New business, Inc or LLC?

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jjpp

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I was hoping that I could gain from some of the group's experience.

I earned my EC license this year and am laying the groundwork for starting my own business. I would like to know some opinions regarding the following:

1 - Inc. vs. LLC: I am not interested in sole proprietorship for liability issues. Which entity is better for our profession and why? (I am in North Carolina if it matters for this)

2 - Lawyers and Accountants: How have you made use of these professionals for help and startup? Due to their expense, I only want to use them where it is really necessary.

3 - Insurances: Liability, Workers Comp, etc. How do I know what coverage I need?

4 - Any other tidbits that may have helped you when you started.

I am currently employed as a supervising electrician for a small company that deals mostly in residential, and very light commercial. While I have steady income, I would like to take care of all items needed for startup.
 
Re: New business, Inc or LLC?

My two best friends, other than my wife, are my attorney and accountant and insurance agent and banker. Wait that's four.
Seriously, talk to your attorney, accountant, insurance agent and banker. They can recommend the best course of action for your particular circumstances.
 
Re: New business, Inc or LLC?

1. LLC

2. Accountant more than Attorney. You should at least know an attorney you can use should you become involved in some type of litigation. Attorneys are typically not business men (or women).

3. Your state and/or county sets minimum limits. Also, deal with a local agent and she/he should know. If not, find another agent.

4. Starting out, you'll have to take jobs that the more established don't want. Tread carefully and honestly and you'll be ok.

Good luck!
 
Re: New business, Inc or LLC?

1. You probably won't get any advantage from a liability standpoint by going with an LLC or Inc. organization. I talked to lawyers before I started up, and they said that setting up an LLC or an Inc. that doesn't really have any assets and only has one owner won't give you any protection because a court can rule that the LLC or Inc. is merely a liability shield and not an entity that is truly separate from the owner, and thus can rule that the owner of the LLC/Inc. is personally liable for the actions of the business. Of course, talk to lawyers in your own state, as the rules might be different there.

2. I have a lawyer friend who has given me good advice. Make sure, though, that whoever gives you legal advice is familiar with the contracting world. The first lawyer friend I went to wasn't, and she gave me advice that proved useless. An accountant is a good idea because business taxes are a lot more complicated than personal taxes. I didn't hire an accountant for startup, but I did keep track of every penny I spent on the business. If you get yourself a basic accounting book and set up your bookkeeping in a program like QuickBooks (I have the Premier Contractor Edition, which I like), come tax time you can just turn everything over to the accountant and let him figure out how to depreciate stuff, etc.

3. There is probably a state law that covers this. Worker's comp is generally only required for your employees, but not for you as an owner. Same for unemployment compensation.

4. The first year can be tough. There's a lot to learn since you will have to spend a lot of time doing business management as opposed to just being an electrician. The biggest mistake new ECs make is trying to get too big too fast. Keep your overhead low (but don't skimp); make major purchases only as the need arises. Ask your friends and family to put the word out for you; I got a lot of good jobs through these kind of referrals.
 
Re: New business, Inc or LLC?

Originally posted by jeff43222:
I talked to lawyers before I started up, and they said that setting up an LLC or an Inc. that doesn't really have any assets and only has one owner won't give you any protection because a court can rule that the LLC or Inc. is merely a liability shield and not an entity that is truly separate from the owner, and thus can rule that the owner of the LLC/Inc. is personally liable for the actions of the business.
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This is absolutely false. Protect yourself. The advantage of a LLC over a corporation (most likely a sub-s) is the reduced paperwork and tax filings. Take care of this before you venture out into the contracting world.

I agree with the rest of Jeff's post.

Good luck!
 
Re: New business, Inc or LLC?

Originally posted by jeff43222:
The biggest mistake new ECs make is trying to get too big too fast. Keep your overhead low (but don't skimp); make major purchases only as the need arises.
Click to expand...
What do you base this on? I couldn't disagree with you more. I think you guessed at this, based on your own personal biases.

An undercapitalized startup will have trouble growing and purchasing equipment and paying the bills at the same time. These are the fellows that should have gotten their head's screwed on straighter before they started. A startup who has the appropriate capital and assests, and a well thought out business plan may grow at any rate and be successful.

A conservative approach, such as you recommended, will work for many. An agressive approach will also work, as long as you have the capital, a plan, and you stick to the plan. Anybody who says otherwise is invtied to my shop to look around.

