LLC or Sole Proprietorship?

Discussion in 'Law and Justice System' started by tigerbob, Jan 27, 2009.

  1. tigerbob
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    tigerbob Increasingly jaded.

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    I'm going to be starting a business making custom hardwood furniture, and I'm currently mulling over my options in terms of what form the business should take.

    Limited Liability Company (LLC)
    Sole Proprietor (SP)

    Of course, I'll be talking to an accountant about this, but was wondering whether others might have experience in this area so I have as much background info as possible before taking professional advice.

    A bit of background...

    The business will require at least $10-$15k initial capital investment in machinery. In addition, I will probably need to rent some commercial space to use as a workshop, so figure between $200 and $400 a month for this.

    I have not yet investigated the cost of business liability insurance. This seems to be one of the major considerations before going with an LLC or SP. If a joint on a piece of furniture fails and someone is injured as a result, I could be liable. My wife and I have significant personal assets (house, vehicles, investment portfolio) that could be pursued, and I of course want to protect us from that possibility. However, the cost of insurance could be several hundred dollars a month which, added to the cost of shop space, puts me several hundred bucks in the red before I even start. I prefer the idea of going with SP rather than LLC purely from a simplicity standpoint, but this liability thing is a real issue. No country in the world sues quite as happily or readily as America.

    As I am starting up a business, I will need to develop a line of furniture and a website. In total this could take up to a year, so I am thinking that as a worst case scenario I will spend up to 12 months making speculative pieces to allow me to market myself. Let's say for the sake of argument that I do not have any paying clients during this time.

    As I understand it, I can choose "Flow Through" or "Entity" taxation with an LLC, but only "Flow Through" as a SP.

    The following are major questions I am asking myself....

    - If my wife is working (not for me), what is the best way to allow me to offset the tax she pays from her salary against the initial losses incurred by the business? I gather I can share ownership of an SP with her, whether she and I file jointly or separately.
    - What is the best structure to allow me to depreciate the initial CapEx over a number of years, seeing as in the first year the business will possibly not have an income?
    - Does it make sense to form a SP for the first year, and then potentially switch to an LLC later? This is particularly relevant in future where I may want to leave some income in the business as retained profits, rather than have these profits included on my personal return.

    I could go on with other questions, but those are the main ones for right now.

    Any insights much appreciated.
     
  2. Ravi
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    Ravi Diamond Member

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    You should also consider becoming an Scorp. I'd avoid the SP because you want to be protected from losing your house.

    Here's a nice little description of the differences between an LLC and an Scorp.

    S Corporation vs. LLC: Which Structure is Right for Your Business

    You can write off $250,000 worth of capital expenditures without depreciating them each year, btw.
     
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  3. DavidS
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    DavidS Anti-Tea Party Member

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    S corp. S corp. S corp. S corp.
     
  4. Dante
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    Dante On leave Supporting Member

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    Of course an LLC for a small biz for reason ravi gave. Things will always depend on the state you live in, because when moved out here to CA I found out they have a differing tax structure for LLCs in this state. There are federal rules and then there are state rules. Look up the state structure for Michigan:
    Forming an LLC in Michigan | Citizen Media Law Project
     
  5. tigerbob
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    tigerbob Increasingly jaded.

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    I've looked at S Corp and while it does appear to offer tax advantages I don't want to be bogged down in paperwork and IRS semantics.

    I'm leaning towards LLC.
     
  6. tigerbob
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    tigerbob Increasingly jaded.

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    Great link. Thanks. Significantly less long winded that the other reference material I've been looking at.
     
  7. Dante
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    Dante On leave Supporting Member

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    make sure you check out the state rules for taxes and liabilities and roles of partners and more... will you be a one man show? are there advantages to redoing a LLC to include another so you have a partner? be creative.
     
    Last edited: Jan 27, 2009
  8. tigerbob
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    tigerbob Increasingly jaded.

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    Actually, I'm wading my way through that link you sent at present. Some good stuff in there (been reading it on and off now for over an hour). Yes, I'll likely be a one man show - the last thing I want is dealing with pain in the ass employees (like I was!).
     
  9. Amanda
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    Amanda Calm as a Hindu cow

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    Anything but SP, srsly. The ease of start up isn't worth the liability.
     
  10. Ravi
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    Ravi Diamond Member

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    One good thing about an Scorp (and this may be true of LLCs but you'd have to check) is that you can hire your minor children...my kids have been on the payroll since they were 8 or 9 doing filing, little chores, etc...write off for me, college fund for them. You have to follow some rules...what hours they're allowed to work, etc...but it's a pretty sweet deal.
     

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