Welcome to Tax Tuesday Insider!

Welcome back to another edition of Tax Tuesday Insider, where we dive into the tips, tricks, and common pitfalls that can make or break your tax strategy.

Today’s topic: Are you wasting your money forming an LLC?

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You’ve probably heard that forming a Limited Liability Company (LLC) is the first step for any aspiring entrepreneur. But guess what? For many small business owners, forming an LLC could be an unnecessary—and costly—mistake.

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Here’s why:

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​1. LLC ≠ Tax Savings

Contrary to popular belief, an LLC doesn’t automatically offer tax advantages. Most LLCs are "pass-through" entities, meaning the profits flow directly to the owner's personal tax return. You might still end up paying self-employment taxes—just like a sole proprietor. For some, staying a sole proprietor or forming an S-corporation might be more tax-efficient.

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​2. You May Not Need Limited Liability

If you’re running a side hustle or low-risk business (think consulting or freelancing), the protection that an LLC provides may not be worth the annual fees, legal costs, and administrative headaches. Are you really at risk of getting sued? If not, you could be wasting hundreds, or even thousands, each year.

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​3. State Fees Add Up

Forming an LLC means more paperwork and annual maintenance costs, including state filing fees and franchise taxes. In some states, these fees can be steep! Ask yourself: Does my business revenue justify these extra expenses?

Here’s a list of state fees for forming and maintaining LLCs across different states in the U.S. Keep in mind these fees may vary slightly depending on changes in state regulations:

California: $70 (formation fee) + $800 annual franchise tax.

Delaware: $90 (formation fee) + $300 annual franchise tax.

Florida: $125 (formation fee) + $138.75 annual report fee.

Texas: $300 (formation fee) + no annual fee, but reports are required.

New York: $200 (formation fee) + a biennial statement fee of $9.

Nevada: $425 (formation fee) + $350 annual list and business license renewal fee.

Illinois: $150 (formation fee) + $75 annual report fee.

Pennsylvania: $125 (formation fee) + no annual report fee.

Georgia: $100 (formation fee) + $50 annual report fee.

Arizona: $50 (formation fee) + no annual report fee.

These fees cover the initial formation and ongoing compliance costs but can vary based on the type of LLC and additional local fees. You should verify with each state's official website for the most up-to-date information.

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​4. More Complicated Than You Think

Many small business owners are misinformed about the complexity involved in forming and maintaining an LLC. On top of initial filing costs, you may have to file for an EIN, maintain separate business bank accounts, and comply with additional reporting requirements. If you're not careful, the paperwork could drown you—and your wallet.

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5. The Cost of Missing Tax Deadlines: Interest and Penalties

One thing many business owners overlook when forming an LLC is the potential for missed tax deadlines—and the financial consequences that come with them. When you miss filing deadlines or fail to pay your taxes on time, the IRS charges both interest and penalties, which can add up quickly.

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Interest: The IRS charges interest on any unpaid taxes starting from the due date of the payment. The interest rate is determined quarterly and is the federal short-term rate plus 3%. This interest accrues daily until the balance is paid in full.

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Penalties: In addition to interest, late filing or payment penalties can apply. The penalty for filing late is 5% of the unpaid tax per month (up to a maximum of 25%), and the penalty for failing to pay on time is 0.5% of the unpaid tax for each month the tax remains unpaid. These penalties can be significant if you’re not careful with your tax obligations.

Staying on top of filing deadlines and payment schedules is critical, whether you’re running a small LLC or a sole proprietorship. If managing taxes feels overwhelming, it might be time to consult with a tax professional who can help you stay compliant and avoid costly mistakes

So, what should you do instead?

Before jumping into LLC formation, think about the real risks and rewards for your specific situation. For many, it’s better to start simple (sole proprietorship) or consider alternatives like an S-Corp if you're generating significant income and want better tax benefits. Of course, everyone’s situation is different, and consulting with a tax professional is the best way to make sure you're not wasting money.

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Ready to figure out the right structure for your business? Let's chat! We’re here to make sure your tax and business structure is the right fit for your goals.

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Quick Tip of the Week: Did you know you can switch your LLC to an S-Corp and save on self-employment taxes? The IRS allows you to elect S-Corporation status even after forming an LLC, potentially saving you thousands a year.

That’s it for this week’s edition of Tax Tuesday Insider! If you have any questions or want personalized advice on your business structure, don't hesitate to reach out. We’re here to help you navigate the complexities of taxes and business formation without losing time or money.

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