How to drastically reduce your tax liability with a Limited Liability Company (LLC)

Limit your tax exposure by forming an LLC

Because we spend so much time dumping on the states and recommending that those live there escape as soon as possible, today I’m going to take a few minutes to give some advice for our brothers that are still imprisoned in the USA. This article is aimed at the Single Dude who has just escaped, or is in the process of escaping the corporate prison. Although this article focuses on forming a Limited Liability Company (LLC) in the USA, much of this advice will work for other types of legal entities and even those formed outside of the US.

Here’s the bottom line, unless you are ready to move abroad tomorrow and fully internationalize yourself, you should setup an LLC ASAP. If you don’t have a business you want to pursue make one up. If you aren’t sure what you want to do yet, start a business that has to do with one of your hobbies or just start blogging about something that interests you and call that a business. If going to try to earn money online, resist the urge to take the easy way out by just listing your social security number on all those tax forms. Form an LLC, it only costs about $100 and you can do it online or by mail, usually in a week or less. You can choose whatever state you want but you should choose one that has low filing fees and little to no taxes. Comparing and contrasting all the states is beyond the scope of this article but I can tell you that Delaware, Nevada and increasingly Wyoming are popular choices. The only caveat here is that if you live in a gay state like Maryland that makes it difficult to open a bank account for an out of state company, you may want to just form an LLC in your state of residence.

OK, so let’s assume now you’ve chosen the state you want to form your LLC in. The next thing you need to do is make sure you don’t get scammed by charlatans that want to charge you money to do something you can easily do yourself. This is similar to travel visa scams, you will find all kinds of bullshit companies listed in Google search results that will want to form your company for you for “just $99”. Of course this will be $99 in addition to the state filing fees. Many states let you register online with just a credit card while others will have forms that you can download, fill out and mail in with a check. Some states may require that you have a “registered agent” or a “registered address.” In those cases it may not cost much extra to just have your “registered agent” do the paperwork too but make sure you do your homework and comparison shop. For example, you may be able to just find a mail scanning service and use that as your registered address instead of overpaying some “agent”.

Google search for Nevada LLC formation

Google search for Nevada LLC formation

Now you’ve got everything lined up, you chose your state, you figured out exactly how to register and you’re ready to go. Here’s a really important piece of advice: make sure you give a couple shares in this company to someone else. It doesn’t really matter who, anybody you trust, a friend, your brother, your mother, your grandmother, etc. If it can be someone that tends to have little to no income, all the better (I’ll explain why later). Conventional wisdom among many accountants is that you have a higher audit risk as a single-member LLC and in some cases a single member LLC may not actually limit your personal liability thus defeating the purpose of having a “Limited Liability Company.” If you were to elect for a single-member LLC you’d essentially be filing returns as a sole proprietorship and that kind of defeats the purpose of what you’re trying to accomplish here.

Within a week you should be up and running. Fantastic! You will now want to register for federal employer identification number (EIN). You can apply for this online. You will need this for all kinds of things including but not limited to filing your taxes, earning freelance income through your company, opening a bank account and often setting up wholesale purchasing accounts (if applicable).

Now what can you do you and what should do with this new enterprise of yours? If you don’t already have a business, make one up that has to do with as many of your passions, hobbies and interests as possible. You love to travel? Start a travel blog. You love photography? Set up a small studio in your house and hang out your sign (virtually or otherwise). Try to associate the maximum number of things that you would spend your money on anyway with your business. If you already have a business, find a way to associate your hobbies and interests with your existing business in a legitimate way. Let’s say you sell products online and you love photography. No problem! Start doing your own product photography! Now you can expense all that expensive photo gear. Whatever you do make sure you really actually do it and you keep meticulous records to support it. I highly recommend using QuickBooks Online to keep your records straight, it’s very easy to use and will make filing taxes a snap at the end of the year when you’ll probably want to use TurboTax. Be creative and explore making money with different things that interest you. And don’t forget, when traveling for your business, make sure you take those mileage deductions, at $0.575 per mile it can really ad up. Again, make sure you keep meticulous records!

If you were already earning commissions, consulting fees, or anything else that you receive a 1099 for, call up the payer and tell them that you incorporated and that you want to run everything through your business now instead of operating as an individual or sole proprietorship. Make sure that you get some proof that they’ve updated their records and changed your name and your social security number to your business name and employer identification number (EIN). Now all of this income that was coming in directly to you will flow through your company and be offset against your business expenses. Nice, eh?

The name of the game here is to have enough businesses expenses that you probably would have spent money on anyway such that the annual earnings from your business (if any) put you in a low or even no tax bracket. If the second member of your LLC has little or no income, you can allocate some of the company’s income to that person further reducing your own income. Remember that you can earn up to $10,150 without owning any income tax at all. If you take the case of the travel blogger, where many day to day expenses could arguably qualify as business expenses, $10,000 of disposable income might just be enough to get by. Especially if you are spending most of your time outside the US.

A word of caution here, this game can only be played so far. You probably cannot have $1,000,000 of revenue and $990,000 of “fun and games” types expenses. You also probably do not want to report a loss year after year. Of course there is no law that says you can’t have a business that loses money but businesses that lose money consistently would be expected to fail; at least if their name is not Twitter or Amazon I guess. If your business has been losing money for several years running, consider closing it and starting a new one.

You may be wondering, “Why don’t I just do all of this as a sole proprietorship?” You could, but sole proprietorships and single-member LLCs get audited more often and sole proprietorships don’t benefit from limited liability. If you have gone through all the motions of setting yourself up as a serious, multiple-owner business, you kept precise records and you clearly delineated between “personal” and “business” with separate bank accounts you will be far more likely to come out on top of audit should you be unlucky enough to get involved in one. Think about, who looks more guilty, Dude A that has spent time and money to set himself up like a real business and behaves like one, or Dude B that has made no attempt to be behave as a serious business at all and is just trying to write off his baseball collection? I hope the point is clear.

Good luck in all your ventures and I hope you will do your part to make sure the parasites in the government and on the welfare rolls get a minimum of your hard earned dollars. 

Special thanks to Ben Garrison and the awesome cartoons he draws. Whenever I want to write a nice rant about government, banks or politicians he always has one that’s just perfect for the featured image.

Disclaimer: I guess because I’m not an accountant I have to say that this is all just for entertainment purposes and you shouldn’t really file my advice. Follow this advice at your own risk, I’m not an accountant or financial adviser or a licensed anything as far as the parasites in the US Government are concerned. Nothing in the article above should be considered tax or financial advice.

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