sole proprietorship, incorperated or LLC? What are the pros and cons of each?

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zappy

zappy

Senior Member
Location
CA.
Right now i'm a sole proprietor, but if I ever get sued, wouldn't it be better to be incorp. or LLC? It's just me with no employees. Another reason why I ask is, I got in a little fender bender in my van, I rear ended someone going like 5 MPH. I was looking down at directions as we were stopping for a red light:mad: So she's claiming her neck and/or back hurts, and i'm worrying about her suing me. Thank you for your help.
 
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texassparky

texassparky

Member
Location
Dallas / Ft. Worth
zappy said:
Right now i'm a sole proprietor, but if I ever get sued, wouldn't it be better to be incorp. or LLC? It's just me with no employees. Another reason why I ask is, I got in a little fender bender in my van, I rear ended someone going like 5 MPH. I was looking down at directions as we were stopping for a red light:mad: So she's claiming her neck and/or back hurts, and i'm worrying about her suing me. Thank you for your help.
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That is what you have automobile insurance for :smile:

wireguru said:
consult an attorney. (a real one, not one in the business of setting up businesses)
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This is the best advice you are going to get...Your structure is dependent on to many variables...what state you structure in, where you work...How much you want to pay to have your taxes filed, there is a lot more to it than just not getting sued....

Lastly don't think for a second that a lawyer wont name you individually on a lawsuit, regardless of your business structure. It all has to do with that particular case's circumstances...
 
Rewire

Rewire

Senior Member
Location
Lake of the Ozarks
You probably need to write a business plan.How you structure your business is a part of this plan. Many things need to be considered before you decide how you will set up your business.Consult with a good Accountant as well as an Attourney.
I am set up as an LLC but will be incorporating at the beginng of next year due to tax considerations.
 
iwire

iwire

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Location
Massachusetts
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M

mpoulton

Senior Member
Location
Phoenix, AZ, USA
zappy said:
Right now i'm a sole proprietor, but if I ever get sued, wouldn't it be better to be incorp. or LLC? It's just me with no employees. Another reason why I ask is, I got in a little fender bender in my van, I rear ended someone going like 5 MPH. I was looking down at directions as we were stopping for a red light:mad: So she's claiming her neck and/or back hurts, and i'm worrying about her suing me. Thank you for your help.
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You are too late to avoid personal liability for that accident, since it already happened - but that's what insurance is for! However, it's always smart to protect your assets by separating yourself from your business as much as possible. Of course, you can sill get sued personally even if you have a company, but you are less likely to end up paying personally. The LLC is intended specifically for the type of business you are operating, a relatively small company with few owners and a simple management structure. In many states, it is simple enough to file an LLC yourself that you would not need an attorney to do it for you if you feel comfortable with the paperwork. Not only can an LLC help limit your liability, you may find it easier to get trade credit and commercial banking as an LLC than a sole proprietorship. Of course, the details of your particular business will determine what's most appropriate for you and you may find it helpful to get legal advice before deciding what to do. This isn't legal advice, just friendly advice :smile:
 
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wireguru

Senior Member
in California, an LLC cant hold a license anyways -only a corporation can. And unless you feel like getting taxed to death I would forget about it unless there was some compelling reason to be incorporated.

As someone else mentioned, anyone suing you is going to name you personally anyways, you would have to demur, they will fight it arging the corp is your alter ego and they will probably win since youre a one man shop and the corp would be worthless without you personally.

I would be more concerned about making sure I was properly insured. I notice many people are terribly underinsured. If you have the cal minimum of 15/30, whats that going to do for you if you hurt or kill someone? Or even if you have 150/300.....is $150,000 going to pay for long term care for some kid you hit while he was riding his bike and turned into a quadrapalegic after he had several long surgeries and spent a month in a coma? It wont -but your tools, equipment, inventory, and the equity in your house might.........


*this post contains my personal opinion only, and is not professional advice. Do not take any action, inaction, or make any decision based on the information I posted above. Consult a professional.
 
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normbac

Senior Member
get an umbrella policy from your agent common is one million it is inexpensive and a necessity with or without a business
 
petersonra

petersonra

Senior Member
Location
Northern illinois
Occupation
engineer
Not a lawyer or an accountant, but maybe I can clear up some confusion. There are several different issues, and they are being mixed up.

Taxes. It generally does not matter what form of business you have, as long as you qualify for and elect sub-chapter S status with the IRS, you won't pay any extra income tax being incorporated (LLC or otherwise) versus being a sole proprietorship. Despite what many people think, there is no such thing as a sub-chapter S type of corporation. It is something you as a taxpayer elect to do to have your corporate income handled on your personal return so you are not taxed both as an individual and as a corporation.

