There's a common myth that keeps coming up in my practice so I wanted to put together something for you to help really break down what an LLC can actually do for you.

We've all seen the Instagram Reels, TikToks or Facebook posts, "form an LLC and save thousands in taxes"

or

"10 reasons why you absolutely need to start an LLC now"

But the truth of a matter is that not every business requires an LLC and the idea that forming an LLC will impart tax savings is just that....a myth. 

What an LLC Actually Is (and Isn't)

An LLC or Limited Liability Company is a legal entity that is formed under State law. Almost every State has some statute surrounding Limited Liablity Companies. These laws spell out the various rights, benefits, and requirements to keep a valid entity in the state of formation.

At its core, an LLC does exactly as the name implies, provides liability protection for its owner. In other words, it's a liability shield so that when something bad happens, the entity is sued and not you personally

LLCs are not federal entities, nor are they always treated something different from the owner. 

Ultimately an LLC is a legal concept, not a tax concept. LLC's for tax purposes can be treated in a number of different ways depending on a variety of different factors. 

So when you read that an LLC provides some "unique" tax benefits, my recommendation is always to summarily ignore the noise and instead talk with a legal and tax professional first.

Five Non-Tax Reasons to Form an LLC

While you shouldn't always form an LLC purely for tax-benefits, there are a number of reasons why you still might want to form an LLC. 

1. Going Into Business With a Partner: Limit Liability & Set the Rules

If you are thinking about going into business with a partner can be a great reason to go ahead and form an LLC. Forming an entity will provide a liability shield between the partners and any clients, vendors, etc.

Having an LLC also forces the partner's to agree to an Operating Agreement, which is the legal document that governs the relationship. While no one thinks that something will go wrong with the business or the relationship, things can and do go wrong. An operating agreement helps take into consideration various issues to make sure everyone is protected.

2. Buying a Business: Use an LLC as the Acquisition Vehicle

LLCs can also be great when acquiring a business. One of the biggest mistakes you can make when buying an cash-flowing business is buying without liability protection. 

3. Giving Employees Equity: Profits Interests (for LLCs Taxed as Partnerships)

Sometimes your business grows and it grows substantially. It's making money and you begin hiring employees. 

Of course we hear about it in the media all the time right now how it is incredibly difficult to hire and retain top talent. One way to work around this is by giving equity to employees. Sometimes this takes the form of stock options, but what if you don't have a Corporation? In those cases, business owners can issue something called a "profits interest" instead. 

Profit's interests are a special tax-construct that allows businesses to give employees the potential upside in a business while protecting them from having to give away the farm if the business were to sell tomorrow.

4. QSBS Planning: LLC → C-Corp Pathway (Plan Ahead)

Did you know that LLC's can be taxed as C Corporations? Well now you do. 

If you live in the small business world, you know that Qualified Small Business Stock or QSBS is an incredibly hot topic these days. Put simply, QSBS allows a shareholder of a C Corporation to exclude the greater of 10x your basis or $15 million in gain from the sale of C Corp stock. 

If you are in a business that you think would likely be saleable then forming an LLC to potentially obtain the QSBS option could be a great option. 

5. Travel Hacking: Business Credit Strategy (With Caution)

Although an LLC isn't necessary for this step it can provide a layer of legitimacy if you are running a bona fide business. 

One of the first things you should do when you form a new LLC is to obtain an Employer Identification Number or EIN. If you are someone who enjoys learning about or thinking about travel hacking, i.e., maximizing credit card points and miles, having an EIN can be a good option to double up on business credit cards and maximizing the potential earning opportunities for points and miles. 

Taxes: The Straight Talk (No Magic, Just Choices)

I was just having a conversation with a potential client. There are no magic pills when it comes to paying less in taxes, especially when starting a small business. 

Influencers on social media do a great job at convincing people that by forming an LLC they can "write-off their life." 

The reality is much different. Single-Member LLCs are pass-thru entities and treated the exact same way as simply running your business without an LLC. The main difference is that an LLC provides a liability shield.

This calculus changes slightly if you are running the company with a business partner, however the recommendation typically stays the same: learn how to run a profitable and efficient business before starting to think about how to save on taxes. 

Rather than focusing in on paying less in taxes instead I always recommend focus on making more money in your business and getting incredibly efficient in your operations.