[ October 30, 2005, 02:36 PM: Message edited by: mdshunk ]
 
Re: New business, Inc or LLC?

Sounds like I need to meet my 4 new friends. Thanks for the advice so far.

Short term goal. P/T side work to develop a customer base for service work. Long term, a good working relationship with a few decent GC's. I currently enjoy working with a smaller crew, and am hoping to model my business after that to start.
 
Re: New business, Inc or LLC?

Originally posted by KyawaComm:
Originally posted by jeff43222:
I talked to lawyers before I started up, and they said that setting up an LLC or an Inc. that doesn't really have any assets and only has one owner won't give you any protection because a court can rule that the LLC or Inc. is merely a liability shield and not an entity that is truly separate from the owner, and thus can rule that the owner of the LLC/Inc. is personally liable for the actions of the business.
Click to expand...
This is absolutely false. Protect yourself. The advantage of a LLC over a corporation (most likely a sub-s) is the reduced paperwork and tax filings. Take care of this before you venture out into the contracting world.

I agree with the rest of Jeff's post.

Good luck!
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Maybe the laws are different in your state, but I got this advice from more than one lawyer. They told me that in my case, I would be a one-man corporation, and the corporation wouldn't really have any assets that didn't actually belong to me personally. They also told me that liability protection for such a corporation could be dissolved by a court. They said incorporating for tax reasons might be worthwhile, but if I planned on staying a one-man shop, I wouldn't get any liability protection by incorporating.

Believe me, this was a big concern of mine before I started up my business, so I did look into it. Ultimately, I chose not to incorporate.
 
Re: New business, Inc or LLC?

No offense Jeff but you are getting very bad legal advice. LLCs were specifically created for people like you. It doesn't matter what state you are in. I'd find another attorney. You and your family need to be protected.

Edited:

Also, why wouldn't you form a LLC? It only costs like $50 and there are no annual costs other than State PP tax filing fees, if applicable.

[ October 30, 2005, 06:36 PM: Message edited by: KyawaComm ]
 
Re: New business, Inc or LLC?

Originally posted by mdshunk:
Originally posted by jeff43222:
The biggest mistake new ECs make is trying to get too big too fast. Keep your overhead low (but don't skimp); make major purchases only as the need arises.
Click to expand...
What do you base this on? I couldn't disagree with you more. I think you guessed at this, based on your own personal biases.

Not quite. I have a financial advisor who specializes in working with electrical contractors, and he grew up in the trade. His father owns one of the largest EC shops in the area.

My advisor told me he's seen countless guys start up shops and go out and buy lots of equipment, hire staff, buy trucks, etc. only to go belly up within a year or two because they weren't able to get enough business to cover all the expenses. He told me that's the #1 mistake new ECs make. New ECs generally don't have a ready-to-go customer base that will be throwing business their way; it takes time to build that up.

He further told me that the way I am doing things is the smart way to go. He said most ECs are in the red for a couple of years before they become profitable, but I've been in the black since the beginning. Business is good, and I have no debts.


An undercapitalized startup will have trouble growing and purchasing equipment and paying the bills at the same time. These are the fellows that should have gotten their head's screwed on straighter before they started. A startup who has the appropriate capital and assests, and a well thought out business plan may grow at any rate and be successful.

A conservative approach, such as you recommended, will work for many. An agressive approach will also work, as long as you have the capital, a plan, and you stick to the plan. Anybody who says otherwise is invtied to my shop to look around.

Sure, if you have the capital to invest, and you know what you are doing, by all means feel free to grow at whatever rate you want. But I think a lot of new ECs don't have a whole lot of capital to start with (I sure didn't), and I also think it's a bad idea to assume a large debt load with the hope that business will be good enough to pay it all back.
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[ October 30, 2005, 07:06 PM: Message edited by: jeff43222 ]
 
Re: New business, Inc or LLC?

Originally posted by KyawaComm:
No offense Jeff but you are getting very bad legal advice. LLCs were specifically created for people like you. It doesn't matter what state you are in. I'd find another attorney. You and your family need to be protected.

Edited:

Also, why wouldn't you form a LLC? It only costs like $50 and there are no annual costs other than State PP tax filing fees, if applicable.
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It actually does matter what state you are in, as corporations are organized at the state level. I'm no lawyer, but I'm sure the laws regarding corporations and the liability protection they provide vary from state to state.

