Do I Need an LLC?
MONEY MEETS TAX · EPISODE 02
Los Angeles · Early 2024
Money & Tax in this episode
Growing side income · Forming an LLC · No automatic federal tax savings
The first time someone asked Evan for his business name, he typed his own.
Evan Park.
He looked at it for a second.
The form had a separate line for company name.
He left it blank.
The distribution company Kevin had introduced him to wanted to add Evan as a vendor before paying his invoice. Nothing unusual. They needed a W-9, payment information, and a few basic details about who they were doing business with.
The problem was that Evan had never really decided who that was.
On the line for federal tax classification, he checked:
Individual/sole proprietor.
He read it again before submitting the form.
Sole proprietor sounded more serious than what he thought he was doing.
But the work had kept coming.
The call Kevin arranged had turned into a project. Then someone from that company introduced Evan to another owner who wanted help reviewing his operations.
By February, Evan had collected a little over $10,000 from consulting and had another proposal sitting in his inbox.
The spreadsheet he created after the first $4,800 payment had grown too.
There were now tabs.
Daisy noticed this one night while walking past the dining table.
“You added tabs.”
Evan looked up.
“Different clients.”
“So you have clients now.”
“I have people who paid me.”
Daisy stopped.
“What’s the difference?”
“I don’t know yet.”
She smiled and kept walking.
That evening, Evan searched:
Do I need an LLC for consulting?
He had searched versions of the same question before.
This time he stayed longer.
An LLC could separate a business from its owner.
It could make contracts and banking cleaner.
Some websites talked about liability protection.
Others talked almost entirely about taxes.
A few made it sound as if forming an LLC was the point at which ordinary expenses suddenly became deductions.
Evan knew enough by then to be suspicious of that one.
Still, the idea appealed to him.
A name.
A separate bank account.
Invoices that didn’t say Evan Park at the top.
Something that looked like a business because maybe, at this point, it was one.
Daisy sat down across from him.
“What are you looking at?”
“LLCs.”
“For you?”
“I think I should set one up.”
“What does it do?”
“It separates the business from me.”
“For what?”
Evan paused.
“Liability. Taxes. Just making it official.”
“That sounds like three things.”
“They’re related.”
“Are they?”
Evan turned the laptop slightly away from her.
“I’m researching.”
“Okay.”
She picked up her phone.
A minute passed.
Then Evan said, “Apparently it’s pretty easy to set one up.”
Daisy didn’t look up.
“That wasn’t what I asked.”
He looked at her.
She smiled.
“You did that to me last time.”
Kevin gave him the name of a CPA.
Arthur Shin.
Evan almost didn’t call.
Their tax return had never seemed complicated enough to justify paying someone to prepare it. Two W-2s, a brokerage account, some retirement contributions. He had always handled it himself.
But this wasn’t really about preparing a return.
He wanted someone to tell him whether he was about to do something unnecessary.
Arthur offered a thirty-minute call the following week.
Evan joined from his car during lunch.
Arthur appeared on screen in a white shirt with no tie. Behind him was a bookshelf and a printer that looked older than Evan expected.
After a few minutes of introductions, Arthur asked how much Evan expected to make from the consulting work.
“I’m not sure. Maybe twenty-five thousand this year.”
“Revenue?”
“Probably.”
“What about expenses?”
“Not much.”
Arthur nodded.
“And you still have your W-2 job?”
“Yeah.”
“What do you want the LLC to do?”
Evan had expected a different first question.
“I guess make the business official.”
Arthur waited.
“And save taxes, if there’s a benefit.”
“Those are different things.”
“Okay.”
“For federal income tax, if you form a single-member LLC and don’t make a separate tax election, the IRS generally disregards the LLC.”
Evan frowned.
“Disregards it?”
“For income tax purposes. You’re still generally reporting the business on your own return.”
“So Schedule C?”
“Generally, yes.”
“The same as now.”
“For federal income tax, yes.”
Evan looked through the windshield.
A delivery truck was blocking half the parking lot exit.
