LLC vs. Sole Proprietorship: Which One Makes More Financial Sense?

llc vs sole proprietorship

Should I select an LLC vs. sole proprietorship? That’s the question that I’ve been asking myself lately as I look at small business planning.

You see, I’ve been an independent contractor / freelancer for a long time. However, I’ve recently started thinking that it makes financial sense to separate my personal and business money. Of course, there are many different ways to do that, but setting myself up as a business seems to be a good next step.

Most likely I’m going to go with a sole proprietorship. I had that kind of business a long time ago and it seemed to suit me just fine. Nevertheless, I don’t just want to jump in willy nilly, so I’m carefully exploring the differences between LLC vs sole proprietorship to make sure I go down the right path.

LLC vs. Sole Proprietorship: Liability

There are many different ways to structure a business. I’ve narrowed it down to LLC vs sole proprietorship. The main difference as I’ve always understood is about my own personal liability. An LLC is a “limited liability corporation” which means that I as an individual have limited liability in comparison to if I were a sole proprietor. In other words, if someone sues my business and I lose, the costs can only affect my business, not my personal finances. In contrast, as a sole proprietor, I’m personally still responsible for the costs of the business. The same is true for creditor issues. It’s worth taking that liability into consideration.

LLCs Cost More to Set Up

Although that limited liability is nice, it comes with a price. It doesn’t really cost much at all to set up a sole proprietorship business. In contrast, there are a lot of fees involved with setting up an LLC. You have to register with the state so there are fees associated with registration and filing documents. Oftentimes, LLCs are also subject to ongoing annual fees. In other words, if you don’t pay each year, then you don’t maintain your LLC registration. You don’t have those costs associated with setting up a sole proprietor business. In general, LLCs are subject to a lot more regulations, which can mean more paperwork, which can mean more time and money.

LLC vs. Sole Proprietorship: Taxes

I currently pay taxes as a self-employed person. If I choose to set up my business as a sole proprietor then I will still pay taxes as a self-employed person. Therefore, for better or worse, my tax situation isn’t going to change. Things seem a little bit more complicated if I decide to set up an LLC. An LLC can be a partnership or a corporation, but it can also be solely-owned. In the later case, it would be taxed like a sole proprietorship.

Therefore, there doesn’t seem to be a huge tax difference for me personally by doing LLC vs sole proprietorship. That said, if I opted to file as a corporation, that could make a difference, which is something worth exploring more. If I do an LLC, I’ll have to file separate business and personal taxes, which I wouldn’t have to do if I set up as a sole proprietor.

Separating Business and Personal Finances

The main reason that I was planning to set myself up as a business is because I want to separate my finances. However, I’m leaning towards doing a sole proprietorship, which actually doesn’t require me to separate my finances. An LLC strictly requires that you keep your business and personal expenses entirely separate. In contrast, you don’t have to do that with a sole proprietorship. You are the business. Therefore, that part wouldn’t actually be different than what I’m doing now as a freelancer. Of course, I still want to separate them, but in the eyes of the government, they wouldn’t need to be.

A sole proprietorship is the right thing for me. My business finances are pretty simple. I don’t run a lot of risk regarding liability. And I don’t want to spend the extra money to become an LLC. But anyone making this decision should certainly look at both options with an eye towards what makes financial sense for them.

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Should You Pay Taxes with a Credit Card?

pay taxes with a credit card

You can pay your taxes with a credit card. Should you?

Every single year when I do my income taxes, I think about the things that I should do differently. For one thing, I always buy tax software. However, I could use the IRS eFile tool for free. I’m a creature of habit and making the switch challenges me. Nevertheless, it would be a financially smart thing to do.

I also typically pay taxes with a credit card. I’m aware that it’s doesn’t make the most financial sense. I do it anyway. That’s something I really need to look at it if I truly want to stick to my frugal living goals.

It’s Convenient to Pay Taxes with a Credit Card

Sometimes I pay a little bit more for convenience. That’s part of frugal living. I’m not trying to get the cheapest thing all of the time. I’m just trying to “trim the fat” to make sure that where I spend money is where it makes sense to do so. Sometimes convenience makes sense.

It’s definitely convenient to pay taxes with a credit card. I see what I owe. I enter the credit card information. It’s all done. I don’t have to worry about whether or not I have enough money in the bank to cover it. If I don’t, then I’ll move money around later to pay that card off. You can’t do that if you pay with a check; you have to have the money right then and there.

I Like My Credit Card Rewards

I have a good cash back credit card. My rewards accrue all throughout the year. I don’t touch them. Then, come December, I have a nice chunk of cash back money that I can use. December is a tough month financially for almost everyone. I also have several big annual bills that come due around then. Plus, as a freelancer, it’s almost always my slowest income month. Therefore, I love using those rewards.

