your personal and they can not sue you personally.S-corps you don't get double taxation, because it passes through to your personal returns.

Member: Corps offer more liabilty protection too

Member: With C-corps you pay taxes and then you get paid and have to pay taxes too

Host - Virtual Office Goddess
LLC is set up the same way - no double taxation, pass-through personal income
Corps also require more paperwork - that is why I went Limited Liability Company. On the other hand, my company assets consist of a laptop, cell phone, and printer.
Think of a s-corp and a LLC as personal income, without the personal liability...

Member: Well Corporations pay taxes, A C-Corp you can not claim losses against your personal where as an SCorp you can

Member: I see, so it's basically for protection in terms of legalities but also impacts taxation in a positive way. Based on the
calculations you posted initially, taxes are essentially HALF (with an LLC) of what they would be as a SOLE PROPRIETOR?

Host - Virtual Office Goddess
The advantages are listed above - miminal liability, being able to pay taxes on NET income rather than as GROSS income - you are NOT an employee, you are an owner producing your own income.

Tax depends on what your expenses are for the year. The more expenses you have, the less NET income you have.
The less NET income you have, the less you pay in taxes.

In other words, you are not paying taxes for money spent maintaining your company. You are ONLY paying taxes for the money you keep AFTER covering your expenses for running a business. - the bigger the business, the more income AND the more expenses (generally). As a sub-contractor instead of a business, you pay taxes on EVERY DIME that comes into your pocket, regardless of expenses paid out

Member: So a huge difference either way!

Host - Virtual Office Goddess
Yep! I'd rather NOT pay taxes for money I didn't get to keep

(cont'd in following reply...scroll down to continue reading)

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Member: I received an email from a company inviting me to establish my LLC via their website for $139.00 (discounted
if I enter their special code) - from what you've said it's really not the kind of thing we need to 'pay' someone else to do for us?

Host - Virtual Office Goddess
Not really - it was straightforward, quick, and cheap!

Member: It doesn't appear that my states sec'y of state accepts LLC filings - any suggestion for where else I might look?

Host - Virtual Office Goddess
I would check Delaware and Colorado. I KNOW you don't have to be a resident of DE to file and LLC there...

Member: OK, great to know - thank you!

Member: Nevada is another state that isn't complicated, I believe

Member: So it truly doesn't matter if I don't live there?

Host - Virtual Office Goddess
Nope, not in Delaware!

Member: Here's a website I just looked up. Maybe it will be helpful? http://www.scorporationsexplained.com/

Member: www.selfemployedweb.com is another informative site

Member: So, LLCs need to pay in a percentage of income quarterly - how much is that and is it paid to the IRS or through the State? Is there a form that comes every quarter to facilitate this or? I guess what I'm wondering is, how easy is it to manage and ensure you're filing correctly throughout the year, etc?

Host - Virtual Office Goddess
I deposit 30% of my NET income to the feds at https://www.eftps.com/eftps/ each quarter. There is no form, but the website is easy to navigate

Member: OK, and then what do you do at tax time?(Do you ever get money *back*??)

Host - Virtual Office Goddess
At tax time, you file your taxes using an additional form called a Schedule C with their taxes to show business income/expenses
Money back depends on whether you owed taxes or have over-paid for the year.
If you have a single ownership, you set up the account using your SSI number - if there are multiple owners you have to request
and EIN number from the feds

Member: Can I transfer my EIN from individual to LLC or S-Corp?

Host - Virtual Office Goddess
No, EINs are non-transferable.

Member: I have heard that it is good to request an EIN number instead of using your SSN #. What are your thoughts on this?

Host - Virtual Office Goddess
Using an EIN means that you are not handing out your SSI number to all and sundry - probably a good idea to use EINs in
this age of identity theft...

Member: So anyone can request an EIN, but it's mandatory for a business with more than one owner?

Host - Virtual Office Goddess
Yes - also, a multiple owner has to file an additional form (Form 1065) showing how much money was earned by each partner.

Member: So schedule C is the form we're looking for at tax time? And is an LLC allowed to have employees?

Host - Virtual Office Goddess
Yes, and LLC CAN have employees - but then you have to file (and pay) quarterly taxes for your employees, as well.
You are required to deduct fed/state/ssi/medicare taxes from the employee and MATCH the ssi/med. These taxes are
deposited quarterly. Again, through the EFTPS system

Check the links page on my website www.virtualofficegoddess.com/links.htm for some useful articles on LLC taxes and small business tax deduction links

Member: My accountant was saying something along the lines of a schedule c needing to be filed

Host - Virtual Office Goddess
Yep - Schedule C goes with your standard tax filing, showing the business income/expenses for the year. This is why I use QuickBooks to track my business. It makes the tracking SO MUCH easier!

Member: Quickbooks has a rental version that I use.

Host - Virtual Office Goddess
Remember - your LLC income is considered PERSONAL income - the schedule C allows you to show the income AND deduct your expenses.

Member: Thank you so much - I, for one, was thoroughly intimidated by the whole process and feel much better about it now. I'm going to get this set up immediately and I thank you so much for the info!!

Host - Virtual Office Goddess
You're welcome! Glad this helped!

*END*

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Thanks for this Tess!

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Dawn Riley
A Virtual Assistant in Paradise
Our business is about making yours better

Thanks, Tess! It makes a lot more sense this way than it did during the chat

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Lily Chambers, The Virtual Office Goddess, LLC
Author "How to Do Your Own Small Business Bookkeeping"

Well thank *you* Lily for taking the time to bring us the info - this thread is getting a lot of hits in the past few weeks so is a great resource!

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This makes it a lot more understandable for sure. I have a notary business and my VA practice and since my Notary biz is primarily mortgage loan closings I definitely will look into filing as an LLC instead of sole proprioter

I am very grateful for this info....got me to re-thinking...lol

Thank you for this information. I think this may be the reason I have been holding back on opening the doors of my business. The tax issue can be pretty intimidating.

Stacee

Just be aware that different states have different requirements so check w/your state to be sure you understand the rules.

__________________
Lily Chambers, The Virtual Office Goddess, LLC
Author "How to Do Your Own Small Business Bookkeeping"

I noticed Nevada was mentioned a couple of times. I live here in Nevada and have looked into doing an LLC here for my business. Right now I am a sole proprietor. It seems to be a fairly easy process for forming the LLC here, can do it right from the Secretary of State web site. But it is not nearly as cheap as Tess mentions for doing it in Colorado. I figured here it would cost me about $175 total. They have an application fee and then some other kind of fee after you are approved. Not sure why I had it in my brain that it would be better to do it in the state I live in......but think I'll check out DE and CO.

Thanks for all the great info Tess. Its great to get a confirmation of some of the things I thought I knew, and the answers to other things I didn't. Can I ask a question? Right now I am on a payment plan for last year's taxes with the IRS. Now, to avoid this same situation next year, I know I should be paying quarterly taxes now. But, I'm concerned that if I do, they will just suck the money up to go towards last year's bill. Am I right in thinking that? Also, if you become an LLC say, now, in the middle of a year........do you pay taxes on the net income only after the date of the LLC? Or will you be able to do just the net income for the whole year when you file next year?

Thanks,
Denise