I often say that people tend to trade freedom for security. This is the driving force compelling millions of people to work uninspiring 9-5 jobs rather than risk starting their own business. Yet, is there any real security in today’s job market. The fact is that anyone can be “let go” from a “secure” job at any time and for any “non-discriminatory” reason. The lack of any real job security is why everyone should start a side business, even as a “hobby” or a fall back.
Why Everyone Should Have a Side Business
Years ago, when I was starting in law practice, I was influenced by Robert Kiyosaki’s book, “Rich Dad Poor Dad“. The premise of the book is that in the long term, you are better served by acquiring “income producing assets” and building businesses, as opposed to only collecting a paycheck and helping someone else build a business. The implications of this philosophical shift are profound, regardless of one’s age or income level, for reasons such as personal autonomy, and financial freedom and tax benefits.
An easy first step to establishing an independent business is setting up a simple LLC. An LLC is a separate legal entity for your business or investments, and this offers a number of potential benefits.
In Rich Dad Poor Dad, Robert Kiyosaki advocated starting businesses and acquiring assets in order to create a base of financial security and personal freedom.
Tax Advantages to Starting a Side Business
There are substantial tax benefits to the ownership of businesses and investment properties and this is the first good reason to start one.
One key reason that owning businesses is advantageous for tax purposes is that proceeds spent on business expenses are deducted from the “income” of the business and not subject to income taxation. This is a concept that is foreign to the world of paychecks, where all income is received after taxes have been withheld and expenses such as auto repairs, gas, etc., are paid from that income.
The Flexibility of Florida LLCs for All Types of Businesses
In Florida, as in many states, it is advantageous and easy to set up a separate LLC for your business startup for many reasons. LLCs are a very flexible entity for tax purposes and can be used for tiny side businesses, large complex partnerships or any venture in between.
For example, if you had a hobby fixing up old furniture, you could file a simple LLC, and name it “My WoodCrafting Business, LLC”. By filing the LLC, you protected the name of your new “side business”. You can also elect how your new business will be taxed. So, if you’re making very little income to start, you can have the LLC taxed as a sole proprietorship and this requires no additional tax filings beyond your individual income tax return.
Tip: If you’re making a little more money from your business, you can also elect to have your LLC taxed as an “Subchapter S Corp”, and this can offer additional tax savings on self employment taxes.
LLCs are also ideal for partnerships, so if there is more than one owner participating in your business, the can be taxed as a partnership.
The Asset Protection Benefits of Using LLCs for Business
LLCs offer asset protection benefits because they are a legal entity that is separate and distinct from the individual. In most states, the pursuing creditor in a legal action is left with the sole remedy of a “charging order”. Depending upon LLC circumstances and the state laws, this charging order may offer moderate, limited or zero relief for the creditor.
I’ve written prior articles about LLCs and Asset Protection that discuss why LLCs are a good asset protection solution.
Owning a business or investment property in an LLC places a liability shield around that asset if you were to be subject to a lawsuit individually. In turn, if the business or investment property is subject to a lawsuit, your other individual assets can be protected as “separate assets” from that lawsuit.
LLCs are especially effective in Florida for asset protection purposes if an “asset protection enhanced operating agreement” is professionally prepared. It is also important to consider your state’s LLC laws because in some states (like FL), a single member LLC may offer less asset protection than a multi-member LLC. Thus, the operating agreement may be even more important in some states than others and it may be advisable to add a second member to your venture.
LLCs also offer asset protection benefits for partners, because the LLC can eliminate the unlimited liability faced by partners (in general partnerships) concerning the actions of the other partners. Again, an operating agreement is critical for LLCs where multiple partners are involved.
Whether you use an LLC or other entity such as a Florida Corporation will ultimately depend upon your specific business needs and goals as well as your state laws around various business entities.
The key is to get started with something that moves you and take a few simple steps to begin to promote your idea and value.
Creating a website and social media accounts for your business are fairly simple steps. For more information about creating a business entity for your Florida start up, feel free to connect with us today.
Steve Gibbs, Esq.