Navigating the World of Entrepreneurship While Keeping Your Day Job
Being an entrepreneur is something exciting, and although it might be seen as a fairy tale, many questions come to your mind. One such frequent question is whether the person can register a Limited Liability Company (LLC) even if he is currently working. The long and short of it is yes, you can. But it will be advisable to weigh the options available to you before doing so.
In this blog post, we will be looking at the advantages and disadvantages of establishing an LLC while employed, determining its legal and tax implications, and suggesting some possible ways to avoid the conflict of interest between your job and business ownership.
Legal Considerations
Looking at your employment agreement
Non-Compete Clauses: Non-compete clauses are also common in employment contracts whereby an employee is restricted from taking up a job with a competitor or starting a competitive business. If any of your LLC’s activities might be deemed to compete with others, it will be important for you to go through your contract comprehensively and appreciate any restrictions you might have.
Confidentiality Agreements: To begin with, such agreements usually do not allow you to tell anyone anything that has been deemed not to be in the public domain within your company. Such information may be included in the trade of your LLC, therefore, consequences of the breach of such agreements should be avoided.
Non-Compete and IP
Intellectual Property Rights: If you run an LLC that has a business that develops ideas, inventions, or other forms of intellectual property that you created during what to practice, there may be an argument that your employer owns such property. Such matters need to be defined as to who owns what and how the property will be used before commencing your LLC.
Properties Reticulated To The State Of Registration
Business Licensing and Permits: The formation of LLCs and running businesses in some states will require specific guidelines and paperwork to be carried out. Policies that pertain to your state and to which you are an LLC should be researched and understood.
Government Licensing: In cases where your LLC is undertaking some business activities that are governed by a professional license (medical, legal, accounting among others), some conditions of internal disclosure about one’s LLC may be imposed upon you.
Financial Implications
Tax Considerations on a Side Business
Self-Employment Taxes: It is obvious as an LLC owner, you will be self-employed; hence self-employment taxes will be attractive. This means you will be paying self-employment taxes which will be very high compared to normal income taxes.
Business Expenses: You are allowed to write off their real business deductions against your LLC’s income. This lowers the amount of income that that individual has to pay tax with as well. However, the individual scholar must be careful in her record keeping to support the expenses of the deduction.
Insurance and Liability Concerns
Business Liability Insurance: It is very important to ensure that your personal belongings are protected from your business liabilities. It is wise to have business liability insurance so that in case of lawsuits or damages, there is insurance that will take care of everything.
Professional Liability Insurance: If services are very much at the core of your LLC, then professional malpractice such as errors and omission insurance will protect you against negligence claims.
Funding Your LLC
Personal Savings: Several entrepreneurs utilize their savings to fund their new LLCs. But then, think about the possible dangers that come with it and if it is worth the risk of putting in your own money.
Loans and Credit Cards: If additional cash flow is necessary, then other alternatives such as business lenders, credit lines, or even credit cards can be investigated. Be careful about the rates of interest and repayment time.
Investors: And if there is every potential for your LLC, you can easily woo investors willing to provide cash in exchange for stakes in the business.
Practical Tips
Time Management and Work-Life Balance
Identify Important Tasks: Create a system where you can handle your full-time job and your LLC. Use a task prioritization system for task selection.
Set Limits: Find a balance between your work and life to be able to cope with overwhelming work. Work time should have a limit and efforts should not extend to home.
Building a Strong Business Plan
Define Your Goals: Specify what the LLC will be all about in the vision statement and the mission statement as well as long-term aspirations.
Conduct Market Research: Determine who your potential customers are and who your competitors are, what is going on in the industry, and how the industry is evolving.
Develop a Financial Plan: Prepare a financial plan to follow through with the operations detailing the revenues, costs, and cash inflow for the period.
Tax Issues When Forming an LLC While Active in Work
Establishing an LLC and working full-time at the same time typically brings in other tax issues in another way. Here is a summary of the notable tax concerns:
Self-Employment Taxes
Double Taxation: Owners of Managing Member LLCs are considered self-employed in the structure of the business which subjects one to income tax at the federal level, and self-employment tax. This self-employment tax captures social security taxes and Medicare health coverage taxes which in normal employment hours is earmarked for both the employer and the employee.
Higher Tax Burden: Because of their ‘self’ engagement level in the business, self-employment taxes normally make the business person worse off in taxation levels when compared to employers in other employment.
Business Expenses
Deductions: Once registered, any qualifying legal sector expenditure can be claimed as a less taxable income in the LLC. Well, it is also important to track the expenses and ensure that they bear relevance to the business rather than personal use.
Home Office Deduction: Owning a separate structure is not always the case for every business. Hence some of them allow for owners or lessees to section part of their attic for that usage and clinch the business home office deduction. They however have complex rules and rules which a tax advisor would be a great help.
Income Reporting
Income Tax Reporting: What Forms do you generally need to provide? Schedule C: As an owner of an LLC, you will also include Schedule C: Profit or Loss from the Business, along with the Personal Income Tax returns. This will detail the income, expenditures, and net profit/loss of the said LLC.
K-1 Form: However, if your LLC is a multiple-member LLC, you will get a K-1 form which is also known as a partner’s return. Income tax shale will report and personal tax return later supplementing all the K-1 information.
Tax Planning Strategies
Tax, Business and Investment Policy: Qualified Business Income Deductions: How will the Business and Tax Strategies lessen one’s tax liabilities? Based on the income level and structure of your LLC, you may qualify for the QBID which means a deduction of your federal income tax liabilities by leaps and bounds.
S Corporation Election: In case of multiple owners of LLC, consider electing S corporation status. LLC protection is effective for multi-member owners and thus minimizes double taxation.
It is recommended that you seek assistance from a qualified professional to make sure that you understand all the consequences associated with starting an LLC while you are in employment and design a tax plan that will save you money.
Do I need to Inform my employer about my company?
As a general rule, such an intention is advisable to be kept from the employer.
Here are some reasons why:
Protection of Intellectual Property: Your entrepreneurial revelation might imply breaching intellectual property contracts or engaging in activity restricted by your employment agreement.
Competitiveness: This could also happen if the business you want to start during employment is arguably in competition with your employer or uses their devices and services.
Fear of Losing Employment: Things would be even worse, if such plans were announced, out of concern for being fired, especially to an employer who can be intimidated by any hint of business plans.
If you decide to share your plans with the employer, it should be done carefully. Design the strategies as follows:
Timing: Make sure that you have a reasonable business plan and are comfortable meeting all the relevant and legal requirements before making your intentions known.
Clarity: Explain what your business is all about and how it is not likely to interfere with your day job.
Professionalism: Present yourself professionally, do not bad mouth your present employer and other relevant individuals.
Ultimately, the choice of whether to notify your employer about your plans and the development of an LLC for America’s Classical Music is solely individual. It is recommended that the decision be made after careful consideration of the possible advantages and disadvantages.
Conclusion
Starting an LLC while employed is an interesting and fulfilling project but demands a lot of time and thought. If you know the legal and financial risks, organize your time efficiently, and consult the experts (Easyfiling) whenever necessary, you will be able to work and be an entrepreneur at the same time.
Do not forget your objectives, properly and timely develop a good business plan, and keep your focus on your objectives. If you have such a strategy, you can pursue entrepreneurship without quitting your day job and successfully launch your startup.
Nabin Adhikari