The lawyers I talked to specialize in small-business issues, and one of them is a close friend who would not steer me wrong.
 
Re: New business, Inc or LLC?

Originally posted by jjpp:
Short term goal. P/T side work to develop a customer base for service work.

Keep in mind that your current employer might not be too keen on you being a competitor while you are still in his employ. You also don't want to let him catch you doing anything for your business (like taking phone calls from propective customers) while you're on the clock for him. I'd get rid of an employee if I caught him doing that while working for me.

Another issue is availability. If you are only available on a P/T basis, you might find it hard to build up any business if you are only available outside of regular business hours. You just won't have much time to build much of anything up if the bulk of your time is spent working at your current job.

My original plan was to do the same as you, but then I got laid off from my regular job a few weeks after I got my EC license. I'm sure the layoff wasn't related to my becoming an EC; I kept it very quiet and hadn't even started advertising or anything yet. Looking back, I can see now that my business is successful only because I didn't have my previous job interfering with my time. Your experience might be different, but I'm glad I got laid off because it allowed me to spend the time on my own business.

Long term, a good working relationship with a few decent GC's. I currently enjoy working with a smaller crew, and am hoping to model my business after that to start.

Not a bad plan. I don't work under GCs very often; I know a lot of ECs don't like working for them. I currently enjoy being a one-man shop, and I stick to jobs of that scope. My main business is residential remodeling and upgrades on old houses, and I deal mostly with homeowners rather than GCs. So far, it's worked out pretty well for me.

If you keep your wits about you, being an EC can be a great way to go. I'm glad I went that route. I sure like it a lot better than being someone's employee.

Good luck!
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Re: New business, Inc or LLC?

A one man LLC or Sub S corp can have the corporate veil torn down in court. Even though, it is still a hurdle for someone to jump over.

The tax reasons (Social Security) is the best argument for not being a sole proprietor. Let's say you salary yourself at $35,000/year. The IRS will probably let that slide without a bunch of gripes. Now you actually make $50,000 more in the business. If you were a sole proprietor, you would owe $7,650 to Uncle Sam, or... you could (as a Corp) keep the money yourself.
 
Re: New business, Inc or LLC?

Originally posted by jeff43222:
So far, it's worked out pretty well for me.

If you keep your wits about you, being an EC can be a great way to go. I'm glad I went that route. I sure like it a lot better than being someone's employee.

Good luck!
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[/QUOTE]

AMEN Jeff!
 
Re: New business, Inc or LLC?

Originally posted by jeff43222:
Keep in mind that your current employer might not be too keen on you being a competitor while you are still in his employ. You also don't want to let him catch you doing anything for your business (like taking phone calls from propective customers) while you're on the clock for him. I'd get rid of an employee if I caught him doing that while working for me.
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I agree, and am very careful with that. My boss knows I am licensed, and do some side work. (Mostly service related) I don't take calls during work hours, I return them during breaks or lunch. All of my customers are word of mouth referrals from my another source.
 
Re: New business, Inc or LLC?

LLC or Inc is designed to protect the personal assets. It is not an illegal attempt do do so.

States may regulate in some manner the LLC or Inc but protection is all the same. None will shield you from illegal or fraudulant acts.
If you go this route always do business as such
and include the LLC or INC in all advertising and business documents. There are advantages and disadvatages in each. small one man op, LLC will be less reporting and paperwork, also if you need investors LLC allows you to give only what portion you want to the investor and do not have to distribute funds unless you want to With an Inc any share holder must be given distributions if you take some as well.(proportionatly)
If any attorney tells you that these entities do not provide any more protection that sole proprietor look for another attorney.
Sometimes advice given is misinterpreted, double check before doing any thing.
 
Re: New business, Inc or LLC?

I don't think Jeff said there was no additional protection for an LLC. The point is you shouldn't consider that to be total protection. A lawyer suggested I do an LLC, and when I asked him about it, he agreed that sufficient insurance is more important. I got the insurance amount recommended by two insurance agents, more than the state required amount. I think the LLC or not is more a financial decision. I can't remember if an LLC is a separate entity so if it goes bankrupt you don't also, like a corp would be. But by the same token, being a separate entity may make it harder to get credit if that is needed.
 
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