THE BENEFITS OF FORMING A LIMITED LIABILITY COMPANY

BY ERWIN BOGS REMPOLA

Limited Liability Companies are becoming popular lately. If you have a small business or real estate investments and you don't have a limited liability company (LLC) yet, I strongly suggests that you form an LLC. Forming an LLC will protect you, your business, your assets, and your heirs.

First of all, if you don't have a business or investments, you don't need to form an LLC. I've heard many rumors going around that anybody can form an LLC even without a business. Some people even have a network marketing on forming a business without a business. What? Even I'm confused. They try to recruit people to join them and encourage the new members to recruit others. So what is the nature of their business? Pyramid scheme. They tell people that they will get the tax benefits of forming an LLC (just for the sake of tax benefits) even if they don't have a business or investment. Here's my opinion on that. First, you will not get the tax benefits if you don't have a legitimate business. Second, if you form an LLC in California, you have to pay $800/year tax with or without profits. So why do you want to pay taxes for having an entity with no business? Is this what they call a tax benefit? Folks, all I can tell you is be careful. This is a scheme. But for the small business owners, investors, and landlords, forming a limited liability company (LLC) is the best way to run your small business.

Forming an LLC is not hard. You can do it yourself (if you know how) or you can get help from lawyers, accountants, financial advisors, or even online. The cheapest way is online. You can also buy books about how to start an LLC. Make sure that you do your own research. I recommend LLC for small business owners and small real estate investors instead of a sole-proprietorship or partnership. You don't need a group or partners to form an LLC. The minimum member can be one. And if you're wondering why I'm not recommending a corporation, which by the way you can also use to operate your business, it's because corporation is for big businesses. If you are just starting a business, then an LLC is the best way to go.

The benefits of forming a limited liability company for your business or investments cannot be overstated. Let's say, for example, that you're a landlord with three rental properties. Aside from your rental properties, you have your residence and other personal assets, such as stocks, bonds, & mutual funds. You recorded (grant deed) all your properties under your name and you operate your leasing business as sole-proprietor. If one of your properties catches fire and the cause of the fire is old electrical wiring, your tenants can sue you for damages and they can go after all your properties including your residence and your personal assets. That's how bad it is. You can lose all your hard-earned assets in a heartbeat.

Okay, let's change the example. Let's say you formed an LLC named "ASSETS LLC," and you recorded (grant deed) your three rental properties under "ASSETS LLC" and used the LLC to manage your landlord/real estate leasing business, then put your residence and other personal assets separate from "ASSETS LLC" and recorded them under your name. The same scenario happens and your tenants file a lawsuit. Here they can only sue ASSETS LLC and go after the LLC's assets. They cannot go after your residence and your personal assets. On the other hand, let's say for example you're having a party in your residence and one of your guests sues you for food poisoning. The guest can only go after your personal assets while the assets of your LLC are intact and safe. Now you know how to protect your assets by separating personal assets from your business assets.

Now let me tell you the ultimate way to protect all your assets. This one is more expensive. Let's say you formed three different LLCs and placed each rental properties under each different LLC that you formed. Then the same scenario happens. The tenants can only sue the certain LLC that owns that certain property that they are renting. They cannot go after the other assets of the two other LLCs that you own. They also cannot go after your personal assets. This is the best way to protect your assets; but then you will be paying three taxes yearly. In California it's $800/year times three so you'll be paying $2,400/year. This type of asset protection is for the advanced investors and for small business owners who want to expand their business. For a starter, I recommend that you form at least one LLC and separate your personal assets from the business assets.

Another benefit of a limited liability company is inheritance protection. A lot of you have businesses and properties to protect. A lot of you are doing this so by the time you depart the face of the earth, you want your wealth to pass on to your spouses, domestic partners, children, grand children, etc. You want to do this easily and you want to do this the cheapest way possible. You want to avoid the costly probate court procedures. I don't blame you. I'm pretty sure you've heard about Living Trusts and their benefits. If you have an LLC, you don't need a Living Trust. If something happens to you and your properties are recorded to an LLC you formed, then you don't need court proceedings for the transfer of your properties. The LLC and its assets automatically transfers to your heir. In fact, you can transfer some of the shares of your LLC to your heir now and you don't have to give them the control of the business operation (if your heir is underage, you can transfer shares of LLC through a trust). You can always change the shares' percentage anytime you need to in case one of your heirs breaks your rules.

Other great benefits of having a limited liability company are the tax benefits. Do you know the difference between business owners (LLC) from regular employees? When regular employees receive their paycheck, Uncle Sam automatically takes his share ( a big chunk of it). Then the regular employees pay their monthly payments of their debts (mortgage, auto, credit cards, etc). By the time they finish paying all the monthly expenses, nothing is left to save. So what do regular employees do? They look for more jobs to earn more money. Again, Uncle Sam will be very happy because the more the employee earns the more Uncle Sam takes. On the other hand, small business owners deal with Uncle Sam differently. Before small business owners pay taxes, they will deduct all the expenses incurred from operating the business which is called "overhead expenses." These expenses include but not limited to rent, auto mileage, mortgage interests, meal and lodging, and more. They can also claim parts of the square footage of their homes that they use as an office for a home based business. Business owners can go to Las Vegas and claim the trip as a business expense, as long as part of the trip is for business purposes. Then after they deduct all the business expenses, they re-invest some of the profits to other tax-deferred investments and real estate. After business owners deduct all the expenses, tax-deferred investments, and donations, what ever is left is the only income that is going to be taxed by Uncle Sam.

Sometimes Uncle Sam will even return all their income taxes back to them. America loves to reward small business operators. At the end of the tax season, employees end up paying more taxes compared to business owners.

For more information about this column, please read my book "DISCOVERING TRUE WEALTH," written by Erwin Bogs Rempola, available at all online bookstores.

" Owning an LLC or home based business is risky. Erwin Rempola is not responsible or liable for any financial losses or damages you might incur in forming an LLC or home based business. Please consult with your lawyer or with your accountant if you want to form an LLC."