Freelancers and consultants often face the question as to whether they should set up a formal LLC. Recently, the issue came into the news because of the Trump tax cuts, passed in 2017, that provide some tax benefits for individuals with an LLC. Because the new tax rules didn’t take affect until 2018, people are filing their taxes under these new rules for the first time.
Specifically, small business LLCs that are filing their taxes as pass-through entities (meaning their business income is reported as personal income) can take a 20-percent business income deduction.
To qualify for the 20-percent deduction, business owners must have taxable income below $157,500 if single or $315,000 if married and filing jointly.
If getting a tax break on your consulting or freelance income sounds intriguing, you’ll want to consider some of the other benefits and drawbacks of filing an LLC.
Costs – There is a small fee to set up an LLC in Connecticut ($120), but moving forward there are additional fees and taxes. Most business entities in Connecticut have to pay a biennial business entity tax of $250. Connecticut also requires all business entities to file an annual report, which carries a fee of $20.
Taxes — Filing an LLC also guarantees that you will come to the attention of state authorities and that you will need to understand your full tax exposure, including whether you must register for a sales and use tax permit and owe sales and use tax on your income, and whether you must register for withholding tax as an employer.
Legal protection – People often form legal business entities to help protect their personal assets from legal liability. However, the protection of an LLC in liability cases can be limited. This is an issue you may want to discuss with an attorney.
For more details on the pluses and minuses of LLCs, visit this article on our website, or contact Brown Paindiris & Scott and its team of business attorneys for more details.