Debts. An LLC or other corporation provides a pretty good shield from creditors. Some vendors may want a personal guarantee though, in which case the shield provided by the corporate structure is not going to hold for anything you personally guaranteed. My understanding is that in at least some states if the vendor puts your name on the shipping invoice along with or instead of your corporate name, that may be enough for it to be considered a personal guarantee if you sign your name to the shipping invoice. It would be a good idea to have a lawyer well versed in this area talk to you about just how to handle things to avoid personal responsibility for debts of the corporation.

Civil liability. As a practical matter, you cannot really avoid personal responsibility for your own actions completely. The best you can do is insure yourself adequately so the insurance company will be the entity paying the legal bills and whatever judgment might come out of a claim.
 
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W

wireguru

Senior Member
petersonra said:
Not a lawyer or an accountant, but maybe I can clear up some confusion. There are several different issues, and they are being mixed up.

Taxes. It generally does not matter what form of business you have, as long as you qualify for and elect sub-chapter S status with the IRS, you won't pay any extra income tax being incorporated (LLC or otherwise) versus being a sole proprietorship. Despite what many people think, there is no such thing as a sub-chapter S type of corporation. It is something you as a taxpayer elect to do to have your corporate income handled on your personal return so you are not taxed both as an individual and as a corporation.

Debts. An LLC or other corporation provides a pretty good shield from creditors. Some vendors may want a personal guarantee though, in which case the shield provided by the corporate structure is not going to hold for anything you personally guaranteed. My understanding is that in at least some states if the vendor puts your name on the shipping invoice along with or instead of your corporate name, that may be enough for it to be considered a personal guarantee if you sign your name to the shipping invoice. It would be a good idea to have a lawyer well versed in this area talk to you about just how to handle things to avoid personal responsibility for debts of the corporation.

Civil liability. As a practical matter, you cannot really avoid personal responsibility for your own actions completely. The best you can do is insure yourself adequately so the insurance company will be the entity paying the legal bills and whatever judgment might come out of a claim.
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California still has separate state taxes for LLC/Corp, there is an $800/yr minimum tax due.
 
L

Leestarkweather

Member
Location
Los Angeles CA
wireguru said:
California still has separate state taxes for LLC/Corp, there is an $800/yr minimum tax due.
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He's right--Ive been Sub-S since 1987 (first year that Calif. recognized Sub-S status). Every year the minimum tax for California is $800.00, which (at 1.5% of taxable net income) covers the first $53K of profit--some years more than the corp nets, others (thank God) I owe more. For Fed purposes, it all flows onto your personal 1040 (Schedule E), so it is not double taxed at the Fed level. It's been worth it to have the corporate shield and that's only good if you do all the annual corporate minutes, etc. Early on I had to sign personal guarantees with most of my vendors open accounts, but after almost 30 years I don't have to, as we have excellent credit history.

There's some other time savers--as a corp. you don't have to receive a 1099 for work done (over $600) for clients. I know one HVAC contractor friend who chose Sub-S just for this reason, as he hammers a lot of residential job checks at the bank and doesn't report the income. I prefer to sleep at night--and not at the handlebar hotel.
 
S

~Shado~

Senior Member
Location
Aurora, Colorado
LarryFine said:
I wonder if the opposite is true. Are a corporation's assets at risk for a personal tax debt in the individual's past?
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I wouldn't think so.

As I understand it....a Corporation is an entity unto its own. You own shares and all, but, are in effect an employee of the entity.

I think as far as personal tax debt, the most might happen would be to force a sell of shares to raise funds to pay off debt. Too many people own shares on Corps that I am sure also owe taxes....never heard of the IRS going after the business entity to satisfy personal debt.
 
O

Ohmy

Senior Member
Location
Atlanta, GA
petersonra said:
Civil liability. As a practical matter, you cannot really avoid personal responsibility for your own actions completely. The best you can do is insure yourself adequately so the insurance company will be the entity paying the legal bills and whatever judgment might come out of a claim.
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This is very true.

1. If you hit and really hurt someone in your work truck, they can sue you as the driver and the business. Soo a corporate shield does not protect you or your business.

2. If hit someone while driving your own car to church, they will sue you, but not the business. So you business insurance will not protect you AND they will try to take your business assets because YOU own them regardless of whether its a LLC, INC, etc. (this is limited to the amount of the business you personally own...in the case of partnerships, etc.)

3. If your employee hits someone while driving your truck, the person hit will sue your business and be able to get at ITS assets regardless of your incorporated status. However, if you are are properly set-up, the person hit will not be able to get at your personal assets (home, boat, etc.) If you are a sole proprietor they could.

So, the best thing is to have lots of personal and business insurance (as mentioned), be incorporated to protect your personal assets, and have your corporation owned by multiple folks (your wife or adult children come to mind) so that you can only lose your share of the business if you are personally sued.

In your case Zappy, you have max exposer....since you own your business in its entirety and you are personally liable for the accident.

IMO
 
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