Monthly Archives: September 2017

The LLC Trap

Operating a business as a limited liability company, or “LLC” is very popular among small business owners. LLC’s have been around for several decades and can be formed in every state. There can be several benefits, but several major drawbacks.

The Benefits of an LLC:

Less Administrative Burden: If you operate as a single-member LLC, you generally do not have to file a separate tax return. You also may not need to have worker’s compensation insurance, which can save on expenses.

Liability Protection: By having your business operate as an LLC, you will separate your business liabilities from your personal assets, which can offer protection of your personal assets.

Now, for the Drawbacks:

No Tax Withholdings: Since you usually do not draw a paycheck as an LLC member, you will not have taxes withheld from a steady paycheck. This requires you to remit estimated taxes quarterly, but in reality, many business owners miss some payments, make partial payments, or skip them altogether. This is how tax problems develop.

High Potential Audit Risk: Many LLC’s only have one owner and do not have to file a separate income tax return for the LLC. Rather, the activities from the LLC are reflected on Schedule C of their individual tax return. This is easier than having to file a corporate return, but at the same time, it increases your chances of being audited significantly.

Self-Employment Tax Shock: Since you usually have to pay self-employment tax as an active member of an LLC, this can double the amount of social security and medicare taxes because you have to pay both the employee and employer portion.

You need to carefully structure the way you operate your LLC in a manner so that you can reap the benefits, while at the same time reduce any downside. This should be performed with the assistance of a tax advisor that is well-versed in business structures.

You’re Not Too Sophisticated for Cash

It seems as though nobody uses cash anymore, but why should you? Smart people use credit cards and pay the bill at the end of the month so they can earn points, build credit, and have additional time to pay for their purchases, also known as “float.” But is it really that smart to use a credit card or check card to make all of your purchases, such as groceries, gas, dining, etc.?

What exactly are the benefits of using old-fashioned cash? I’ll give you a few:

  1. Easier Budgeting: No one likes to budget, which is why almost no one does this. But with cash, you can easily set aside a certain amount that you need each week for variable expenses, such as groceries. Once you start using cash you will become more aware of how you spend your money as it’s more tangible than swiping a card.
  2. You Will Spend Less: It’s easy to whip out your card a make purchases without even realizing how much you are spending. I’ve heard statistics that say that you tend to spend between 10% to 50% more on purchases when using a credit card or check card versus using cash. If your variable expenses are $50,000, then a 10% savings would equal $5,000, which is greater than any credit card rewards or possible float.

Watching your spending is one of the ways of becoming wealthy or at least financially stronger. I have witnessed this habit over the years, although it would be considered a small sample size and not an actual study, but there is a great book that espouses frugality called “The Millionaire Next Door” by Thomas J. Stanley.

As a caveat, I do not recommend using cash for business expenses as it creates an accounting nightmare.