When I pay taxes on a credit card, I get a nice bit of cash back. I don’t need it in the spring, but I’m really happy that it’s there come December. Therefore, I do like that aspect of paying taxes with a credit card.

The Rewards Don’t Outweigh the Fees

Here’s the thing, though. If you pay taxes with a credit card, then you’re charged a fee. You can’t pay the IRS directly with a credit card, so you have to use a processing service. The fee varies depending on the service you use. According to the IRS, the fee is sometimes deductible. However, that’s not always the case.

In my experience, the fee almost always costs more than the rewards I get back on my credit card. If you have an excellent cash back card then you might still get a little extra money. At the very least, it might even out. However, if you’re trying to pay with a credit card just to get cash back, then you should be aware that you probably aren’t doing yourself any financial benefit.

If you’re using a cash back rewards card, try to use one that’s got at least 3% cash back. Moreover, check with the processing service to see if the fees differ depending on the card that you use. For example, the fee is sometimes higher for American Express, so you might want to pay with a different card to keep costs down.

If You Don’t Pay the Credit Card Immediately, Then You Really Pay

It isn’t cheap to use your credit card. I usually pay my balance in full each month. Therefore, I don’t pay a lot of money in interest. However, if something goes awry, those interest charges can add up fast. If you do pay your taxes with a credit card, make sure that you don’t rack up a bunch of interest fees by failing to pay that card balance off quickly.

You can set up a payment plan with the IRS. Therefore, if you don’t have the money to pay your taxes right now, then you shouldn’t go straight to a credit card. Save money by working directly with the IRS instead, where the fees will be considerably lower.

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2018 Tax Changes: What You Need to Know Before You File

2018 tax changes

There are some important 2018 tax changes. If you haven’t filed your taxes, yet, then make sure that you know about these changes. In some instances, adapting to the changes might save you money. Everyone wants to get the most they can back from their tax refund so don’t let the changes mess that up for you.

2018 Tax Changes Come From Tax Reform Bill

These 2018 tax changes are coming as a result of the Tax Reform Bill. It is better known as the Tax Cuts and Jobs Act (TCJA). This bill passed in late 2017. However, the changes didn’t go into effect right away. That’s why you didn’t notice it last year when you filed your 2017 taxes.

It’s time now for those changes to go into effect, though, so it’s important to review the bill. There are changes that impact individuals, businesses, tax-exempt entities, and governments. However, we’ll only be looking at the 2018 tax changes for individuals in this article.

Overall, the Changes Should Make Filing Taxes Easier

One of the biggest changes is that the standard deduction has been expanded. Therefore, people who previously took itemized deductions may now be able to get as much (or more) money back just using the standard deduction. As a result, this simplifies taxes.

Many other deductions have been taken away. For example, you can no longer take a deduction for job searches or moving expenses. Therefore, you’ll probably benefit from just taking the standard deduction.

That said, if you do your own taxes, you may find that you need to figure out your itemized deductions first. That’s the only sure way to calculate whether you get more back from the standard deduction or not. Therefore, it might not save you as much time as it should.

If you want to save time and are willing to take the chance that you may or may not save money, then just take the standard deduction. In most cases, it’ll be the right thing to do. The standard deduction has almost doubled, which means that most people won’t save money with itemized deductions.

On the other hand, these 2018 tax changes are designed to last until at least 2025. Therefore, you might want to do the math this year, see if the standard deduction truly makes sense for you, then use that information when filing in future years.

The Changes Benefit Low and Mid-Income Filers

The people who benefit the most from these changes are those who are low-income or middle-income. They are most likely to get more back from the new standard deduction. Tax Foundation reports that the use of itemized deductions will drop more than 70% for people with an income between $10,000 and $50,000. Furthermore, it will drop at least 63% for people earning between $50,000 and $200,000. Therefore, if you earn less than $200,000 then chances are that you benefit from the new standard deduction.

Additional 2018 Tax Changes

Here are some other important things to know:

  • Fewer people will need to pay the Alternative Minimum Tax Liability.
  • The maximum credit for the Child Tax Credit has increased so it pays to have kids.
  • Furthermore, there’s a new additional credit for other types of dependents.
  • Tax brackets have changed, generally lowering marginal tax rates.
  • If you are self-employed or a small business owner, there are additional changes to learn about.

There’s one more important thing to note. Due to the 2018 tax changes, many people had less money taken out of their paychecks this year than in years past. If that’s true for you, then your refund will likely be smaller than years past as well. Even though you may pay less in taxes, you get less back because you paid in less.

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