“So what tax does the LLC save?”
“By itself?”
Arthur shook his head.
“None automatically.”
That was not the answer Evan had expected.
He had spent the last week reading articles with titles that made LLCs sound like financial upgrades.
Arthur made it sound more like paperwork.
“So why does everyone make one?”
“I wouldn’t say everyone does.”
“But there are reasons.”
“Sure. There can be legal, operational, banking, contracting, ownership, or other reasons. If liability protection is the main concern, talk to an attorney about what it actually protects and what it doesn’t.”
Evan nodded.
Arthur continued.
“But don’t form a single-member LLC because someone told you the letters ‘LLC’ lower your federal income tax.”
Evan wrote that down.
Then stopped.
He wasn’t sure why.
Arthur asked, “Are your clients asking you to have an entity?”
“Not exactly.”
“Are you signing contracts?”
“Some.”
“Separate bank account?”
“Not yet.”
“Planning to keep doing this?”
Evan looked at the calendar on his phone.
There were two client calls scheduled that week.
“I think so.”
Arthur nodded.
“That may be a better reason to have the conversation.”
There was a short pause.
Then Arthur said, “You’re in California, so there’s another part.”
Evan already disliked the sentence.
“What part?”
“California still requires filings for a single-member LLC even when it’s disregarded for federal income tax purposes.”
“Okay.”
“And there’s an $800 annual tax.”
Evan looked back at the screen.
“Eight hundred dollars?”
“Yes.”
“Every year?”
“Generally, while the LLC remains subject to it.”
“What if I only make twenty-five thousand?”
“The annual tax isn’t based on whether you made twenty-five thousand or two hundred fifty thousand.”
Evan leaned back in the driver’s seat.
“So I can create an LLC that doesn’t automatically save federal tax, and California charges me eight hundred dollars for having it.”
“That’s one way to summarize part of the decision.”
Arthur almost smiled.
Evan did not.
That night, Daisy was working at the dining table when Evan came home.
He put his bag down.
“So the LLC doesn’t save taxes.”
She looked up.
“Then you’re not doing it?”
“I didn’t say that.”
Daisy closed her laptop.
“I’m confused.”
“So was I.”
“That’s reassuring.”
Evan sat across from her.
“It might still make sense. Separate bank account. Contracts. Clients. Keeping everything cleaner.”
“And liability?”
“I need to talk to an attorney if I care about that part.”
Daisy nodded.
“And it costs eight hundred dollars.”
“Apparently.”
“How much have you made?”
“A little over ten.”
“So eight percent.”
“That’s not how I’d look at it.”
“Of course not.”
Evan pulled out his phone.
“I’m expecting more work.”
“I know.”
He opened the California Secretary of State website.
Daisy watched him for a moment.
“So do you need an LLC?”
Evan looked at the screen.
“No.”
She waited.
“I think I want one.”
Daisy opened her laptop again.
“That’s a different answer.”
Evan didn’t disagree.
The Tax Behind the Story
An LLC and a federal tax classification are not the same thing.
If Evan forms a single-member LLC and makes no separate corporate tax election, the LLC is generally disregarded for federal income tax purposes. His consulting activity can still be reported on his individual return, much like a sole proprietorship.
That means simply adding “LLC” to the business name does not automatically create new federal deductions or eliminate self-employment tax.
California adds a separate issue. A single-member LLC can still have California filing requirements and an $800 annual tax even when it is disregarded for federal income tax purposes.
For Evan, the better question is no longer:
Will an LLC save me taxes?
It is:
What problem am I trying to solve by creating one?
Want the tax rules behind the story?
Does an LLC Automatically Save Taxes?
A deeper look at sole proprietorships, single-member LLCs, federal tax classification, California Form 568, the $800 annual tax, and when a separate entity may still make sense even without automatic federal tax savings.
Next Episode
The $800 Tax
Evan decides to make the consulting work official.
Forming the LLC takes less time than he expected.
Understanding what California expects from it takes longer.