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Is it Better to be Self Employed or an LLC?

Attorney Thomas B. Burton answers the following question: Is it Better to be Self Employed or an LLC?

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Transcript of the video: Is it Better to be Self Employed or an LLC?

"Is it better to be self-employed or an LLC?"

Hello, I'm Attorney Thomas Burton and that's today's question.

What if I told you, it's possible to be both! You can form an LLC and gain the limited liability protection of a limited liability company similar to a C corporation but you can still be self-employed for terms of your taxes similar to sole proprietorship. The primary benefit of this LLC is that you form a separate legal entity at the state level and then you are now personally liable for the assets and liabilities of the business. You separate those business assets and liabilities from your personal asset and that's where an LLC, a limited liability company is similar to a corporation, where we allow you to create this legal entity separate from yourself.

However, an LLC by default is taxed if you're a single member LLC, the default is its taxed as a disregarded entity as flow-through taxation, meaning all profits and losses of the business flow through to the individual owner and are reflected on the individual owner's tax return. Generally, on Schedule C to your 1040, for a business.

You can still be self-employed, what's called self-employed in the tax parlance, and have an LLC where you are the single member, the member of an LLC is the owner. So if you own 100% of the membership interest, that's what we call a single-member LLC and by default, you're a disregarded entity, profits and losses of the business flow through you on your individual tax return.

Your question is it better to be self-employed or an LLC, I would say the two are not, you can have both. It doesn't mean one or the other, you can still form an LLC and be self-employed.

Now a lot of times, I think when people hear the term 'self-employed', they think of a sole proprietorship where there is no business entity but even if you own, if you form an LLC and you're the single member, you're not considered an employee of that business. You're the owner and all the income and expenses flow through to you, even if you don't pay yourself, this salary, let's say, you still if the business makes a profit, it flows through to you.

Now the only way to change that would be, be a C corporation where you can keep money at the corporate level and you pay yourself as an employee or an LLC or other entity could file the S-Corp election and then you can pay yourself as an employee of the business and there can be some certain tax benefits to that but again, it depends on your specific situation. So you want to examine those specific numbers about whether it makes sense for you, with your tax professional but in terms of, are you self-employed or an LLC, you can be both and gain the benefits of that limited liability protection of the corporate entity, the limited liability company, the LLC and you can still remain self-employed where you either 100% owner of the business.

So great question and thank you for asking. Thanks for tuning in and we'll see you next time!

© 2023 Burton Law LLC. All Rights Reserved. Transcript and captions provided for ease of access for the hearing impaired. For questions about this topic, or to suggest a topic for a future blog post, please contact the office.

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