Some people ask what is the benefit of actually creating a business. After all what is the big deal, people can operate as a sole proprietorship in their name without any cost.
Creating a business starts by registering the business name with the state. It is convenient to setup your business in your local state for in-office visits. There are certain states where a charging order is the only way to receive a judgement from an Limited Liability Company (LLC). Wyoming is one of these states, but you must have a registered agent that lives in Wyoming. So you will end up paying $150 a year to somebody to act as a registered agent, and they likely will do absolutely nothing for you all year.
The charging order requires the judgement to be paid from distributions made from the business. If the business never distributes money then the judgement will never get paid. The charging order will never force somebody out of business or bankrupt them, it will just force them to pay the judgement out of the funds actually distributed.
This discourages filing a suit against a business, because if you are granted a charging order as the plaintiff you will receive a judgement. That entire judgement is subject to income taxes whether or not it has been received. As I discussed earlier this may never happen if funds are never distributed.
In other states such as Utah setting up an LLC is enough protection in itself. In almost every case the laws regarding LLCs will protect your personal assets. The name itself limited liability company means that your liability is limited to the money that you have invested in your business.
Creating a new business allows you to file for a separate federal employment identification number (FEIN) that you use to file all tax returns. This FEIN number will also help you keep your social security number private because you can disclose the FEIN instead on W9 forms and applications and such.
With a business you can create a business bank account. You will need your business registration with the state and a printout of your letter granting your FEIN. With a business account you keep your personal assets separate from your business assets. If you are not separating your personal bank account from your business bank account you are commingling assets. Someone could potentially pierce the corporate veil, and go after your personal assets as well as your business assets, because the way that you are using them is one and the same.
Setting up a business bank account also makes the accounting much easier. If you have to search through your personal bank account and pile of receipts for business expenses it takes much longer and costs you more money when you go to do your taxes. With a business bank account you can reconcile your bank account and keep a set of accounting books that is accurate and reliable.
If you are ever audited by the IRS the auditor will not be happy if you tell them that you will have to go through your personal bank account and tell him which expenses are business related. The auditor may determine that all the expenses are not business related because you have nothing to substantiate your claims. This can result in tens of thousands of dollars in taxes and penalties. On the other hand, if you give the auditor your books for your business the auditor can quickly audit the information, and because the financial data is separate it is sufficient proof to determine that the expenses are business related.
Having a set of accounting books gives you information that helps you manage your business with real numbers instead of an assumption of how your business is performing. Sometimes your books will help you see if you are over-spending on certain types of expenses. The books will also show you exactly how much money you are making versus how much is in the bank account. You can also setup budgets when compared to your financial data you can determine if you are over or under budget on certain items. Just like with personal finances if you don’t know how much your spending you really don’t know how you are doing financially.
You can also have a set of books for you individually. This helps track expenses and reconcile the bank accounts. It also tracks medical expenses and charitable expenses as well. These personal financial statements will also help you determine if you are depleting or contributing to your savings.
With a business you can begin to establish business credit with Dun & Bradstreet. This business credit history is important as your business grows older. When applying for loans you can show the bank your financial statements as well as tax returns for the business.
There are many reasons why you should setup a business for any business activity. The benefit of having an accurate set of books, and business that has been properly set up outweighs the cost of these items. Knowing where your business is financially allows your business to expand and thrive.